By CANDIA DAMES, Guardian News Editor

The dramatic collapse of investment bank Lehman Brothers and the $50 billion buyout by Bank of America of the brokerage firm Merrill Lynch sent jitters through financial markets across the globe yesterday with local analysts predicting that The Bahamas will face substantial implications as a result of the 'tsunami' that is crushing iconic Wall Street institutions.

"These are confirmations that the tremendous problems that the United States economy has been struggling with for more than a year related to the sub prime mortgage activity that have not yet been fully resolved in the United States and around the world," said Julian Francis, former governor of the Central Bank, who described the latest developments as "pretty grim".

James Smith, also a former Central Bank governor, who works in the financial services sector, also said the news was not very good in part because Lehman is a direct investor in The Bahamas.

"Clearly, we need to watch the developments closely because [they] could have an adverse impact both on the larger industry — tourism — in terms of its impact on the consumer, and also in terms of foreign direct investment into The Bahamas, and so I think we should be concerned," Smith said.

Lehman sold the Royal Oasis Resort in Freeport to the Ireland-based Harcourt group nearly a year ago, but still has substantial investments in The Bahamas including the Ritz Carlton Rose Island project where it has already reportedly invested $100 million. But it was not immediately known yesterday what impact the company's troubles will have locally.

The global economy had heightened interest in the developments on Wall Street yesterday as the fate of other big name players in the financial world remained uncertain amid mounting fears over the worsening impact of the U.S. credit crunch.

Wendy Warren, CEO and executive director of The Bahamas Financial Services Board, told The Nassau Guardian yesterday that the financial crisis in the United States will continue to affect The Bahamas.

"We know that the world is flat and interconnected," Warren said. "The financial crisis impacts the discretionary spending on leisure travel. While we are predominantly a private wealth management jurisdiction, the parent companies of many organizations in The Bahamas are exposed to the volatile global markets. The private wealth sector is directly impacted as clients adopt a more conservative approach to investing, reducing the margins that our financial institutions can generate."

Francis noted too that there are several implications for The Bahamas.

"Our economy is largely dependent on the health of the international economy and particularly on the optimism which is felt by participants in the global economy," he said, adding that the financial crisis in the United States may create uncertainty among investors.

Francis said the situation could result in a slower return to investing by various parties. "And The Bahamas could certainly be negatively affected by that," he added.

There are also concerns that the consuming public in the United States, Europe and Asia could be directly impacted by the latest developments.

"The situation with Lehman Brothers indicates that the United States economy is going to have to go further in digesting the problems which have come about as a result of the subprime activity," Francis said. "That is going to result in the U.S. economy struggling even harder to begin to recover."

In other words, he added, the recession that the United States economy has been experiencing in recent months is not going to be helped by the current situation on Wall Street and that means that some consumers would likely put off any thought of taking vacations any time soon.

The deepening crisis comes as the Bahamas Hotel Association reports worsening performance among local hotel properties. The results of a newly-released survey show that the state of the U.S. economy combined with higher travel costs associated primarily with fuel costs is taking a toll on hotels in The Bahamas. More than seven out of every 10 hotels or 71 percent in the nation do not expect to make a net profit in 2008.

Francis noted as well that the state of the U.S. economy has created great pressures for the local tourism industry over the last 12 months.

"We have seen already the impact of this on projects such as the Ginn project in West End and others," he said. "The second and third home market which is significantly dependent on the American consuming public — and also to some extent on the Europeans — is absolutely negatively impacted by these developments."

With the latest developments being watched by analysts both locally and abroad, it remains unclear at what point there would be a turnaround in the U.S. economy.

"As long as you have this uncertainty, this negative sentiment, those principal areas in which we are impacted negatively are going to persist," Francis predicted. "For us, the bottom line is that we'll have to wait a bit longer for the recovery, which we hope will not be too long in coming. My own sense of it is it won't be before the middle of next year at the earliest before we begin to see any real beginnings of a turnaround in the U.S. and certain of the European economies."

In considering its response to these challenging times, The Bahamas recognizes that it cannot control the global economy, Warren noted.

"What we must do is prepare our country to compete," she said. "Amongst other things, we must define where we can expand and reinforce our foothold in our two key industries. We must define which markets we will pursue, what products/services will be delivered and what is required to succeed."

She added, "We must calibrate our services with the needs and expectations of our targeted clientele. In other words, we must be focused on growth and expansion. At the same time, the private and public sector must set its hand to the till and improve service delivery and the value we add to our customers. Critical changes must be made in the short term so that our key industries are recognized as a 'flight to quality, safe haven'. From the customer services agent to the registrar general, we must invest in our key infrastructure: People and systems."

Smith, meanwhile, found the constant bad news about the U.S. economy disconcerting - pointing to the crises faced by investment bank Bear Stearns and mortgage giants, Fannie Mae and Freddie Mac earlier this year.

Unfortunately, these are kinds of developments The Bahamas has no control over, said Smith, adding that the options for diversification of the Bahamian economy are neither clear nor attainable.

"While it (diversification) is something one keeps the eye on, you've got to be very careful," he warned. "You might be moving from the frying pan into the fire."