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from Global Investing:

We’re all in the same boat

The withering complexity of a four-year-old global financial crisis -- in the euro zone, United States or increasingly in China and across the faster-growing developing world -- is now stretching the minds and patience of even the most clued-in experts and commentators. Unsurprisingly, the average householder is perplexed, increasingly anxious and keen on a simpler narrative they can rally around or rail against. It's fast becoming a fertile environment for half-baked conspiracy theories, apocalypse preaching and no little political opportunism. And, as ever, a tempting electoral ploy is to convince the public there's some magic national solution to problems way beyond borders.

For a populace fearful of seemingly inextricable connections to a wider world they can't control, it's not difficult to see the lure of petty nationalism, protectionism and isolationism. Just witness national debates on the crisis in Britain, Germany, Greece or Ireland and they are all starting to tilt toward some idea that everyone may be better off on their own -- outside a flawed single currency in the case of Germany, Greece and Ireland and even outside the European Union in the case of some lobby groups in Britain. But it's not just a debate about a European future, the U.S.  Senate next week plans to vote on legisation to crack down on Chinese trade due to currency pegging despite the interdependency of the two economies.  And there's no shortage of voices saying China should somehow stand aloof from the Western financial crisis, even though its spectacular economic ascent over the past decade was gained largely on the back of U.S. and European demand.

Despite all the nationalist rumbling, the crisis illustrates one thing pretty clearly - the world is massively integrated and interdependent in a way never seen before in history. And globalised trade and finance drove much of that over the past 20 years. However desireable you may think it is in the long run, unwinding that now could well be catastrophic. A financial crisis in one small part of the globe will now quickly affect another through a blizzard of systematic banking and cross-border trade links systemic links.

Just take the euro zone for a start. HSBC economists on Friday said the costs of a euro zone breakup would be "a disaster, threatening another Great Depression" and far outweighed the costs of repairing the flawed fiscal backstops to the monetary union -- especially given the wealthier creditor countries within the union tend to ignore the benefits they've reaped from the euro over the past 12 years. Aided by the "entangling effects" of the euro, it showing that cross-border holdings of capital have exploded from about 20% of world GDP in 1980 to stand at more than 100% now (global GDP was estimated by the IMF to be about $62 trillion last year). By contrast, the first wave of globalisation in the late 19th and early 20th century saw cross-border holdings peak at 20% of world GDP before WW1 reversed everything.

"A euro break-up would be a disaster, threatening another Great Depression," wrote HSBC chief economist Stephen King and economist Janet Henry. " Cross-border holdings of assets and liabilities within the eurozone have risen dramatically, leading to a tangled web of mutual financial dependency. With the re-introduction of national currencies, disentanglement would proceed at a rate of knots, undermining financial systems, generating massive currency moves, threatening hyper-inflation in the periphery and triggering economic collapse in the core."

That tangled web of trade and finance, however, goes well beyond the euro zone. One of the reasons the fast-growing emerging markets look, for the second time in four years, set to succumb to the western financial crisis is that western banks -- European banks in particular -- provide them with so much finance. RBC economists, citing data from the Bank for International Settlements, shows outstanding European bank lending to emerging markets at some $3.4 trillion -- almost 10 times that of the U.S. banks and more than three times Japanese bank lending.

JP Morgan, meantime,  reckons a one percentage point decline in western real domestic spending growth (GDP less net exports) leads to a 2.7 percentage point drop in exports from emerging economies as a whole. If their forecast for a recession in the euro zone and US slowdown to 1 percent annualised growth by the middle of 2012 proves correct, then that should slow EM export growth to 6% annualized in 4Q11 and just 4% annualized in 1H12 from double digit growth rates earlier this year. While that would still be far better than 2008/2009 emerging export collapse of about 20%, the projected pace of export growth would still be weaker than at any point in the expansion of the 2000's save during the SARS scare.

Tilting at windmills

The growing discomfort among pension funds over EU plans to regulate the hedge fund industry has prompted another public pronouncement, this time from Dutch schemes with assets of about 450 billion euros, including APG and PGGM.

We’ve noted the potential pivotal role the pension industry could play before, but as yet there hasn’t been an appreciable softening in the tone adopted by the hardliners. Their standard bearer Poul Nyrup Rasmussen called London Mayor Boris Johnson “out of touch with reality” after the much-lobbied blonde tried to strike a blow for the alternatives industry on a vist to Brussels this week.

It is notable though that the Dutch funds have deliberately sought to divorce themselves from the frenetic efforts of the hedge funds and private equity funds, instead pleading to MEPs as ‘users’ of the industry.

Speaking to Global Pensions, APG compliance officer Gerben Everts said: “Unlike suggestions in the proposal, we do not think the protection envisaged by the directive is really beneficial for us, as professional investors.”

He urged more transparency among hedge funds, and echoed warnings by the UK’s largest pension scheme and the British trade body for pension schemes that the rules as they stand could lead to higher pension premia and lower payouts — difficult conclusions to ponder for a socialist parliamentarian aware of the problems posed by Europe’s ageing population.

Pensioners totter to the rescue

It may look like an unlikely scenario on paper, but Europe’s elderly masses could be about to provide the killer blow to draft EU rules to regulate the alternative investment industry.

Hedge fund associations, private equity lobbyists, the British government and even the United States Treasury have waded into the debate over the proposed legislation, seeking to soften an approach which has been labelled an exercise in post-financial crisis political grandstanding, rather than a measured look at how to better regulate the sector.

Now though, the pension funds have entered the stage, and their concerns will be far more likely to win over MEPs across the politcal spectrum.

The giant schemes have pushed more and more retirement money into alternatives as they seek to diversify their portfolios and find the kind of returns that can cushion the effects of pensioners — eventually you and I — living long enough to drain the coffers dry.

They have been stung into action by the possibility that their pursuit of profit to pay future liabilities could be derailed by measures likely to remove non-EU competition from the funds marketplace, while loading punitive additional expenses on the funds that remain. 

Hedge fund body Aima has clearly spotted the opportunity to ride on the coat-tails of a powerful ally and has rushed out estimates that Europe’s pension funds face a 25 billion euro hit. But they might want to cool their enthusiasm:

Pension funds have been constantly pushing for increased transparency from the hedge fund industry as their allocations increased, and are only protesting what they see as misguided regulation, not the concept of regulation itself. Should the retirement schemes succeed in forcing the tipping point which leads to changes to the draft, they will gain a powerful new bargaining tool and could even end up dictating the terms of a new era for a once secretive industry.

from Global Investing:

Falling on deaf ears

The European private equity industry today published its response to the proposed Alternative Investment Fund Managers directive that seeks to place controls on the industry.

In what it must hope will be seen as a carefully considered and constructed response to the European Commission's hastily drafted and ill-thought-out proposed directive, the European Private Equity and Venture Capital Association -- the voice for private equity in Europe -- calls for the threshold for reporting on its companies' activities to be lifted to 1 billion euros assets under management from 500 million.

It argues that private equity firms smaller than that specialise in managing small and medium-sized companies and should be subject to national legislation.

EVCA also wants a grandfathering clause introduced so firms existing funds that use no leverage and have no redemption rights (the vast majority of all unlisted private equity funds) would be exempt from the directive. It argues that failing to do this could result in termination of these funds "with disastrous consequences for the industry and its portfolio companies".

The big question is who in Europe is listening?

Having already gained a surprise concession in the published draft, which lifted the reporting threshold to 500 million euros from an expected level of 250 million euros, private equity may be seen as pushing its luck by asking for further leeway.

While the Socialists lost ground to the Conservative right in the recent European Parliament elections, it would be a mistake to think that the left wing coalition leader Poul Nyrup Rasmussen will be any less strident in his call for stringent legislation on private equity and hedge funds alike. The right wing Governments in France and Germany have been just as loud in their demands for legislating of the industries.