It's a year to the day since Lehman Brothers filed for bankruptcy, sparking a market meltdown that sent shock waves the world over. After no buyer could be found for the 158-year-old New York investment bank, the Dow Jones Industrial Average plummeted a staggering 504 points in a single day and a global financial crash and credit crunch ensued. The effects reverberated around the world and Bermuda has not proved immune. Business Editor Jonathan Kent examines how the crisis has impacted the Island's economy over the past 12 months.

The US was already in recession before Lehman Brothers crashed a year ago, but the fall of the venerable investment bank is widely regarded as the spark that ignited a financial crash of staggering proportions.

It was an event that effectively shut down the flow of credit, as trust in the financial system collapsed.

With the world on the brink of complete financial meltdown, governments and central banks around the world took unprecedented measures to resuscitate their ailing economies. Over the past year, hundreds of billions of dollars have been spent on propping up financial institutions, who borrowed 10, 20 and even 40 times their assets in the pursuit of returns that proved unsustainable.

As a global financial centre in its own right, Bermuda's fate is intertwined with that of the world's major economies, especially the US. There was no way the Island was ever going to be immune from the crisis.

Bermuda's economy has felt the pain over the past 12 months in tangible ways that have eroded the personal wealth of many and cost some their livelihoods. And it has raised great uncertainty over the future.

JOBS

The financial services sector that drives the Bermuda economy has seen significant job losses over the past year. Insurers, banks, accountancy firms and fund management companies all axed jobs.

XL Capital, Ernst & Young, Butterfield Fulcrum Group, Bank of Bermuda HSBC, Citigroup and Swiss Re were among those revealed to have made job cuts, but there were many more whose downsizing never appeared in the media.

As David Ezekiel, chairman of the Association of Bermuda International Companies told The Royal Gazette, many companies are downsizing by attrition, not replacing workers who leave and not renewing the work permits of some guest workers.

Government's annual employment survey showed that the Bermuda economy gained 362 jobs in 2008 to close the year with 40,213 posts, indicating that the Island's job market as a whole had suffered nothing like the damage sustained elsewhere.

One reason was the comparative resilience of the insurance sector, which forms the lion's share of the Island's international business sector, compared to other financial sector businesses. Though most of the Island's insurers investment losses on the plunging financial markets and faced larger-than-normal catastrophe claims following hurricanes Gustav and Ike, claims were paid as usual and premiums were gathered.

Problems ran deeper for XL, who suffered a loss of more than $2.5 billion last year, and AIG, an employer of around 200 people in Bermuda, which was saved from collapse by a US Government bailout announced the day after Lehman filed for bankruptcy.

The Island's funds sector saw dramatic shrinkage. Bermuda Monetary Authority figures showed the net asset value of Bermuda's investment funds was $158.9 billion at the end of the first quarter - a drop of almost $90 billion compared to 12 months earlier.

With hedge funds globally seeing a net inflow in recent months and asset values rebounding, there are hopes that this trend will be reversed in future quarters.

However, more job losses are likely as this year, particularly in distressed tourism and retail and in the construction industry, which has boomed in recent years on the back of major office building projects all over Hamilton.

According to Alex DeCouto, president of the Construction Association of Bermuda in a newsletter published in April, the industry faces "a severe and sudden downturn" in the fourth quarter of this year as many of the major projects are completed.

Bermuda's tourism industry has also suffered badly from a large drop in both leisure and corporate visitors.

The latest figures make grim reading, with air arrivals down 14 percent in the second quarter. Those visitors spent 24 percent, or $28 million, less than last year. Hotel revenue was down $69 million, or 29 percent, in the April through June period.

BANKS

For many Bermudians, the day that Butterfield Bank announced it was launching a Government-backed sale of preference shares to raise $200 million to meet enhanced regulatory capital standards, was the day the economic crisis really reached Bermuda's shores.

The announcement came of Friday, March 6, as Finance Minister Paula Cox announced the Government's move to guarantee the principal and dividends of the shares to purchase the shortfall if the private sector did not snap up the full $200 million was aimed at "preserving the stability and resilience of the Bermudian economy and protecting bank depositors".

The move came after Butterfield had to write down the market value of investments tied to US mortgages by close to $200 million last year.

Stress tests by the Bermuda Monetary Authority and the bank itself each found that the bank needed to raise extra capital to meet the regulator's heightened standards of capital adequacy to ensure it could withstand a severe economic downturn.

Government's involvement was bold and, as far as the scale of the deal was concerned, unprecedented. As it turned out, Government did not need to buy any of the preference stock, as the offering was oversubscribed, with the vast majority being purchased by Bermuda-based investors.

Butterfield made no further write-downs in the second quarter and the stabilisation of the US housing market could mean that the troubled investments may be set to regaining value in the coming quarters.

On the same day as the Butterfield announcement, Capital G Bank announced that its parent company Edmund Gibbons Group Ltd. had injected $20 million to boost the bank's "capital buffer".

Neither the Bank of Bermuda HSBC, nor the Bermuda Commercial Bank, needed to raise extra capital.

Overall, while investments tied to US mortgages caused a few problems for Butterfield and Capital G, the conservative long-standing conservative lending practices of Bermuda's banks stood the sector in good stead.

RETAIL

The retail sector has felt more pain than most, as consumers have tightened the purse strings. Retail sales volume — that is total sales adjusted for inflation — started to drop three months before the Lehman Brothers crash and have continued to fall every month since.

During the second quarter of 2009, retail sales in Bermuda fell to $277 million, compared to $290 million last year. Apparel stores sales dipped by an alarming 18 percent. Motor vehicle dealerships continued to suffer, some feeling the strain from a continuing weakening of the dollar against the euro. Food stores were the only sector to see improved sales, as food prices continued to rise.

Kristi Grayston, who chairs the Bermuda Chamber of Commerce's Retail Division, said last month that the numbers were "frightening" and that retail, a major employer of Bermudians, was "an industry in crisis".

She believes the numbers are evidence that even those residents for whom nothing has changed during the crisis had curbed their spending, to the detriment of the local economy.

INFLATION

If the downturn has had a silver lining for Bermudians, it's in the cost of living. Some believing the economy had been overheating before last summer, driven by waves of new insurance companies setting up on the Island and a boom in construction.

Last year, Bermudians suffered an horrendous rise in the cost of electricity as the rise of crude oil prices to a peak of $147 a barrel last summer caused fuel prices to rocket and power company Belco passed on the added cost to consumers through the fuel adjustment charge.

The crisis caused the price of oil to drop by more than $110 from its peak, before rebounding to its current level of around $70 a barrel. That has made a significant difference to Bermuda consumers in what they pay at the pump for gasoline as well as in their energy bills.

The boom in construction has significantly increased supply in both commercial and residential real estate, easing the upward pressure that had previously caused rents and home prices to soar.

Rents recorded their first monthly fall in more than two years in June, although they were still two percent higher than a year earlier.

Price rises have been smaller across the board and in June this year, the annual rate of inflation fell to 1.2 percent — its lowest level in at least 32 years.

PUBLIC FINANCES

When the economy contracts, Government's revenue base shrinks. At the same time, Government is expended to maintain levels of public sector spending — and even increase capital project expenditure — to boost the flagging economy.

Like most governments across the world, Bermuda is borrowing more. By the end of last year, public debt was estimated at seven percent of gross domestic product (GDP). That is expected to break 10 percent this year.

Opposition MPs have argued that Government has weakened its position now by overspending in good years.

In March, MPs approved the lifting of Government's statutory borrowing limit to $1 billion. It included provision for $250 million to be used to support the economy in cases of systemic risk. The Temporary Loans Amendment Act was also passed to allow Government to effectively increase its overdraft limit from $15 million to more than $110 million.

The Government expects its borrowing to rise to $640 million in the current fiscal year.

Rating agencies have paid attention to the increased borrowing. Moody's downgraded Bermuda Government bonds to Aa2. Ratings downgrades are important because they make it more expensive for Government to borrow money.

Standard & Poor's lowered its outlook for the Island's creditworthiness to negative from stable, citing risks from the Island's banking sector. A more encouraging assessment came earlier this month from Fitch Ratings, which affirmed Bermuda's AA+ sovereign rating and said the Island was "in a strong starting position for facing the global economic crisis", because of its low levels of public debt, relative to other countries.

BSX

Most stock markets around the world are at a dramatically lower level than they were this time last year and the Bermuda Stock Exchange is no different.

A year ago today, the Royal Gazette / BSX Index closed the day at 4,316.98. Yesterday it closed almost exactly 2,000 points lower, at 2,317.73.

The wiping out of millions of dollars worth of local wealth was largely a result of the decline of the BSX's biggest domestic company, Butterfield Bank. Yesterday, its common share price closed at $5, compared to just below $14 a year ago today.

Many other local companies have suffered meaningful declines. Argus Group Holdings Ltd., a major investor in Butterfield Bank, made hefty write-downs on the market value of some of its assets, leading to a $115 million net loss for last year. Its international life insurance unit also had exposure to the Bernard Madoff fraud. Argus shares have dropped from $14 last year to $8.50 a year ago.

The BSX Index lost almost a third of its value in 2008, and this year to date it is down by a further 32 percent, as it has not followed the huge rallies seen over the six months on the US stock markets.

On the plus side, the trend in recent months is upwards. On April 15, the Index touched a six-year low of 1,977.68.