By Mark Egan, 12.09.2001

WASHINGTON (Reuters) - New York's World Trade Center, an icon of global capitalism, crumbled on Tuesday after a series of attacks, leaving Wall Street in clouds of smoke and rubble and raising the specter of a global recession.

Economists said a global economic contraction was almost assured as world stock markets plunged, the U.S. dollar spiraled lower against the yen and euro, and oil and gold prices soared after terror attacks on landmarks in New York and near Washington.

Analysts speculated the catastrophic events could deal a hammer blow to U.S. confidence and could send already wary investors fleeing to gold and other assets which benefit in uncertain times.

President Bush said in a televised address to the nation that the world's richest economy would carry on despite what he called "evil, despicable acts of terror."

"Our financial institutions remain strong and the American economy will be open for business as well," Bush said.

For years the United States has been seen by investors everywhere as a safe haven -- a place where trillions of dollars could be invested, offering returns typically better than those available in Europe and elsewhere.

But terrorist attacks that caused both towers of the World Trade Center to collapse and left the U.S. Pentagon in flames could have a devastating effect on confidence in the U.S. economy, which was already teetering on the precipice of recession, economists said.

Markets were shut across the United States, which attracts almost two-thirds of all global capital flows, in the wake of the attacks and were to remain closed on Wednesday.

This added to the uncertainty about how American markets would react to the tragedy.

"A full-blown global recession is highly likely,' said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis. "Recently, the economy has been on a high wire act, straddling between a recession and an anemic growth; (this) damage to confidence will push us into a recession," he said.

HELP BEING READIED

The world's major central banks issued statements saying they stood ready to act to counter any potential market turmoil. The U.S. Federal Reserve said it was open and operating and that its discount window would provide liquidity as necessary -- a tacit admission that it stands ready in crisis mode. Federal Reserve Bank of New York President William McDonough, speaking in Switzerland, said the U.S. central bank would, "provide that liquidity which is needed."

Later, the European Central Bank said it also stood ready to provide liquidity to keep financial markets functioning. Japan's Ministry of Finance said it had provided extra liquidity after the U.S. attacks and that it stands ready to take appropriate foreign exchange actions as needed.

The Nikkei stock index in Tokyo opened Wednesday's trading sharply lower, plumbing levels not seen in 17 years and losing more than 6 percent.

U.S. Treasury Secretary Paul O'Neill, who was traveling in Tokyo, sought to reassure markets, saying he has every confidence in the financial system's ability to weather the latest challenge.

"Our nation's financial markets are strong and resilient," O'Neill said in a statement issued from Japan, where he will remain until further notice.

"In the face of today's tragedy, the financial system functioned extraordinarily well, and I have every confidence that it will continue to do so in the days ahead," he said.

The closure of markets on Wednesday will mark only the second time the New York Stock Exchange has shut for two consecutive days, the last being in honor of the end of World War Two in August of 1945.

Economists said there could be untold damage to the U.S. financial system, noting many key stock market players in the World Trade Center buildings were likely killed.

Sohn said he expects a "stampede" of sell orders once American stock markets reopen, and a run on insurance companies, possibly crippling the financial system and forcing the U.S. Fed to cut interest rates even further.

The Fed has already cut rates seven times this year by a total of three full percentage points to try to reignite sputtering economic growth.

GLOBAL RECESSION?

The unprecedented assault on key symbols of U.S. military and financial might came as growth around the globe slows to a crawl. The U.S. economy is barely growing, Europe's is slowing rapidly and Japan's actually contracted in the second quarter. Kevin Logan, an economist at Dresdner Kleinwort Wasserstein in New York summed up the feelings of many, saying Tuesday's events meant, "it won't be business as usual" anymore.

"People will begin to invest and spend less as they try to determine what the future will bring. I can only imagine the stock market is very vulnerable," he said.

Before the attacks, the International Monetary Fund had expected global growth of just 2.7 percent this year, down from almost 5 percent last year, with the risk of a global recession rising -- the top item on the agenda at the upcoming meeting of leading industrial nations in Washington later this month.

Economists said the worst-case scenario could be a massive capital flight out of U.S. assets -- something that could crush already weak U.S. stock prices and banish the American economy into its first recession in more than a decade.

"The major risk is panic in the financial markets," said Kathryn Kobe, an economist at Joel Popkin & Co. in Washington. "If for some reason the United States is no longer seen as a safe haven for capital...there could be some very large capital movements."

Oil prices, regarded as one of the culprits behind the slowdown that began late last year, spiked more than 10 percent on Tuesday before closing up nearly 6 percent on the day at a over $29 a barrel -- a shift eyed nervously by analysts, who said higher oil prices would also hamper economic growth.

Parts of the U.S. economy, notably the manufacturing sector, are already in recession. But consumers have remained confident, helping prop up the broader economy. However, economists said that faith will be rocked by Tuesday's events. And the tumble in stock prices -- if sustained when the New York stock market eventually reopens -- could further injure confidence and spending, which in the United States has remained intact in the face of the slowdown.

The U.S. economy grew only 0.2 percent in the second quarter and analysts feared that the attacks could finally turn that paltry growth rate negative.

Reuters

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