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Money managers under the microscope
from Global Investing:
Emerging markets facing current account pain
Emerging markets may yet pay dearly for the sins of their richer cousins. While recent financial crises have been rooted in the United States and euro zone, analysts at Credit Agricole are questioning whether a full-fledged emerging markets crisis could be on the horizon, the first since the series of crashes from Argentina to Turkey over a decade ago. The concern stems from the worsening balance of payments picture across the developing world and the need to plug big funding shortfalls.
The above chart from Credit Agricole shows that as recently as 2006, the 34 big emerging economies ran a cumulative current account surplus of 5.2 percent of GDP. By end-2011 that had dwindled to 1.7 percent of GDP. More worrying yet is the position of "deficit" economies. The current account gap here has widened to 4 percent of GDP, more than double 2006 levels and the biggest since the 1980s. The difficulties are unlikely to disappear this year, Credit Agricole says, predicting India, Turkey, Morocco, Tunisia, Vietnam, Poland and Romania to run current account deficits of over 4 percent this year.
Some fiscally profligate countries such as India may have mainly themselves to blame for their plight. But in general, emerging nations after the Lehman crisis were forced to embark on massive spending to buck up domestic consumption and offset the collapse of Western export markets. For this reason, many were unable to raise interest rates or did so too late. As the woes of the Turkish lira and Indian rupee showed last year, the yawning funding gap leaves many countries horribly exposed to the vagaries of global risk appetite.
There are some supportive factors however. The Fed's signal this week that U.S. interest rates are unlikely to rise before 2014 shows that central banks in Europe and the United States will continue to gush money for now. So there should be enough cash available to plug the gaps in emerging nations' balance sheets. Second, as growth eases, so will the deficits. For these reasons, Credit Agricole says the market will be forgiving of large current account deficits this year. But it warned:
What will happen once (developed market) rates are raised is another story, and emerging markets would better have fixed their main imbalances when the global monetary normalisation begins.
GLG: Italy and Greece deserve a central bank
Guest contributors Bart Turtelboom and Karim Abdel-Motaal run the Emerging Market strategy at Man GLG. The views expressed are their own.
History is written by the victors. That is what emerging markets discovered after their currency crises of the 1990s, and it is what will happen when the annals of the euro crisis are compiled. Treatment of this crisis has varied, but in all its forms the basic premise is already set: Germany and the world are the undeserving victims of Peripheral European excess. The Periphery spent and borrowed too much causing the current crisis. Add to this the cultural imagery of Greek pensioners retiring at the tender age of 55 on exotic Aegean islands at German savers’ expense and the colourful chapter on this historical saga is written.
If Emerging Markets is any guide, the problem with this narrative is not just that it is wrong, but downright dangerous in its policy implications. The tyrannical hold of this perspective on European policy making is pushing the continent down the path of a historic pro-cyclical fiscal contraction almost as the be all and end all of crisis response. There is already a mountain of evidence that this has not worked, whatever the merits of debt reduction and ideological divisions on its pace and timing. The missing ingredient has always been and remains today, quite different. Italy and Greece lack a central bank. More importantly, they deserve one, desperately.
For an economy where paper money is the medium of exchange and fractional reserve banking exists where a bank transforms a unit of deposits into a multiple of that in loans, a central bank is essential. This is as true of Switzerland as it is of Greece. It performs a function of lender of last resort to prevent a rapid run on an otherwise solvent bank (a liquidity crisis) from turning into a solvency one for that bank or for the entire banking system. When Italy and Greece signed onto the Euro, they had a legitimate right to expect that the Central Banks they were giving up would be replaced by a common Eurozone one, which would in effect perform the same function for their economies. What they got instead was a Central Bank which is constrained by mandate, and German objection to its modification, from performing that function for anyone but Germany.
In the Eurozone, not only are the ECB’s clients the member state banks, but also the sovereigns. We are in the advanced stages of a full blown and contagious run on both, with the ECB for all intents and purposes on the sidelines. Whatever support it has provided so far in the guise of purchases of distressed member state debt and bank liquidity provision has been trivial in relation to the size of the run, and communicated in such a tentative way as to aggravate it, by signalling impotence. The ECB’s absence, whatever its legal justifications, has effectively reduced Italy and Greece, not to mention the Eurozone, to the status of a barter economy.
Italians and Greeks can and should justifiably ask for redress. They did not give up their Liras and Drachmas to be put through a fiscal vice as the cost of the most basic central banking services being provided them, any more than U.S. states did for the same service from the Federal Reserve. The lender of last resort function is a relatively uncontroversial one, which has little to do with ideological debates about the desirability or effectiveness of active monetary policy or with Weimer Republic-induced phobias of hyperinflation and money printing. The idea, that in the middle of a full-blown bank/sovereign run, a central bank’s intervention would be made conditional on preceding actions, fiscal or otherwise, that are subject to political vagaries, is extraordinary and dangerous.
A confidence crisis is precisely that; it cannot wait and must be dealt with decisively and conclusively if the vicious cycle is to be arrested. This is not to say that the fiscal and debt problems which challenged confidence to begin with should not be addressed; they should. However, in this European version of the Emerging Markets archetype, we are in now well beyond the phase where a medium term fiscal adjustment announced by technocratic governments in Greece or Italy will have any effect. It maybe part of the solution, but it is certainly not sufficient, or the most urgent issue. The ECB needs to act and act big.
I agree completely! This is a fantastic article. If only policy-makers in Europe would listen. Unfortunately, we can be pretty sure they won’t. Now that Europe is ruled entirely by right-wing governments, fiscal responsibility is not really in the cards.
Morning Line-up
Hedge fund stories from the past 24 hours from Reuters and elsewhere:
Blackstone backs Asia-focused hedge fund – FT
Galleon managers in Asia eye fund buyout - Reuters
ECB warns EU plans could prompt exodus – Reuters
Blowin’ in the wind
The timing of the Alternative Investment Management Association’s hedge fund disclosure initiative indicates just how strong the winds of change are blowing in hedge fund land.
Coming just a day after ECB President Jean-Claude Trichet called the credit crisis “a loud and clear call” for extending hedge fund regulation, the move shows the hedge fund industry feels it must be more active in deciding the future shape of regulation.
The move, which will include regular — probably quarterly – disclosure of systemically significant holdings and risk exposure to national regulators, goes further than that suggested at last month’s Treasury Select Committee by Marshall Wace chairman and Hedge Fund Standards Board trustee Paul Marshall, who had proposed aggregating data through prime brokers.
“The international agenda is starting to gallop away… We can see which way the wind is blowing and we want to exercise leadership,” said AIMA CEO Andrew Baker, adding the proposals had been in the pipeline since early in the new year.
But AIMA’s drive to do this also serves to highlight the low number of funds that have signed up to the HFSB’s voluntary code – a fact seized upon by last month’s Treasury Select Committee.
AIMA is proposing unifying all the industry standards — AIMA, the HFSB, IOSCO, PWG and MFA — into one code. Their fear is that regulators may do this for them.
A loud and clear call
It may not have been a massive surprise, but ECB President Jean-Claude Trichet had an unwelcome message for hedge fund managers today.
The current crisis is, apparently, “a loud and clear call” to roll out regulation to all important market players, “notably hedge funds and credit rating agencies”.
For those hedge fund managers who felt, perhaps with a degree of justification, that their industry had been relatively blameless in precipitating the current crisis, that call may have been somewhat quieter and more muffled.
But the drumbeat of those calling for greater hedge fund regulation is growing and it seems increasingly likely that hedge funds will face a new raft of rules in the not too distant future.
Hedge funds have attempted to justify the slow take up of volunatry codes aimed at staving off heavy-handed regulation, but day-by-day the industry looks like it may have missed the chance of a quiet life… well, relatively speaking.
