WASHINGTON, Feb 9: The collapse of Enron Corp. and subsequent probes into fraud and accounting irregularities have not only hurt financial markets and other companies, but could impede a US economic recovery, analysts say.
The meltdown of what had been the seventh largest US corporation has been weighing on other firms with complex or questionable accounting.
But economists say that the fallout from the Enron affair could ultimately damage business and consumer confidence, and possibly even delay the recovery that most experts say is building.
Steven Wieting, an analyst with Salomon Smith Barney, said that the Enron Enron affair has also affected corporate bonds, making it more difficult and expensive for firms to borrow money.
Tyco, for example, ended up tapping bank lines of credits — which increase interest costs — because of fears it may not be able to sell short-term bonds to get needed cash.
Real or imagined, there has been an impact in financial markets and financial markets are closely tied to economic performance and to business confidence and consumer spending, through the wealth effect, Wieting he said.
The loss of confidence in the financial reporting of Corporate America could hurt both consumer and business spending, added Sung Won Sohn, chief economist for Wells Fargo.
Slumping stocks may be a result of the loss of confidence, but could create more woes for a recovering economy.
Leading indicators across the economy are pointing up. But stocks, another leading indicator, are pointing down, said Wieting.
Equities are stuck in a rut for the time being, Sohn said in a note to clients. Investors are shunning stocks that face accounting and financial problems. There is fear that heavily indebted companies will have to issue large amounts of stocks to repair their balance sheets. In view of accounting irregularities, foreign investors could question the premium on US stocks, deciding to invest closer to home. The contagion from the US could infect firms overseas.
People have the idea that (accounting) is objective, but it’s very subjective, he said. Every single form of accounting is correct.
Still, he said that confidence in corporate statements will be an important factor going forward.
A lack of confidence, justified or not, may cause credit to dry up for corporations, and may ultimately cause more failures that will impede a recovery.
The important thing is to get at the truth, and companies should be wiling to provide whatever data is necessary clarity may be more important than regulation.
Sohn said however that he did not believe Enron would drag the US economy down and that the scandal may have some long-term benefits.—AFP
