Impact of Terrorism on Financial Markets essay

The problem of terrorism is one of the most serious problems the world community is currently facing. In the late 20^th century – early 21^st century terrorism became an international problem and a great threat to many countries of the world. National boundaries could not be a serious barrier on the way of terrorism which started to spread worldwide to the extent that even countries, which were geographically remote from areas of military conflicts, where terrorist could develop their infrastructure and train, were under attack. In this respect, it should be said that theUS is nowadays one of the major targets of international terrorism though other countries, including those of the EU are also under attack and the terror attacks that occurred within the last decade perfectly illustrate the extent to which terrorism may be dangerous.

At the same time, terror attacks targeting at the most developed countries such as theUSalso demonstrated their disastrous effects. In this respect, it is necessary to underline that negative consequences of terrorism are not limited by profound psychological trauma many people receives in the result of terror attack or violation of social order. In actuality, the terror attacks, especially those that were organized in the most developed countries, such as theUSand probably the most notorious attack of September 11, proved to be quite harmful for the financial markets. It should be pointed out that terror attacks deteriorated considerably the situation in financial markets and produced a negative impact on the development of economy at large.

Impact of terrorism on economy

In order to better understand the impact of terrorism on financial markets, it is primarily necessary to briefly dwell upon the impact of terrorism on economy at large because the negative effect of terrorism on financial market is basically the consequence of the deterioration of economic situation at large. To put it more precisely, the negative impact of terrorism on financial markets is a constituent element of the general deterioration of economic situation in a particular country that suffered from terror attacks or even the entire world.

First of all, it should be said that terror attacks produce a multiple effect on economy. This means that the effects of terrorism on economy may be both direct and indirect. In this respect, it should be said that the direct effect of terrorism on economy may vary depending on the terror attack. Practically, this means that terror attack may be more or less severe and disastrous. As a result, the destruction caused by terror attacks may vary considerably. On the other hand, whether terror attacks were extremely disastrous or they caused some minor injuries they still produce a negative impact on economy.

Speaking about direct impact of terrorism on economy, it should be said that it is traditionally associated with the costs of terror attack to economy. What is meant here is the costs that economy, i.e. state, companies, public organizations, etc., has to spend on the recovery after terror attacks. It is obvious that terror attacks lead to destructions and direct economic costs of terror attacks include the destruction of life and property, responses to the emergency, restoration of the system and infrastructure affected, and the provision of temporary living assistance (Bruck and Wickstrom 296).

At the same time, it is also necessary to remember about indirect economic consequences of terror attacks, which may be not so obvious as direct consequences, but their effect may be equally negative. It is worthy of mention that indirect effects of terror attacks may be really perceived by national economy in the medium term after attacks.

Basically, indirect consequences of terror attacks undermine consumer and investor confidence (Bruck and Wickstrom 298) and may be viewed as a serious threat to the further development of economy. At any rate, terrorism contributes to the considerably slow down in the economic development of a country, region or even entire world. Basically, terrorist attacks may lead to the growing trend to save and reduction of spending that also slows down economic development and recovery of economy after terror attacks.

Also, it is necessary to remember about the long-term impact of terrorism on economy. It should be said that terror attacks contribute to the decreasing productivity of economy in the result of the raising the costs of transactions through increased security measures, higher insurance premiums, and the increased costs of financial and other counterterrorism regulations (Ratha 126). Naturally, this can hardly fail to affect the development of economy as well as the situation in financial markets.

Negative effects of terrorism on financial markets

a. The disruption to the trading infrastructure

Obviously, the deterioration of economic situation is in a way determined by the crisis in financial markets. At the same time, the problems caused by terrorism in financial markets are aggravated by numerous problems that the entire economy suffers from. However, it is necessary to underline that one of the major negative effects of terrorism on financial markets is the significant deterioration or even disruption to the trading infrastructure.

First of all, it should be said that terror attacks undermine dramatically the stability in financial markets and force the major players to change their policy and behavior to the extent that in the most severe cases some players can even stop for a certain period of time any activity in financial markets. In this respect, it is possible to refer to the notorious terror attacks of September 11, after which numerous key market players were affected significantly. It is not a secret that the major market players had substantial operations in or around theWorldTradeCenter. Naturally, when theWorldTradeCenterwas destroyed by terror attacks they could not continue to function normally because theTwinTowerswere destructed physically. As a result, this terror attack led to the closure of theNew Yorkfinancial markets. Taking into consideration the fact that theNew Yorkfinancial markets play an extremely important role in the world financial markets it was quite logical that the closure of theNew Yorkfinancial markets had undermined stability in the world financial markets at large. At the same time, it is worthy of mention that the biggest disruption to the trading infrastructure was caused by damage to the communication system of the world’s largest custodian and settlement bank, the Bank of New York (Eldor and Melnick 371).

In such a situation, many leading financial institutions had to relocate in order to resume their functioning. In such a way, the terror attack of September 11, demonstrated that the accurate terror attack can undermine the infrastructure of the financial markets not only in the US but affect the entire country and even the world since the New York financial markets, being deprived of their traditional infrastructure needed some time to relocate or restore their functioning in a normal way.

The government securities market

Despite the fact that terrorism affects considerably practically all financial markets and economy at large, the government securities market seems to be the most exposed to the disastrous consequences of terror attacks. The reason for such a vulnerability of the government securities market to negative effects of terrorism is quite evident.

In fact, traditionally, terrorists target not just at the destruction of some buildings, infrastructure, or killing people but they do it purposefully. This means that they organize their terror attacks to force certain state to change its policy and fulfill the demands of terrorists. This goal may be met by terrorizing and threatening society, causing numerous destructions and deteriorating social stability as well as economic and financial development of a country.

In such a situation, the government and its securities market suffer the most from terror attacks since it is the government that is supposed to prevent and respond on terror attacks and it is the major counterpart of terrorists.

Consequently, financiers view the government as one of the parties in the war against terrorism. Naturally, when the government is in the state of war, which is the result of terror attacks, its positions in the financial markets deteriorates considerably and government securities market suffers the most.

At the same time, the government securities market may be affected in the result of the loss of the major players that define its functioning. For instance, theUSgovernment securities market was considerably affected by the loss of the largest interdealer broker, Cantor Fitzgerald, and other small brokers whose offices were located in theWorldTradeCenter(Lacker 22). The situation was deteriorated dramatically by the disruption to the infrastructure and the lack of possibilities of communication using traditional means, such as phones.

The insurance industry

Not less disastrous impact terrorism may produce on the insurance industry. In fact, it is quite natural that the insurance industry is affected by terror attacks because the numerous casualties and destructions naturally lead to the increased demands to insurance companies. This means that the pay offs of insurance companies increase substantially, to the extent that they cannot always satisfy all their clients in a relatively short period of time. This is why certain tension or even a profound crisis begins in the insurance industry in the result of terror attacks.

Such a situation is extremely dangerous not only for the insurance industry proper but also for all financial markets because in well-developed countries, such as theUS, the insurance industry plays one of the major roles in the financial markets as well as in national economy at large. At the same time, traditionally, the insurance industry is considered to be quite profitable, while terror attacks may change radically the expectations of insurance companies concerning their profits. For instance, theUSinsurance industry was substantially affected by large claims resulting from the terror attacks of September 11, that generated losses estimated at more than $50 billion (Chen and Siems 355).

The capital and stock markets

Naturally, the deterioration of the economic situation and the position of many companies in the market cannot fail to contribute to the deterioration in the capital and stock markets. Obviously, terror attacks decrease the security of financial markets and, consequently, the higher risk of the financial market or national economy the lower is the interest of investors to this market and economy. In fact, the unwillingness of investors to invest money in economy that is exposed to terror attacks is quite natural because terrorism is a direct threat to the investments. As a result, terror attack lead to the slow down of investments and the numerous attempts of investors to redirect capitals from the markets affected by terror attacks to the markets where the risk of terrorism is minimized or considerably lower.

It is quite useful to refer again to the experience of theUSand September 11 terror attacks in order to fully assess the extent to which terrorism may be destructive to capital markets. It should be pointed out that the attacks occurred around9 a.m. This is why the New York Stock Exchange and the NASDAQ Stock Market never opened for trading on September 11 (Flynn 194). It is also worthy of mention that the US securities markets resumed trading only on September 17, when it was safe enough to personnel to resume work and when the infrastructure was restored enough for the normal functioning of the markets.

As for the impact of terrorism on stock markets, the consequences of terror attacks are also extremely negative since they decrease the stock rates of companies operating in the local market. For instance, in terms of market volatility, theUSstock markets after September 11 were down during the first day of trading and continued to drop in the following days (Ferguson215). Obviously, this example proves the fact that the stock markets may be simply ruined by terror attacks. At any rate, the negative effects of terror attacks, even if they are not so catastrophic as terror attacks of September 11, are quite significant to the stock markets and, normally, it takes some time to recover from terror attacks.

The equity markets

In fact, the similar trends are typical to equity markets. Similarly to other financial markets, the equity markets also tend to the decline and the more severe is the terror attack the more rapid and more profound the decline of the market is. For instance, the impact of September 11 attacks was visible worldwide on the major equity markets, which experienced sharp and rapid decline, demonstrating that market participants perceived the event as the global shock (Sandler 315). At the same time, this effect perfectly illustrates the negative impact of terrorism on the equity markets which inevitably decline though the scale of decline may vary depending on the terror attack.

Conclusion

Thus, taking into account all above mentioned, it is possible to conclude that the impact of terrorism on the financial markets is very significant. It proves beyond a doubt that terror attacks lead to the deterioration of economic situation and decline of financial markets. In such a situation, it is worthy of mention that the negative impact of terrorism on the financial markets is not limited by terror attacks only. The problem is that terrorism and terrorist organizations keep people as well as the financial markets in permanent tension since there remains fear about the future perspectives of the markets and life of people as long as there remains the real threat of the further terror attacks. This is why it is extremely important to solve the problem of terrorism in order to maintain the stable and sustainable development of the world economy and financial markets.