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Thursday, 23 January, 2003, 17:42 GMT
Terrorists 'hold world economy hostage'

Fears of terrorism have left the world's greatest economies hostage to the acts of a single protester, a leading banker has warned.

Thomas Russo, vice-chairman at investment bank Lehman Brothers, has warned that, in the world's heightened state of sensitivity to terrorism, one atrocity could cause mayhem, from falls in financial markets to widespread job cuts.

If we have a bad event this year, it will not be something we have thought about at this stage

Michael Mussa
"The most fundamental issues are the issues regarding terrorism," Mr Russo told a packed meeting of global leaders at the World Economic Forum's annual summit in Davos, Switzerland.

This was related to a "great divide" between cultural attitudes in the US and those elsewhere in the world, he added.

Political challenges

"There is not a common understanding between the US and a huge chunk of the world," Mr Russo said.

"Until we make this, there is always going to be this overhang over the markets."

Fellow panellist Michael Johnston, executive vice-president at US-based Capital Group Companies, added that the greatest challenges to prosperity were "not economic, but political".

"If I was God, I would put most energy into these [political areas]," Mr Johnston said.

Maverick economist Michael Mussa, former head of research at the International Monetary Fund, added that the unpredictability of catastrophe made it so difficult to cope with.

"If we have a bad event this year, it will not be something we have thought about at this stage," he said.

Share recovery imminent?

However, the panellists were united that financial markets were poised to end their most difficult period since the Great Depression.

The European Central Bank has made a fundamental misjudgement

Michael Mussa

Prospects for US shares were bright as the country's economy was set for a much stronger recovery than that forecast by many economists.

These experts have been over-reliant on analysing historic data, the panellists argued.

Forecasters have been "looking in the rear view mirror to see where we are", Mr Johnston told the session.

An emphasis on cost cuts - achieved through laying off staff and relying on stockpiled, rather than newly ordered, goods - meant company profits were poised for recovery.

Mr Russo added: "Increases in earnings should feed through into increases in the underlying stock."

European 'misjudgement'

But Mr Mussa warned that expectations of European economic recovery had been hit by the refusal of the European Central Bank (ECB) to cut interest rates more than half a percentage point last year.

"The ECB has made a fundamental misjudgement," Mr Mussa said, now senior fellow at the Institute for International Economics.

Furthermore, the boost to business of last year's cut had been balanced out by the rise in the euro of more than 15% within the last year.

"There is greater reason to think that the European economy is not going to pick up momentum in 2003," Mr Mussa said.



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