Flu could boost gov't intervention further


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SNAP ANALYSIS-Flu could boost gov't intervention further
27 Apr 2009 12:13:00 GMT
Source: Reuters
By Peter Apps, Political Risk Correspondent
Reuters AlertNet - SNAP ANALYSIS-Flu could boost gov't intervention further
LONDON, April 27 (Reuters) - The spread of a possible flu pandemic could see an increase in already heightened levels of government intervention in economies and financial markets as a result of the global financial crisis.

In the short term, it might serve to give governments an easy justification to impose protectionist measures that could further stifle slumping trade flows.

Doctors and officials around the world are moving to contain the spread of a swine flu outbreak that has already killed more than 100 people in Mexico and spread to countries around the world, with markets already reacting nervously.

"At the moment, markets are still making the assumption this will not be that serious," said Dresdner Kleinwort emerging foreign exchange strategist Jon Harrison.

"But if it were to turn out much worse you would see a rise in government spending and government intervention. This sort of crisis would be too big for anything other than governments."

Governments have poured unprecedented amounts of money into capital markets in recent months supporting, and in some cases nationalising, banks to try and stimulate lending as economic output and trade around the world dried up particularly after the demise of Lehman Brothers in September.

Those moves have largely reassured markets but also left investors uneasy and watching politicians and political forces much more closely as their influence on markets deepens.

If the flu crisis were to worsen, analysts say markets could see a repeat of some of the interventions that worried investors last year, from the introduction of controls to contain capital flight to the sort of stock market suspensions Russia tried to use to halt capital flight after the Georgia war.

Mexico's peso has already come under pressure from the outbreak, falling 3 percent in electronic trade on Monday although there are as yet no suggestions that Mexican markets will be closed as a result of the crisis.

Dresdner's Harrison said most exposed would be fledgling emerging economies that might see mass capital flight if the virus hit them hard. Those reliant on tourism or travel might be particularly vulnerable.

Several countries including Iceland, Ukraine and Nigeria have tightened capital controls to limit the impact of the global financial crisis.


John Raines, deputy director of political risk at London-based consultancy Exclusive Analysis, said even if swine flu was controlled and no more destructive than the SARS outbreak, it would likely further hit trade particularly in agricultural products.

"At the very least, I would expect them to use it as a way of supporting their domestic pork industries," he said. "Trade is always the first to go and it is an easy excuse for protectionist measures. But if it became a true pandemic, affecting millions, then all bets are off."

However, trade restrictions prompted by public health emergencies like the swine flu outbreak are permitted under international law, if they are only maintained as long as necessary, White & Case law partner Brendan McGivern said.

"As long as the measure you take is based on sound science, it is perfectly permitted within the rules," McGivern said. "I would view this as a bit different than crude protectionism."

Totally unexpected "black swan" events such as the outbreak of the First World War -- when investors suddenly had to adapt to the prospect of global conflict in a matter of weeks -- have sometimes prompted draconian intervention and have had a seismic economic impact.

Stock markets from Wall Street to Vienna closed for up to five months in July 1914, while the global economy suffered a liquidity crisis generally seen as much worse than that seen last year as lending largely ceased.

(Editing by Richard Hubbard)

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