Those of you keeping track of the news yesterday, we had to watch the devastation in Mumbai as a large coordinated attack occurred and is on-going today. So far, attacks on two hotel complexes and several other locations in India’s commercial center have left 121 people, including 15 policemen, dead and 370 injured in fighting more than 36 hours after militants first struck according to Bloomberg.
R.R. Patil, deputy chief minister of the state of Maharashtra said the attackers arrived in Mumbai from the sea. Mumbai is the financial center of India and has been previously been a target for attacks. However, this time the assailants choose to hit where the rich and famous come to be pampered and shop. Apparently, Westerners were the main target of the terrorists.
Prime Minister Manmohan Singh is facing intense pressure to act as papers in India are decrying the government's "unwilling and incapable" of dealing with terrorism. According the BBC, Singh has promised to strengthen anti-terrorist laws and hinted at retaliation against Pakistan if their involvement in the attacks could be proven. "We will take up strongly with our neighbors that the use of their territory for launching attacks on us will not be tolerated, and that there would be a cost if suitable measures are not taken by them."
This is truly disturbing as both India and Pakistan are nuclear powers. Pakistan has denied any involvement in the attacks and has offered assistance in bringing the attackers to justice. The Mumbai attacks may disrupt the recent positive developments between India and Pakistan. Recently, Pakistani President Asif Ali Zardari made an important unilateral offer to make no first use of nuclear weapons in any conflict.
Pakistan has seen its economy collapse from the global credit crisis and has seen its inflation rate soar to 25%. The IMF is set to provide a $7.6 loan next week after approving the loan on Monday to avert a balance of payments crisis. Under the terms of the loan, Pakistan gets $3.1 billion immediately and the rest will be phased in quarterly. Remember on December 27th last year, a suicide attack on a political party gathering claimed the life of Benazir Bhutto. She had recently returned to the country after 8 years of self-imposed exile and her death started a series of further changes that caused then PM Pervez Musharraf to lose power. From an economic and political standpoint, Pakistan remains unstable.
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For the United States, this is a dangerous and difficult foreign policy situation. The US and Pakistan have been at odds with the US attacks against Afghani rebels in the mountainous region between the countries. Also, the US and India have recently finalized a civilian nuclear cooperation agreement that President Bush signed into law on October 8th. This week, President-elect Obama named current US Defense Secretary Robert Gates to stay on to run DOD. Tuesday of next week, Obama will name the rest of his security team. Obama will have a tall order to fill in keeping the nation safe during his tenure. While President Bush remains one of the most unpopular presidents, his record on domestic terrorism is truly exceptional and we hope that Obama will be able to match it.
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While the loss of life in Mumbai is horrific, the financial markets are reacting by selling risk and this is manifested in selling equities and buying US dollars. We have not seen any panic running into short-term US Treasuries. The markets appear to be saying that they are worried, but not excessively so. The Mumbai developments add to the reasons to be negative for the stock markets. The focus on emerging markets and their instability will prompt more investors to pull their money back from this sector. The collapse of the Russian ruble shows how the mighty in the EM have fallen and the risk that remains from the credit crisis.
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