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French Version

Stocks tumble as war cries rumble

US President George Bush sees post-war Iraq emerging in the hinterland, although he didn’t initiate the war yet. He and two of his European allies, Britain and Spain, gave Iraq a 17 March ultimatum to cooperate with the UN disarmament demands or face war.

The US administration, meanwhile, has already inserted plans for creating a post-war ‘new image of Iraq’. Its request last week for five American engineering firms to prepare for the rebuilding of Iraq, poses a question about American intentions.

Analysts believe the US wants to preserve its economic and political supremacy in the region, and punish its former allies, mainly France and Germany, who oppose its plans for war.

Bush continues to intensify war jitters as his recent hawkish statements pushed the stock markets towards a further slump. Economists agree that war is inevitable, and what really matters for the moment is its length. Their common assertion is that "the shorter the war is, the better for the global economy."

The health of the US economy remains in doubt as the military standoff in the region depresses the US consumer confidence and delays business investment.

For British chief economist Mark Cliffe, ‘a blitzkrieg war’ on Iraq would cost the global economy nothing. "The US allies have to foot their own bill this time. In 1991, the Gulf states, Japan and Germany all paid out to help cover the costs of war."

The knock-on effect could be even more marked. Already the world’s economies are suffering as investments are put off and people are thrown out of work.

"Early estimates of US GDP growth for the first quarter of 2003 ranged around 3 percent, but this seems wide of the mark," said American analyst Stephen Lewis, who doubts if there will be any growth at all in the US.

The US dollar still loses more of its power against the euro and the Swiss franc. The euro began the week on Monday at $1.1, while the dollar regained some of its strength to Sterling at $1.594 compared with $1.60.

European stocks declined in the early sessions of the week as fears of an imminent war with Iraq continued to drain investors’ enthusiasm. Stocks of many large companies, notably the telecoms, sank sharply to lower points since most of these blue-chips registered net losses around Europe. Observers at the stock exchanges think the war fears drag more of the unfortunate businesses and investments behind.

Deutche Telekom posted a narrower-than-expected fourth-quarter net loss for 2002, while the British pharmaceuticals group, AstraZeneca was the biggest loser at London’s FTSE with 3 points after its withdrawal from a European group-approval process for new drug manufacturing.

In Milan, trading was suspended in shares of six companies in a pyramid ownership structure related to Telecom Italia. The suspension remained two days until Tuesday.

Tokyo stocks ended their early sessions this week sharply lower as concerns about the market’s impact on Japan’s fragile financial system prompted further selling. Worries are rife among Japanese investors as the Nikkei stock average reached its lowest level in more than 10 years.

Europe’s gold rose this week to over $358 an ounce. Gold dealers there predict prices will continue to rise while war looms. For many, the level of $450 an ounce is possible if a war on Iraq continues for long.

"It has come to the forefront of investors’ minds that it is very likely the military action can begin very soon," said German currency strategist, Paul Mackel. "Bush signalled the UN members have days to sort things out and the US will act alone if necessary. And the US acting alone is a dollar-negative story."

Many investors raised the stocks of gold assets to shield themselves from a frail dollar and falling stock markets.

"It is difficult for us to imagine anyone seriously shorting the gold markets when the war drums are beating ever louder," Britain’s Prudential-Bache International said in a statement.

An open-end war on Iraq would cost the US administration roughly $800 billion from the moment the zero hour begins. The US Congress priced war at $9 billion a month, added to $13 billion a month for deploying troops and $4 billion a month for the occupation of Iraq. Still, none of the US administration or the Congress can predict how long the war will be.

All calculations ignore the impact on the world economy, which is much harder to quantify. The most obvious effect is on the oil prices.

This week’s meeting of the Organization of Petroleum Exporting Countries (OPEC) in Vienna pledged to cover any deficit on world markets due to a halt in Iraqi oil deliveries.

OPEC sources indicate earlier the cartel will take drastic measures to prevent oil prices from reaching above $40 a barrel. The 11-member organization supplies over a third of the world’s crude oil, and aims to prevent any oil price shocks that could dampen future global economic recovery.

The organization, however, adhered to its current 24.5 million barrels a day output a limit for now. Iraqi war fears have driven US oil prices to a 12-year high of almost $40 a barrel. But oil experts agree prices could quickly collapse if war is short and Gulf supplies only minimally affected.

Assuming the oil price would be around $25 without the crisis, an $8 rise per barrel would lead to a world’s daily increased cost of $600 million. Optimistic economists believe the oil price will drop once the war is over, similar to 1991.

"We think the oil price will settle to around $28," says Keith Wade, chief economist at the London-based Schroders Investment Management. "This is because inventories are so low and it will take sometime before Iraqi oil comes on stream."

As countdown to war continues, Wade warns "even an ideal, short war will not put the world economy back on a recovery path."

Amman,17March2003
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