The streets of the city of London, the capital’s financial district, were quiet when the bomb went off. To mark the Conservative Party’s victory in the United Kingdom’s 1992 general election the day before, the Provisional Irish Republican Army placed a massive Semtex bomb in a transit van outside one of London’s grandest buildings, the Baltic Exchange. The bomb exploded on Friday, April 10, at 9:25 pm, killing three people and injuring 91. Had it been detonated several hours earlier, when the streets around the exchange were full of the City’s financiers and traders, the carnage would have been much worse. Even so, the explosion caused considerable damage in the neighborhood’s narrow, warrenlike streets.

WHEN THE Irish Republican Army bombed British financial targets in the 1990s, investors and the markets barely blinked.

The bombing of the Baltic Exchange signaled a turning point in the IRA’s terror strategy. The paramilitary group had previously attacked military and political targets in England and Northern Ireland. The deliberate attempt to damage the UK’s financial power base was new, and far more treacherous. “Part of the IRA’s tactics were to disrupt the British economy,” says Anthony Richards of the Centre for the Study of Terrorism and Political Violence at the University of St. Andrews in Scotland.

The Baltic Exchange bombing caused hundreds of millions of pounds worth of damage and disruption, and perhaps more significantly, it created a climate of fear. In the five years that followed, the IRA made several more attempts to strike at the heart of the British financial establishment. It aimed to destabilize the economy to such extent that Westminster politicians would have no choice but to make concessions on the matter of British control of Northern Ireland (see “Northern Ireland’s Troubled Economy”).

TOP VIEW From 1992 until 1997, the Irish Republican Army carried on a terrorist bombing campaign targeting British financial institutions. The ordeal parallels America’s current struggle against terrorism in some encouraging ways. Despite the fear and uncertainty suffered by British investors and society overall, the economy and the markets did not flinch and the IRA’s campaign of economic terror ultimately failed.

The parallels between the United Kingdom’s experience in the 1990s and the security challenges currently facing the United States are striking: Large, sophisticated economies endure threats of disruption and violence from politically motivated terrorist organizations. Major global financial centers—the City of London and Wall Street in New York—have become prime targets of violence, causing heightened levels of market uncertainty. This has forced the financial industry to invest vast resources in security, while investors and everyday citizens face a troubled future.

American investors living in dread of the next orange alert can take some comfort from the British experience with terrorism, but only some. “The economic costs [of the terror campaign] were not significant enough to impact the UK economy as a whole, so investors were not scared off,” says Paul Wilkinson of St. Andrews’ terrorism center. However, he adds: “If there had been a more sustained campaign in the financial center, then it could have had some effect.”

In the Crosshairs
Paul Rogers of the Department of Peace Studies at the University of Bradford, England, has written several papers on the economic impact of IRA terrorism in Britain. He argues that the shift in the paramilitary organization’s focus in the early 1990s from economic targets in Northern Ireland to those in Britain was part of a significant change in strategy. The explicit targeting of Britain’s economic base began in 1992 and continued—with the exception of an 18-month ceasefire starting in mid-1994—until the formal peace process began in 1997. During this time, the terrorist organization made six attempts to detonate large-scale bombs in British financial centers, three of which were successful.

Almost a year after the bombing of the Baltic Exchange, the IRA detonated another bomb in the City of London, targeting the Bishopsgate area. It killed one person and injured 44 others, while causing damage estimated at $1.5 billion. The next attack rocked South Key near Canary Wharf, a rapidly expanding business center a few miles to the east of London’s financial district. The bomb killed two people and again caused substantial damage. These incidents agonized London’s business establishment, causing many to wonder if the attacks would hurt the City’s international standing. “There was a huge worry that Frankfurt would gain the upper hand over London as Europe’s leading financial center, particularly after the Bishopsgate bombing,” Rogers says. (Click image to enlarge)

In addition to attacking Britain’s central business districts, the IRA used small explosive devices against transport facilities to attempt to unhinge the UK’s infrastructure. On the same evening of the Baltic Exchange bomb, a van exploded in North London at one of Britain’s busiest traffic junctions. The IRA added to the confusion and uncertainty by issuing frequent false alarms, which only ratcheted up the anxiety. “They gave hoax calls on devices planted at specific points on the motorways, which caused traffic gridlock,” Richards recalls.

Financial trade publications were quick to point out London’s vulnerability. In June 1993, Bank Systems & Technology wrote of the Bishopsgate bomb: “. . . the strategic damage the IRA seems to have wanted to inflict—and succeeded—is seriously sapping the world financial community’s confidence in the Brits’ ability to keep the financial district safe for business. The fact that the blast occurred on the first anniversary of another such outrage is being interpreted as a message to foreign banks that the IRA can come and go in England with impunity.”

The global and dynamic nature of the financial markets heightened these concerns. “The businesses here are not tied to the United Kingdom because they do a lot of business in this country. They are here because it’s a good place to do business internationally, so they could move,” says Greg Williams, spokesman for the Corporation of London, the local government body that administers the City. “That makes us especially vigilant in making life comfortable and secure for them here.”

Measures to ensure that security increased the cost of doing business in the City. “After the Baltic Exchange bombing there was a change in approach to procurement design for buildings,” says John Haddon, London-based director of the security consultancy Arup. “We saw elements of structural and facade resilience against bomb blasts being introduced, especially by those banks that had been affected by the bombs of the early 1990s. We also found that clients were taking disaster recovery centers more seriously, and were putting back-up data centers some distance away from their headquarters.”

Uncertainty in Check
While the IRA no doubt hoped that the threat—and deadly execution—of its prolonged bombing campaign would have a serious effect on the UK’s economy through its negative effect on financial markets and on inward investment, the evidence indicates otherwise.

Direct investment inflows (see Graph 1, opposite page) to the United Kingdom, for example, maintained their general upward trend, apart from one dip that occurred, ironically, the year that the IRA declared its 18-month ceasefire. “During the terrorist years, Britain was probably the most popular destination in Europe for foreign direct investment,” notes Nicholas Crafts, an economic historian at the London School of Economics. Foreign investors determined that the country’s strong business fundamentals offset the risk premium caused by the terror campaign. (Click image to enlarge)

Similarly, UK stock markets from the beginning of 1992 until the end of 1996 rose overall during the period in which the IRA targeted Britain’s economy. Graph 2 (above) shows the level of the FTSE 100, Britain’s most-often quoted equity index, over the period in question.

Over the short term, again there is little evidence that the terror campaign frightened investors out of the United Kingdom. Graph 3, right, shows the FTSE 100 in the days immediately before and after the Baltic Exchange bomb. The market rallied and continued to do so in the days following the explosion. Likewise, the market was experiencing a short-term downward trend immediately before the Bishopsgate bomb. After the bombing, the market continued its downward trend for a few days before beginning a recovery.

The Ring of Steel
Walking around the City today, one still sees the same international banking marques—JP Morgan Chase, Merrill Lynch and others—that were doing business there during the IRA’s bombing campaign. “Overall, the huge size of the UK economy meant [the bombings] were not a significant factor in terms of scaring away companies or affecting the stock market,” says St. Andrews’ Wilkinson. “Certainly there were the costs of clearing up and of rebuilding, but they were not significant enough to have an effect on the overall economic figures for the United Kingdom.

The fact that the protracted campaign of financial terrorism was relatively short certainly cushioned the economic effect of IRA activities. If the group had been detonating explosive devices in the City since the early 1980s, then things might have been different. The effective response to the threat from the police, Security Service (MI5) and the Corporation of London also lessened the brunt of the IRA’s blows, and kept businesses steadfast in the Square Mile. “In 1992, the then home secretary brought in a measure that made MI5 responsible for leading in the intelligence effort against the IRA,” Wilkinson says. “That was a big change on the mainland. The police had been overstretched in the earlier period because they had so much to do—they were really concentrating on the handling of specific incidents.” (Click image to enlarge)

Illustration by Viktor Koen.
Graphs 1, 2, and 3 by Economist Intelligence Unit.