A continuing credit and consumer spending crunch could have an impact on tourism in Bermuda and the Island must closely watch what is happening in the world's economic markets.

That is the view of E.T. (Bob) Richards who believes the Island's second economic pillar is the most vulnerable compared to other industries that could feel a squeeze.

The markets have been in increasing turmoil as the fall-out from the sub-prime collapse continues to have negative impacts on economies across the world.

The markets recovered somewhat yesterday after the US Federal Reserve cut its interest rates, but experts still feel a recession is looming.

Mr. Richards said Islanders should closely monitor what is taking place in the US and exercise prudence.

"It's not good news but it's not a disaster either," Mr. Richards said. "If the US economy is affected by the overall credit crunch and the consumer stays home or stops shopping, that's going to have a pretty negative effect on our tourism industry.

"I think our tourism industry, at the moment appears to be more vulnerable than the reinsurance industry, believe it or not, so that's something to watch."

Asked on the likelihood of tourists staying home, Mr. Richards, who is also a successful investment banker, responded: "I don't know, we analyse these things but we don't have crystal balls.

"But it appears to me it's a higher vulnerability on the tourism front than on the reinsurance front at the moment — we have to see how that unfolds into the summer — it's certainly a time to be watchful and prudent in our own financial dealings."

According to the Associated Press (AP) last week, JP Morgan Chase and Wells Fargo, two of America's biggest banks, joined a growing chorus in warning that the sub-prime mortgage mess is just the start of a sweeping lending crisis.

And some fear that consumers falling behind on all kinds of loan payments could tip the economy's scale toward recession.

Economist and Bermuda College lecturer Craig Simmons also weighed in on the US's economic woes, saying it is still too early to say how much impact it will have on Bermuda.

He said: "The very nature of the sub-prime mortgage meltdown is such that we don't know and will not know the full impact for months to come. At the heart of the meltdown are complex financial instruments that have never been tested in a bear or declining market.

"Equally alarming is the fact that investment experts purchased huge quantities of these instruments (collateralised debt obligations or CDO and asset-backed securities) for clients without understanding how these instruments produced (or lost) value.

"Investment experts believed what the rating agencies told them, that these securities were as safe as US Treasury bills, yet offered a higher rate of return. The moral of this story is that if you cannot understand how an asset works, don't buy it!"

The AP also reported that cash-strapped consumers are having a tough time making payments on credit cards, on home equity loans and even for their cars.

Mr. Richards added: "We've had a three quarters of one percent cut in the Federal Funds Rate this morning by the Federal Reserve which surprised the market.

"There is a great deal of panic and negative sentiment in global markets as we speak. This often happens during times of uncertainty."

However, the overseas stock market crunch has not greatly affected companies listed on the Bermuda Stock Exchange, said Mr. Richards, who described locally-listed companies as "resilient".

He stated: "I have this morning been looking at the publicly-traded stocks that are Bermuda based such as Ace, XL, Endurance, RenRe, etc. and they haven't been doing too badly.

"They have been hammered pretty well already this month but in the panic that happened this morning, they're pretty resilient, which if you look at it that way, it's the market's view that most of the bad news is already factored in.

"I think this is pretty good news for Bermuda. I think it's a pretty good indicator that most of these companies are viewed to be sound.

"It's viewed that these companies' exposure to the sub-prime problem is fairly limited — that's what I've been reading. The company that seems to be worse affected is XL Capital which has a significant stake in one of these companies involved in bond insurance."

With big name hotel developments in the pipeline such as a new Ritz Carlton Hotel to be built at the Par-la-Ville car park, a possible new St. Regis resort built on the old Club Med site, some are wondering if these firms will be able to secure the proper financing.

Also in the plans is the controversial Southlands development, a deal between Government, Southlands Ltd. and the Jumeirah Group, which would ultimately see a 497-bed facility developed. Government has yet to announce the finalisation in the deal with St. Regis, despite promises by Premier Ewart Brown that construction on the project would take place last year.

Asked if he thought this would affect the feasibility of these projects, Mr. Richards speculated: "They all get financed in global debt markets or private equity sources — hardly any get financed locally because we're talking about hundreds of millions of dollars.

"The credit crunch means there is an increase of aversion to risk by people who lend and invest money, it's going to make financing of these projects much more difficult for the investors.

"Certainly, some of these projects might be at risk because of the developments globally, but we will have to see, how well they do it, in financing these things.

"Certainly the environment for get the financing necessary for these projects has worsened materially in the past six months — it has worsened a great deal — we might see some postponements."

Mr. Simmons seemed to concur with Mr. Richards' sentiments, adding any shortages of credit in the US, UK and the EU is a threat to the viability of project development, mergers and acquisitions.

"The costs of raising the requisite funds to finance a hotel development has undoubtedly increased since this time last year," he stated.

"It maybe the case that developers will have to wait until credit markets regain confidence. The Fed is trying to play its part with interbank rate cuts, but this does not address the deeper issue of confidence."