Global financial meltdown: Businessmen who may lose billions of dollars, if…

  • Friday, October 10, 2008 - By IKENNA EMEWU(ikenna@sunnewsonline.com)
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The Nigerian casualties

Days of sorrow for the rich are here. It is a worldwide scourge that makes the wealthy, the powerful and the moneybags shed hot tears. That is the new calamity the world faces today that looks worse than the nuclear armament scare we heard but was later averted.

The crisis that makes the rich cry is not about a genocide of human beings. It is about money.

Their money has developed wings and flown away into space and out of reach. Indeed, what the American now calls the junk money house came crashing badly in August. However, expert views from the US economy watchers and analysts say the real mess was cooked way back in 2004 and 2005 when mortgage facilities nosedived.

They hoped for recovery but rather got the worst shock when, on one fateful day, in September, three giant companies on Wall Street, New York, the US hub of strategic economics, stunned the world by declaring themselves bankrupt. Lehman Brothers, a real shaper of things and the AIG, world’s most viable insurance firms till that fateful day confessed that the centre could no longer hold. It was calamity that brought back to US and later the whole world reminiscences of the great depression of the 1920s to sometime in the 1930s.

Nigerian victims
The economic moves of the past eight years exposed Nigeria to mega investments and inflow of foreign investors whose interests have been noticeable in the telecoms, oil, banking, insurance and other sectors. There have also been massive facility developments involving billions of dollars and naira. Because of the level and depth of the local economy, none of these mega projects is financed from within the system. It is either the finance comes from US banks, especially the US EximBank or some other financial institutions or from big banks in Europe, prominent among which is the Paris BNP Paribas.

Fears have already gripped the money and capital markets that credit facility access is no longer possible now as the loan givers are rather recalling what they had put out, in this era where self-preservation seems to be the in-thing.

What it means to the nation’s economy is that the big investors will grind to a halt until the coast clears. As it happens, projects already in the pipeline, that would help make the economy pick up, will have to wait. Among them will be Aliko Dangote’s $1.85 billion investment outlay, which was effected through a confirmed letter of credit routed through GTBank Plc to J.P. Morgan, New York in August. The letter was sent to an engineering consortium led by the Chinese firm, Sunoma International Engineering. The deal would see the total volume of cement produced by Dangote Cement rising to 26.5 million metric tones per annum by 2010.

President of Dangote Group, Alhaji Aliko Dangote, said the $1.85 billion will be used for the expansion of the Obajana Cement plant in Kogi State. It will include a second train that will increase capacity to 12 million tones, while new plants will be constructed at Ibese and Shagamu, both in Ogun State, with installed capacities of 5.5 million metric tonnes per annum, respectively.

With the financial crisis across the world, such ambitious project would suffer a set back, as multinational companies are, at present, preserving funds within their localities. If funds no longer flow from the Chinese firm, the project would be on hold and the money already invested by Dangote would be on the verge of being lost.

The next casualty in the Nigerian economy may likely be Dr. Mike Adenuga, the telecoms magnate whose investments span the oil and banking sectors.

Adenuga’s Globacom, Nigeria’s leading telecoms firm, currently has a proposal to annex 50 per cent of the assets of a foreign telecoms outfit to boost the position of Glo. That deal is almost tied up. A report in a foreign business publication on August 31 noted that Glo’s merger with Vodacom was almost a done deal as the owners of the company feel more disposed to the sale than the one they had been negotiating.

The report said: “The bid threatens to disrupt a plan already at an advanced stage for Telkom to shed its 50 per cent stake in Vodacom by selling 12.5 percent to the UK operator, Vodafone, for R18.75 billion and distributing the rest to its own investors. The deal would see 100 per cent of Globacom merge with Telkom’s 50 per cent stake in Vodacom in a new listed entity dubbed “Vodaglo,” with an estimated value of R140 billion. Mowana believes Globacom and 50 per cent of Vodacom are each worth about R70 billion and would be equal partners in Vodaglo.”

The question that is agitating the minds of Nigerians is, would the Glo deal still hold in the face of economic crunch abroad?

Last month, there was reliable report that Femi Otedola, the billionaire oil merchant and owner of Zenon oil, had concluded arrangements to invest US$2 billion in a new sector of sugar and cement. His plan is to build plants in Nigeria that would expand and open up the economy and also generate thousands of jobs to make better the economy better. To do this, he would need money from abroad, in according with standard financial practice.

Indeed, the international lending rule requires that an investor seeking for loan should provide a minimum of 30 per cent of the take-off capital for a project and get the rest from multilateral financial institutions. The implication is that these projects that run into billions are made possible only through the support of international finance agencies.

With the global economic crunch these financial institutions are no longer willing to extend any facilities now. Therefore, the projects would come to a stop until the financial crisis is sorted out.
The move to bring AIG, a global multi-billion dollars insurance United States-based firm to Nigeria by Chief Dele Fajemirokun is at jeopardy. The businessman had brokered a deal for AIG to partner AIICO in Nigeria. This had cost him a staggering billions of naira. When the deal was struck, AIG was in good financial standing. Suddenly, the company’s finances plunged and would have collapsed if not for the bailout extended to it by the United States government. With AIG in trouble, the firm would, most likely, call off the deal with Chief Fajemirokun.

In the main, at least 20 major investors in Nigerian economy would, one way or the other, be affected directly as individuals and in their credit procurement. Generally, many citizens of the country, like in many other economies, would lose much. They may include such international businessmen, such as Chief Tony Ezenna, Chief Sony Odogwu, Chief Razak Okoya, Bode Akindele, Emmaneul Ojei, Jim Ovia, Oba Otudeko, Paschal Dozie, among others.

A prominent investor in the country, who is also a politician, for example, is reported to have lost a about US$100 million already in investments in US due to the crash.

Government projects may not be spared owing to the global financial crisis. At present, there are on-going projects that need counterpart funding from abroad. When funds no longer come from abroad the projects would be stalled. Indeed, projects, like the railroad re-activation awarded some years ago to a Chinese firm would likely be stalled as a result of the problem in release of facilities.

Nigerian capital and money markets
Before the major world crisis, the Nigerian economy had started showing some symptoms of ailment. As a result, investors in stocks, a sector that gained popularity in the past few years, have been crying loud over slump in values of shares. That makes the alarm bell ring louder as the problems assume global dimension.

Last week, CBN announced that it had pumped US$1.5 billion into the nation’s economy and introduced new measures to protect the country’s financial institutions from being affected by the financial crunch around the world.

Prof. Chukwuma Soludo dismissed insinuations that the global crisis will soon hit Nigeria, saying: “The banks are sound and safe; our reserves are safe and sound and growing. All the fundamentals are strong and there is no cause to worry much.”

The Minister of State for Finance, Mr. Remi Babalola, re-echoed this clean-bill-of-health posture on Wednesday when he told journalists that the Federal Government had no plans to inject fund into the stock exchange or the bank. His reason is partly because there is no distress from the reports of profits posted by the banks and also because the stock exchange and banks are not owned by government. But he left a caveat that in case the FG finds out later that the banks needed assistance it would not hesitate to come to their rescue because of their importance to the economy.

Babalola also said that even in the US, the government did not just throw $700 billion into the system, as ordinary money but employed them into buyback of bad debts. Therefore, he said, if any need would arise for capital injection by the Federal Government it the US example may be adopted.
Despite this optimism, financial analysts say that the Federal Government should rather prepare for the worse so that if anything goes wrong in the financial sector it would come to the rescue.

Doomsday
Some weeks to September 15, there had been signs that a major problem was in the offing. When work closed on Friday, September 12, at Wall Street, there was palpable fear that the worst may happen the following week. By Monday the crash came. The first casualties were Lehman Brothers AIG and Merrill Lynch. On that fateful, as the news of the bankruptcy of the big players came on air, 4,500 Lehman workers in London alone lost their jobs. London Daily Mail of September 16 reported that Lehman and AIG paid the price for their huge exposure to the US sub prime mortgage market, whose collapse has been blamed for triggering the global credit crunch.

After the fall of the first three, the gravest concern the economies had was who would be the next to go. On that same day the major stock exchanges lost colossally, including FTSE whose share valued dropped by four per cent. About £50 billion was wiped off from value of investments.

Genesis
The pro-market economy threw the system open to private persons calling the shots in the management of the resources of all persons. They have the world in their palms, and this has been prone to some abuses at the whims of the powerful cabal. Signs of the abuse started with exposure of some powerful auditing firms and their culture of inflating figures and creating favourable balance sheets that do not exist in concrete terms.

Later, it was the overshooting of credit facility limits by bankers and other loan agencies. There are stipulated loan limits and acceptable collaterals for their security. For sometime, the players adhered to the rules. But since their say was unchallenged by regulating bodies, abuses took over. Instead of sticking to the acceptable credit limits and the value of the securing collateral, it was an open affair, where everyone was at liberty to do whatever.

At last, instead of say $1million collateral security for $11million loan, it would be stretched to $1million security for $41 million. This resulted in a situation where bogey or junk credits took over the system. Money and assets were counted in figures that existed on papers because of declaration of assets that were never seen. At a point, the equities were no longer equal, and an attempt to match figures to corresponding concrete assets led to the opening of a can of worms that showed that nothing existed as declared. The alert made investing companies call for foreclosure of assets and facilities, and, therefore, a panic that exposed the real situation as hollow.

The insurance companies that guaranteed or insured these declared assets were left with a reality of paying indemnities over what is not there and hence a damning bankruptcy because the commitment in the insurance contracts must be adhered to. In US alone, the value of junk credits is as much as $4.5 trillion, a figure that makes nonsense of the $700b bailout fund by the US government.

Meanwhile, the delay by the Congress to pass the bailout bill into law exposed the economy to more ridicule. The loss of confidence among the people, which the US government wanted to forestall, could not be attained. Crisis has taken over the day, and it spirals by the day. Thursday last week alone, Wall Street announced a total loss of $1.02trillion in share values in one day.

The position now
Nothing actually seems to have looked up for the world economy even now. It gets worse every unfolding day.

On Monday, the news from European markets was not cheering. London shares lost £100 billion in the biggest fall ever. Major European markets were also sharply down and on Wall Street Dow Jones opened 515.32 lower at 9810.06, the first time it has been below 10,000 for four years.
Trading on exchanges in Iceland and Russia had to be suspended. Once again, bank shares saw the biggest plunges with HBOS falling 16 per cent, RBS down by 21 and Barclays slumped by 16 per cent.
Although it seemed the UK would not have a shake as bad as that of US at the beginning, something different is unfolding. There was an initial injection of £250billion into the system by the UK central reserve. Given the earlier position of things for a market with about £2trillion in all bank deposits, there was a feeling that the shock would be minimal.

But events of the day proved otherwise. It was alarming. Owing to alarm by UK experts that there may likely be a capital flight in the country to other EU nations, after a promise by German leader, Angela Merkel of safety and stability, the EU decided to meet to take a regional position on how to tackle the problem.

Depressions back in time
The economic recessions or depressions of the past had links, one way or the other, with wars. But today, it is a different story, maybe because there is another form of warfare ragging. The World War 1 that swept through Europe was a catalyst that precipitated a deluge of economic problems. Because of the prime position of Europe in world economy then, its destabilization meant rattling the world. As a result of the slow-pace merchantilist economy of the time, the recovery was not swift. After the war in 1919, the victim nations had not picked up before the World War 11 set in. But that time, US was favoured because it was far away from the wars and never suffered any economic casualty. Its stability favoured it, as the place the world, UN and its allies were setting up.

In the early 1970s, the OPEC nations shook the world economy through the oil supply regulation that hit the bigger economies. Recovery from this ushered in the pro-market economy nurtured into life by the trio of Ronald Reagan, Margaret Thatcher and Mikhail Gorbachev.

Experts in world economy today blame the present calamity to over liberalization that placed the fate of everyone in the hands of rapacious few minders and dictators of the pace of the economy. Instead of allowing the market forces to determine the pace, as pro-market economy preaches, the minders became the market forces and decided to pull the strings – all in their favour.

Why it escalates
The world had been reaping the benefits of a global village, where information technology magic has re-written the pace of known economic indices of development. In the past 30 years especially, it has been a world economy operated like traders in one market place. Money is wired round the world in a matter of minutes, touching as much as hundred locations. That pace generated hyper wealth and profits where even the media of all sub-sectors reported the news in present tense – as it happens.

Now it seems the other side of the coin is flipped. Immediately the wall of the Wall Street came tumbling down, media beamed it live to the entire globe. Operators relayed the message round the globe while sitting at a spot, via their cell phones. As they sent caution messages to business associates to slow down on investment, they also sent jitters that sent even those economies not yet affected panicking that the worst would come.

Today, the stampeded that keeps rising in tempo is partly as a result of the turmoil churned up by the awareness of the situation through the information system. Those who want to invest are withholding their capital and the crunch depletes further.

With the trend already on, it seems the meltdown is on a downhill roll until it hits the base. Every new day brings more stories of losses in stock all round the world. Since the facilities of the trade (in cash and kind) in the various stock exchanges round the world had been virtually the same, they all now suffer the same effect.

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