The Hindu : Global investors shy away with spate of scandals

Online edition of India's National Newspaper
Wednesday, Jul 17, 2002

Business

Business

Global investors shy away with spate of scandals

By Batuk Gathani

BRUSSELS JULY 16. On both sides of the Atlantic, investors are increasingly wary of buying financial assets as for the first time euro rose above the one U.S. dollar mark since February 2000, as analysts conclude that investors are not only losing faith in the U.S. economy but in Europe they are also extra cautious. On Monday, the European stock markets suffered the biggest one day decline as investors fear about continuing downtrend.

The dollars decline, also highlights foreign investors reluctance to buy American assets and this makes it harder for the U.S. to attract capital needed to fund its current account deficit, which is widening at an embarrassing pace with higher defence spending and falling tax revenues due to recessionary trading conditions and fall in corporate profits. To compound the crises the investors — both domestic and foreign — are more than concerned about spate of latest accounting scandals where company accounts have been widely "doctored and fiddled'' to comply with financial lust of senior company executives and market analysts.

A satirical and popular British weekly, this week carries a cover picture of Osama Bin Laden, who says that he proposes to renounce terrorism and instead become an accountant, to fight his war against America. The accounting scandals, falling stock markets and the decline of the dollar are causing much unease on both sides of the Atlantic and yesterday it was a `black Monday' when stocks plunged in the U.S. and Europe. The main British index dropped below 4000 for the first time since December 1966 and as panic gripped investors, more than rest four lakh crores was wiped off the value of leading hundred stocks.

The euro has appreciated at the cost of the falling U.S. dollar and according to market traders it remains to be seen if the dollar/euro value consistency can be sustained indefinitely. Analysts said the link between dollar's decline and falling value in stock markets may put pressure on politicians to act, otherwise the current market turmoil could destabilise a global economic recovery, which at best looks increasingly fragile. It is argued that the current rise of the euro against dollar may benefit European inflation and bonds and at best, deter the European central bank from raising interest rates. The response of the U.S. Federal Reserve to raise low American interest rates is also keenly awaited.

The dollar peaked against the euro early in February and has since fallen by 12 per cent. It is also argued that the current fall in the value of the dollar may push up American inflation rate far more than it will depress European inflation. All this is tougher for European exporters and it is concluded that within the global economy, the falling dollar will cause inflation at producer price level.

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