Lagos — The THISDAY Town Hall Meeting, the third in the series, presented the perfect platform for regulators and operators in the financial services sector to hold discussions on the international financial crisis and its impact on the Nigerian financial system. Although Nigerian commercial and investment banks have been insulated from the catastrophic scenes recorded in the US and some parts of Europe, the economic slowdown in advanced economies, is likely to take its toll on the rest of the world.

The biggest danger today is the global credit squeeze and the reluctance by banks to lend money to each other. The implication is that Nigerian banks which had easy access to international credit a couple of months, or a year ago, will find it more difficult get credit from international banks. Banks overseas that, on the surface, look healthy have every reason to be fearful after seeing venerable institutions like Bear Stearns, Lehman Brothers, Meryl Lynch, HBOS and Fortis going down in the maelstrom that has hit global financial system. Any institution that had its money stuck in any of the failed or ailing banks and mortgage institutions may have to kiss their money good bye.

Even the $700 billion bail out plan passed into law by the US government, last Friday will do very little to stem the hemorrhaging going on in the financial system, at least in the immediate to medium term. So if banks in the US don't start lending to businesses anytime soon, more and more companies will have to lay off workers and unemployment is certain to spiral which will impact on consumption and productivity.

Technically, the US - world's largest economy which accounts for almost 40 of global GDP - has slipped into a recession. For Nigeria, a slowing US economy should send warning signals to officials responsible for managing the economy. Just recently, the Federal Government announced that the 2009 budget will be predicated on an oil benchmark of $62.50 per barrel. Given the economic tightening that is happening in the US and the rest of the world, oil prices are likely to head south after a brief spike during the winter months. Even China which has been blamed for high oil demand, leading to high prices, is very concerned about the US economy which is its largest export market. If anything else, this is the time for our budget planners to be very careful when putting together the 2009 budget and perhaps be prepared to rein in spending.

The governor of the Central Bank of Nigeria, Professor Chukwuma Soludo has probably seen the signs and cautioned during the town hall meeting against the injection of excess capital into the financial system, as this can present a moral hazard and encourage irresponsible spending. So far, nonetheless, the N1 trillion injected by the CBN into the economy two weeks ago when it reduced its monetary policy rate by 50 basis points, relaxed borrowing from its discount window and lowered the liquidity and cash reserve ratios, has failed to have the desired effect on the capital market where asset prices have continued to fall.

That the Nigerian capital market has failed to respond to the intervention by the CBN a fortnight ago is an indication that liquidity in the financial system here is still tight. The surest indicator is investors' preference at the moment for investing in fixed income securities such as treasury bills and 10-year federal government bonds which have risen to some 10 percent and 12.75 percent respectively in the last one year. With interest rates that high and an appreciating naira, there is no way investors will turn to the capital market anytime soon where returns are much lower. What has happened is that they have simply rotated their portfolios to safer instruments where they can be guaranteed reasonable returns. Essentially, the flight to fixed income securities is being replicated in several markets worldwide as more and more equity markets lose value.

But while more advance capital markets may be able to absorb the losses owing to their depth, the Nigerian capital market where banking assets alone account for 65 percent of market capitalization, cannot afford to keep shrinking. That is why Soludo's emphasis during the Town Hall meeting was on safeguarding the financial system through a coordinated collaborative response to the global financial crisis, and not the isolated intervention being undertaken by various countries. Besides, other than Nigerian banks having limited access to international credit, all the big players from First Bank to GTBank may be exposed to the crisis overseas through their subsidiaries, albeit to a lesser extent. Even a former executive of GTBank privately admitted that the value of its Global Depository Receipts listed on the London Stock Exchange have been halved in the last few weeks. The same must have happened to UBA's GDR on the New York Stock Exchange.

Fortunately, governments are beginning to recognise the need for some kind of coordinated approach to the financial crisis instead of depending on the US to fix the global financial system. Two days ago, the heads of government of several EU countries met in France to discuss what can be done to save their financial institutions from going under. Surprisingly, the International Monetary Fund which acted quickly to save several Asian countries when they experienced a financial melt down in the 1990s has been rather quiet this time around. Perhaps this has to do with the fact that the Fund has never witnessed a financial crisis of this magnitude. The present melt down is said to be worse than the Great Depression of the 1930s.

Then again, the IMF and World Bank had not been set up during the depression so their economists, just like several economists around the world, are just as befuddled on how to respond to the crisis. It's just as well that both institutions have their annual meetings coming up this week. Hopefully, all finance ministers and central bankers will be on deck to fashion out a solution. Like Soludo said, "the situation requires the world to evolve a new financial architecture that can respond to a crisis of this magnitude."