Bermuda Asset Management's (BAM) chief investment officer Bob Richards, in his quarterly market commentary, took a look at the direct hit on Bermuda's economy following the WTC disaster and surmised that it could have a negative impact not only on Bermuda, but also the Government.

Mr. Richards is a former Cabinet minister and BAM is the investment manager of Government pensions, but he said the purpose of his commentary was "analytical rather than political".

In a newsletter, Mr. Richards wrote: "It is not customary to include remarks about the Bermuda economy in our commentary for a number of obvious reasons including its small size and lack of impact on the major markets we cover."

But, Mr. Richards said the paradigm had shifted after the WTC attack as Bermuda's economy had taken a direct hit in its primary industries: insurance, reinsurance and travel.

Mr. Richards concluded that the fallout from the effect on these industries, could be lower government revenues.

Mr. Richard wrote: "As most of Bermuda's taxes are consumption based, a slowing in the travel industry and temporary curtailing of local spending in the reinsurance sector is likely to result in lower government revenues. An absence of corresponding government spending cuts would either increase the need for higher taxes at precisely the wrong time or increase borrowing, an action that may earn the disapproval of the rating agencies.

"A credit rating downgrade of Bermuda would result in increased borrowing costs for Government.

"Also since the credit rating of Bermuda-based financial institutions depends, to some extent, on the financial strength of the home country, these institutions could face rating downgrades as well."

Mr. Richards called sharp increases in government expenditure, throughout the year, "troubling", adding: "Such increases were clearly based on an economic paradigm starkly different from that which we now face. No one could have anticipated the events of September 11, but how quickly we react to this new and difficult world will be important to the future of Bermuda's economy...it is critical that the Government makes the correct fiscal adjustments during this difficult period," he concluded.