TWO of Bermuda's leading business figures have spoken out on Bermuda's financial crisis, claiming the worst is yet to come, and blaming Government for failing to embrace the economy's only major driving force: international business.

Grant Gibbons, former Finance Minister and deputy chairman at Colonial Group International, and Shadow Finance Minister Bob Richards, who is president of Bermuda Asset Management, have both called on the Premier to stop alienating the island's international business sector as the island faces the worst recession of recent times.

Both Dr. Gibbons and Mr. Richards claim the current economic downturn will impact Bermudians far more than that of the early 1990s, thanks to our complete dependence on international business.

"It's fair to say we have all our eggs in one basket," Dr. Gibbons told the Mid-Ocean News.

"Let's look back to 1989 to 1990 ¿ the last recession in Bermuda. It's an interesting parallel. The important thing to recognise is that the Bermuda economy was different at that stage.

"Tourism was a far more important part of the economy proportionally. The proportion of income from tourism versus international business was about 1.5: 1 ¿ and that has reversed dramatically. In 2006, the last available figures, international business was 4:1 versus tourism. We're in a different economic environment."

Mr. Richards agreed, adding that the recession will be more "deeply felt" this time due to an "adversarial relationship" between the current Government and the international business sector.

"The problem is that this Government has been alienating international business at precisely the wrong time ¿ not that there's a good time, but the timing couldn't be worse," he said.

"We've seen our marquee companies doing different things this year ¿ XL has major problems, and ACE has moved its charter to Switzerland, which is a negative commentary on Bermuda.

"What we have to do ¿ what Bermudians need to know ¿ is that while global forces are definitely at work here, the extent to how it is felt has a lot to do with the actions of our Government.

"Whether it is a shallow or deep recession has everything to do with Government policy. So far Government has done all the wrong things. We warned of a recession in February and they did not acknowledge it until August. Now they grudgingly acknowledge it, but the Government has not been prepared for a downturn. Things will be worse as a result."

He added that Bermuda's economy is entirely dependent on a small group of powerful insurers and reinsurers, who are free to choose whether to take their business to another jurisdictions.

"I think one has to remember that the entire economy is driven by international business," he said. "The engine is international business. Only a few people call all the shots ¿ the members of ABIR, the Association of Bermuda Insurers and Reinsurers.

"We're talking about a handful of people. The Premier has gone out of his way to alienate these people. We have to stop doing that first ¿ it's not just the work permit or term limit policy. What has built international business from the 1970s until the turn of the century was a good working relationship between international business and the Government. That has gone. It is now an adversarial relationship."

Dr. Gibbons too sees the work permit and term limit policies enacted by the current Government as part of Bermuda's worsening image in the international business market.

"I think if we get back to the basic issue, international business has a range of jurisdictions to choose from ¿ the Caymans, Ireland, Switzerland," he said.

"The degree to which Bermuda is considered attractive or unattractive is important ¿ it's a very expensive place to do business. It is difficult with the current work permit and term limit procedures for companies to undertake the staffing they want.

"There is a clear move to shift staffing to other jurisdictions, and there is concern over the relationship between Government and international business. The bottom line is that Government has to do a much better job to welcome international business. I fear unless there's a real effort by Government, we will lose business to other jurisdictions."

Dr. Gibbons added that the island's professional services industries would start to feel the effects of the precarious (re)insurance sector, especially as the number of new international businesses registering in Bermuda is falling.

"International business is affected by the financial crisis," he said.

"Many of our reinsurers have had write-downs and losses on portfolios. This has affected profitability and the ability to raise capital. That has been the real tightening of liquidity by banks and other financial institutions that have traditionally loaned money.

"We are seeing an increase in caution, and job retrenchment. Businesses are battening down the hatches. There's been a huge decline in stock prices, which makes it more difficult to raise capital. All of that speaks to the spending that international business does in Bermuda, whether insurance funds or financial intermediation. This impacts spending on professional services, like law firms and accounting firms."

Dr. Gibbons warned that a slowdown in the (re)insurance sector will manifest itself in the housing market, as well as affecting small Bermudian owned-business including restaurants and taxi services. The problem will trickle down to Bermudians' mortgages and loans, which will in turn impact the greater economy.

"Bermudians employed directly by international business, or who depend on it ¿ that is, taxi drivers, restaurants ¿ are likely to be affected," he said.

"It's already started. New registration of international businesses is down 40 per cent in the second quarter versus the same period in 2007. We're seeing a slowdown already and we haven't seen the third quarter data yet.

"International business is one of the largest employment sectors. The degree to which these employees stop spending ¿ because of salaries or bonuses or job retrenchment ¿ will have an impact. The concern now is a slowdown.

"There is the housing market ¿ I've heard anecdotally that there has already been a slowdown in the rental sector. This will impact Bermudians who have apartments or houses they rent to non-Bermudians in the international business sector. This in turn will affect Bermudians' mortgages and loans, which will impact the broader economy."

Dr. Gibbons believes that Bermuda's dwindling tourism figures will continue to suffer thanks to the financial crisis overseas, compounding the island's economic problems.

"We have to remember Bermuda is a service economy, driven by tourism and international business," he said.

"One of the important ways to look at it: how will this credit crisis impact our customers, that is, our visitors and international business? How they are impacted will affect how Bermudians fare.

"The visitor issue is clear-cut. Vacation travel is considered discretionary spending. A large proportion of our visitors are from the east coast US, and we've seen a blow to US consumer confidence. There's been a drop in housing values, and increase in foreclosures and people defaulting on mortgage payments. There's unemployment in our key markets ¿ New York, Boston and other areas with financial service sectors.

"With what happened to Lehman Brothers and Bear Stearns ¿ it is their employees we are trying to attract as visitors," he explained.

"Their bonuses have been hit, stock prices are down, and their perception of their wealth and spending ability has taken a blow. Air arrivals are down 9 per cent, and visitor spending ¿ a more direct measure ¿ is down almost $33 million in the first half of 2008. We're already seeing an appreciable decline in this important sector of our economy."

Dr. Gibbons believes the last recession may be seen as a template for our current troubles in that expats may be forced to leave the island, as they did in their droves in the early 1990s. However, he warns that as Bermuda can now no longer rely on income from tourism, this recession will prove more damaging in the long term than the last.

"From 1989 to about 1993, there was a recession in the US," he said.

"Bermuda followed a couple of years later, and from 1990 to 1993, things in Bermuda slowed down appreciably. Look at the statistics ¿ quite a few non-Bermudians left the island, so we effectively exported our unemployment problems. There was a more than 20 per cent decline in jobs held by non-Bermudians from 1989 to 1993.

"In those same years, the decline of jobs held by Bermudians was only five per cent, so the 20 per cent is an appreciable difference. Some may see that as positive, but if there was a real decline, spending in all sectors would be affected ¿ retail, transport, entertainment, housing and education.

"In that period, there was also a decline in air arrivals and expenditure, but tourism was a more important part of the economy. International business is a much more significant part of the economy now. To a large degree, Bermuda's fortunes are tied up in the impact of this credit crisis on international business."

Dr. Gibbons believes Bermuda's recession is in "early days", despite this week's headline news that XL chairman Brian O'Hara was forced to sell 80 per cent of his shares in the insurance giant. He sees the combination of a weak economy and the upcoming US election as an incentive for Bermuda and its Government to get behind international business before it is too late.

"It's still early days ¿ the full impact remains to be seen," he said.

"Companies are seeing a much more difficult operating environment. It appears there might be consolidation as weaker firms merge. AIG could well be dramatically smaller as they sell of assets to pay back the loan from the US Government.

"I would say that no one would have expected the situation that AIG got itself into. No one expected that some of the larger flagships would be under the pressure they're currently under. For XL, part of it was the consequence of the sub prime crisis and their connections to that. When you combine the operating pressures and stress of the current climate and other political issues, we should be very concerned."

Dr. Gibbons urges the Government, in the face of US political pressure, to ensure Bermuda is seen as "competitive" against other jurisdictions ¿ including Switzerland, where ACE recently relocated its charter.

"We need to be as competitive as we possibly can as far as international business is concerned," he said.

"If (Democrat Barack) Obama is in the White House, he's under pressure to fund some of the financing and injection of liquidity into banks, and to finance structured derivative products. The issues about tax, and the degree to which offshore jurisdictions like Bermuda are seen as tax loopholes, are a real concern.

"It's fair to say that could be a real threat. I'd be pretty likely to vote for Obama personally, but Bermuda could be very much under threat vis-à-vis tax issues that attract international business.

"It's not a question of demand from international business and tourism, but how competitive we are with other jurisdictions. Switzerland is at the top of the mind, as well as Ireland and others. By and large we have to be sensitive about our competitiveness and attractiveness ¿ it affects what we need Government to do. Switzerland is looking very attractive these days, and tax relationships are stronger between the US and Switzerland than between the US and Bermuda."

While Dr. Gibbons is clear on the Government's essential role in welcoming international business, he admits that it is difficult to predict what will happen next in the global financial crisis.

"What's so interesting and challenging about all this ¿ as someone involved in the insurance sector and financial services ¿ is that no one, here or abroad, has seen anything quite like this before," he said.

"With the interconnectedness of the credit and financial markets worldwide, it's fair to say no one knows what will happen next. Warren Buffet couldn't predict how it'll play out."