The fall-out from American International Group's $85 billion bailout by the US government to prevent it from bankruptcy could have much wider-reaching implications for the future of Bermuda's economy and jobs.

That is according to former opposition leader Dr. Grant Gibbons, who reckons the Federal Reserve's decision to hand the world's biggest insurance company a two-year loan, take a 79.9 percent stake in its stock and replace the management, may impact both the firm's operations and employees in Bermuda as well as having a knock-on effect on businesses Island-wide.

Craig Simmons, an economist lecturer at Bermuda College, has also warned of the Island's companies making big cut-backs in order to balance their books and foreign currency flowing into the country drying up.

But Finance Minister Paula Cox has moved to reassure Bermudians and the community at large that Government was working to ensure Bermuda's economy and the local and international business industries.

"This is an unfolding and ever evolving situation," she said. "As I indicated yesterday, Bermuda is a global player and just like other international players, it should be anticipated that we will feel the ripple effects of what is happening in the global markets. However, there are also timely reminders for us all, especially for the business and financial community of the continuing importance of proper risk assessment and risk management.

"However, with all that is taking place in the global economic community, I want to reassure the people of Bermuda and assure our stakeholder entities that the Ministry of Finance will continue to do all that is necessary to protect and safeguard Bermuda's national economic interest and to support our local and international business' operating environment as we navigate these challenging times."

Premier Dr. Ewart Brown added: "The recent events on Wall Street are concerning from a global perspective and I am confident the Minister of Finance and her team are effectively monitoring the situation and will be prepared to address the issues as they pertain to Bermuda."

Dr. Gibbons said the AIG fall-out would impact on a number of fronts, both on the company's staff and those which provide services to it.

"The first front is the potential job security for those that are working for AIG and providing services to it on the Island, depending on how the restructuring works out over the next six months to a year or two and that remains to be seen," he said.

"I think, as a number of people have observed, the terms are pretty stringent that they have imposed on them and whatever survives will be a much smaller company, I guess, that remains to be seen how that is done.

"It will also have a huge impact on earnings and pension issues that people normally get from working for a large international company like that."

He said the overall impact of the global credit crisis on US financial institutions, such as Lehman Brothers, and re/insurance companies, was having a knock-on effect on Bermuda's tourism industry, with a drop-off in tourists coming to the Island and business travel.

"Those that are working in the tourism sector are going to be under a lot of pressure and it also probably means that businesses could well be doing less business travel, which is another important tourism component, and some people certainly think business travel is keeping tourism going at the moment," he said.

Another factor affecting Bermuda's financial and re/insurance sector, according to Dr. Gibbons, was the impact on the balance sheet of those companies AIG was guaranteeing, with numerous firms concerned about their illiquid investments such as CDOs (collateralised debt obligations) and other derivatives.

"I think all of this means there is going to be a lot more of a conservative approach to spending money and hiring people and I think it is going to be a matter of battening down the hatches and preserving liquidity," he said.

"Add that to a soft market and less hiring and earnings, job losses variating stock prices and you get the general knock-on effect on the business environment."

But he said that one of the most worrying issues was the effect on international business overall, which has gone from a ratio of 1:1 in the 1990s to 4:1 today in terms of the level of spending in the local economy.

"We are dramatically more reliant on international business, its health and the spending that comes from that sector in the economy," he said.

Meanwhile, Dr. Gibbons believes that as a result of pressure on salaries and jobs, particularly in the international business industry and the local market, there would be a trickle-down effect with guest workers cutting back on housing, shopping and dining out, reflected in what is already happening in New York.

Mr. Simmons said that since 1996 the rate at which credit was created was almost double that of economic growth, suggesting that borrowing from financial institutions is increasingly relied upon to fuel growing consumer, construction, and capital spending, making the financial system less stable and more susceptible to shocks externally or locally.

He said as financial sector firms absorb multi-billion dollar write-downs, their net worth decreases, with financial institutions reducing their costs.

"Labour is usually the largest cost and so we should expect lay-offs as firms seek to meet capitalisation requirements of regulatory agencies and profit margin expectations of shareholders," he said.

"According to Labour Productivity Indicators published by the Department of Statistics, unit labour cost in international business is $1.26: a dollar's worth of output is costing $1.26. In other words, the international businesses operating in Bermuda as stand alone operations are unprofitable.

"There is a good chance that head offices will not look kindly at their Bermuda operations and scale down their presence here. The wide majority of Bermudians employed in international business are women, many of whom are bread winners. It follows that the children of these families will feel first-hand the effects of the credit crunch."

Mr. Simmons said that the flow of foreign currency in and out of Bermuda will also be adversely affected, as the incomes Bermudians receive from international business decline when jobs are lost, and investment income — which earns more foreign currency than tourism (from stocks, bonds, real estate, etc.) will further reduce the flow of foreign currency into Bermuda and he reckons it may be harder to come by in 2009 than at any time in recent history.

"Growth will be adversely affected," he said. "After at least two years of unsustainably high growth (over five percent), the outlook for 2008 and 2009 will have to be revised downward. Many Bermudians will welcome this news because it should also have a calming effect on the cost of living."

David Ezekiel, chairman of the Association of Bermuda International Companies, said that everyone was playing a guessing game at the moment trying to work out what was going to happen to AIG and what impact it would have on them or their business.

"We know that there are problems and that confidence is dented and we have seen what has happened in the past and it does have an impact on private sector projects, not just in terms of the availability of financing, but confidence in business plans if people with all these projects are depending on a robust tourism and airline product and when all that is down there is no doubt that, at a minimum, there will be a slowing down and at some point there might be a deferral of these," he said.

"I think in a way we have already an insurance sector dealing with a soft market if we take a look at the number of corporations that have set up in Bermuda and whether it be investments or the banking sector, it is all going to be impacted.

"It is going to be a rocky road for sure."