The debt crisis of 1980s among LDCs (Least Developed Countries) and which arose out of the fact that; these countries had borrowed heavily from external financial markets to the extent that, they could not repay due debt out of their foreign earnings did not fundamentally change LDCs outlook to their financial structures.

This is evidenced by the extent to which the current financial crisis has impacted on these markets, which have not evolved at all.

As pointed in earlier articles, these financial systems seem to have maintained the colonial status quo where they had been designed to finance colonial trade in raw materials destined for western factories, and post-colonial African states have not changed their landscape for better, except in names and logos.

What one would have expected of these states was to turn in ward and reform their financial markets, reorganize and thereafter liberalize them, so as to make them efficient vehicles for mobilization of local savings and their subsequent investment.

Yet there is little evidence that this has been done, and even with the debt forgiveness under (HIPC-heavily Indebted Poor Country Initiative); it is highly likely that, these same LDCs will need more HIPCs in the near future IF their financial markets are not reformed to avoid a repeat of 1980s crisis.

Securities market however, is one of the financial intermediaries that are part and parcel of the minimal reform agenda LDCs have put in place to mobilize local savings and allocate these efficiently to competing ventures.

In ‘narrow’ financial markets as those to be found in LDCs, the principal financial instruments used by economic agents have been bank intermediated loans.

Yet equity raised from securities markets has an advantage over debt with respect to risk sharing, as such risks are shared between users of funds on one hand and providers of capital on the other.

This then acts as a protection against external shocks as abrupt capital flight and economic down turns, due to factors ranging from an adverse balance of payments to poor harvest due to adverse climatic conditions, all of which are characteristic of most LDCs.

More over, equity finance improves the efficient allocation of capital, as there is no conflict between lenders and borrowers with respect the to the level of riskness of project, as is the case where debt was used.

Equity markets helps to allocate resources efficiently when they direct saving flows to the best investment returns for a given level of risk. If there was no risk (ideal world) funds would be allocated where interest rates were uniform in all uses.

In the real world however, risk does exists and funds are best allocated when return differential are just sufficient to offset risk differential among users. Securities markets promote efficient use of resources when the allocation of funds is carried out at a least cost, or with minimal cost of transfer.

Organized securities markets have been traditionally associated with highly developed countries where there exists a wide range of negotiable financial assets with varying degrees of risk, yield levels, and maturities.

They are as it is put ‘the pinnacle of capitalistic economies’ as they have raised substantial amounts of resources for investment in most ventures whose capital needs bank based financial mechanism can not meet.

Taking the example from our region, Safaricom IPO (Initial Public Offer) in Kenya, could not have raised over USD 780 million it was targeting had it not used the NSE (Nairobi Stock Exchange) an amount no commercial bank or even a consortium of commercial banks in the region could not have helped to raise.

Securities markets world wide have helped raise substantial amounts of (capital) savings from disaggregated savers, a pool of which funds is invested long-term in viable ventures.

Securities Markets and Financial Crisis

Securities markets indexes are indicative of the dynamics within a given economy, especially the perceptions/expectations of investors with regards to economic fundamentals of underlying economy.

Such indexes which raise and fall with increase/fall in demand of securities traded on given securities market in an economy, are always used as a ‘barometer’ of the healthy or otherwise of an economy.

Financial and economic specialists as well as other stakeholders monitor indexes of international securities markets as FTSE 100 (London Stock Exchange), NASDAQ (for commercials) and Dow Jones (industrials) of Wall Street, New York; Nkikkei 225 of Tokyo, Hang Seng of Hong Kong, CAC 40 of Paris, DAX of Frankfurt, to gauge the ‘mood’ of investors, and their expectations at a given point in time.

Although these are expectations of performance of companies quoted at the respective securities markets, they nevertheless measure expectations of the performance of the underlying economies as most of these companies contribute enormously to the GDPs of these western economies. When such indexes are falling, simply implies that many investors are leaving the markets (selling their securities- the so called bears market) and this leads to a free fall of shares of companies whose balance sheets are virtually wiped out as their capital in terms of shares is diminished.

Decline in stocks prices causes bankruptcies of companies and severe macro-economic difficulties (governments raise funds from securities markets by way of bonds/treasury bills/stock, and this is difficult under stock market crashes) including business closures (banks raise their capital from securities markets, and are constrained when these markets are in turmoil) redundancies and other economic repression measures which then feed back (cyclic) into their economy (if not addressed) and cause even more severe economic consequences to underlying economies.

The current financial crisis has seen stock markets indexes fall (on average reaching as low as 21% (Great Depression of 1929 saw stock prices fall by 28%) the difference being that, the current stock markets fall were short, sharp, and shock international financial markets so fast that billions of dollars in investors money was lost in a record short period of time which was unprecedented in the history of securities markets.

Iceland recorded the highest fall at 77% which like the plunge recorded by Moscow stock exchange of around 60%; saw their stock markets closed for a while to avoid more speculative selling of securities that would see more companies balance sheets wiped off, and thus liquidated which would then impact on the economies out put and render the recession worse.

While investors withdrew from investing in securities in these times, they switched to currency trades which saw the values of some hard currencies such as the US dollar, Japanese Yen, and the Euro increase.

The UK Sterling Pound lost heavily partly as a result of the impact of the financial crisis on UK economy, whose financial sector has been one of the main sectors of their economic growth, and London the world financial centre, a position that has been shaken by the current global financial crisis.

Nonetheless, the impact of fall in prices of instruments traded on these securities markets is that; institutional investors, companies and governments can not raise the required capital for investments and thus growth, as savers are reluctant to stake their money in traded securities.

This stifles growth of most sectors as it has a multiplier effect where a closure in the follow of capital from one segment of the financial market and for that matter, a very critical one: the securities markets; send a wave of closures on other financial markets (as buyers of funds in one financial market are sellers in another) which strangles underlying economies.

This reduction in flow of funds in the economy denies companies of resources with which to finance their operations and these have to reduce their out put as on the demand side consumers are also hit hard for their can not get credit to finance their consumption.

Under these conditions governments through their central banks exercise their cardinal duty as ‘lenders of last resort’ and must avail credit to kick start such recessed economies by way of stimulus packages and other economic measures to that end.

To be continued...