For markets, terror becomes less terrorizing

From a financial and economic standpoint, the industrial world is getting used to terrorism. The London bombings last week haven't caused much discombobulation to the bond and stock markets. Nor have the European or American economies suffered a big blow.

"There's a general feeling we can handle it," says Richard Reid, chief economist with Citigroup in London.

That doesn't mean analysts are callous to the tragedy. "The market is getting more experience in dealing with crises," notes David Wyss, chief economist of Standard & Poor's in New York, a financial information firm. "They are personal tragedies, not economic disasters."

Indeed, there is a widespread sense that radicals are losing their power to terrorize the markets. Their impact is more subtle, modest, and long-term.

In the immediate aftermath of last Thursday's bombings, the London stock market plunged briefly. The exchange halted computer-generated trading for nearly four hours. But by the close of trading last Friday, prices had recovered to their prebombing level.

That's a far cry from the aftershocks of 9/11. On the day the New York Stock Exchange reopened for trading, a week after the World Trade Center towers fell, prices tumbled 4.9 percent, as measured by the Standard & Poor's 500 stock market index. But by the time of the bombings in Madrid - in March 2004 - the S&P 500 dipped only 1.5 percent.

Last Thursday, as pictures of wounded Londoners flashed across television screens, stock markets in the United States actually closed slightly higher and posted strong gains Friday and Monday.

This has lead to some predictable chest-thumping.

"The [market] aftereffects simply stood up and rammed democracy back into the face of the terrorists," held Don Hays, an American stock-market commentator.

"Despite the radical Islamist assault and its attempted fear tactics," stated conservative economist Lawrence Kudlow in New York, "rising equity bourses surely suggest that the US-British allied coalition of the willing is slowly but surely making enormous gains to defeat the totalitarians and to spread democracy and freedom worldwide."

To be balanced, reactions to 9/11 and the London bombings differed in part because there were far fewer casualties this time around.

"The scale is entirely different," says Mr. Reid. Moreover, most of the carnage in London was sudden and underground, out of the range of TV cameras. In New York, the calamity unfolded more slowly before millions of shocked viewers.

More than that, market participants have more experience with terrorism.

"Humans are resilient, and adjust to the higher level of tension astonishingly well," says Mr. Wyss.

"It has a psychological effect," commented Commerzbank economist Peter Pietsch in Frankfurt, Germany. "But its economic and financial consequences are more like zero."

It also helps that people are more prepared.

Londoners were "expecting some kind of event like this," says Reid. They anticipated trouble at the Group of Eight summit of industrial nation leaders in Scotland - though not necessarily a terrorist attack. Authorities and the police had been rehearsing what to do in such a case, and, as Reid remarks, they "responded to it in a controlled sense."

Nevertheless, the London attack could have mild economic consequences.

In London, monetary authorities indicated they were ready to step in if needed to shore up financial markets. Reid figures special monetary easing won't be required, but suspects the bombings might put pressure on Bank of England policymakers to lower interest rates when they next meet. Similar pressure could be felt by the European Central Bank, the monetary authority for the 12-nation euro.

In the US, the Federal Reserve has been engaged in monthly increases of 0.25 percentage points in a key short-term interest rate, the Federal Funds rate, to ward off inflation. Wyss speculates that the London tragedy may "slightly increase the pressure" on the Fed to skip another rate increase when its policymakers meet Aug. 9.

The latest bombings have spurred some in Congress to call for more spending to protect rail and bus lines. Such a measure would have a good chance of being passed by lawmakers and signed by President Bush, figures Stan Collender, a National Journal budget analyst.

So terrorism makes economies a bit less efficient by piling on new security costs for business and government.

In general, economists expect current economic trends to persist. "The US economy and the global economy were slowing down prior to the London event," says Reid. He expects that to continue.

While the world seems sturdy, resilience should not be viewed as "an all-clear signal for the global economy," warns Stephen Roach, chief economist of Morgan Stanley, a New York investment firm.

Mr. Roach suggests other factors that could have a more far-reaching effect than terrorists do, including high oil prices, rising US-China trade frictions, the huge US trade deficit, and "the income- and saving-short, asset- and debt-dependent American consumer."

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