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Money managers under the microscope
from Global Investing:
EM growth is passport out of West’s mess but has a price, says “Mr BRIC”
Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O'Neill. O'Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China's economy is growing by $1 trillion a year and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece? Italy's economy was surpassed in size last year by Brazil, another of the BRICs, O'Neill counters, adding:
"How Italy plays out will be important but people should not exaggerate its global importance. In the next 12 months the four BRICs will create the equivalent of another Italy."
Emerging economies are cooling now after years of turbo-charged growth. But according to O'Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent, a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.
"Post-crisis, these countries will be our passport out of this mess."
But there has to be a payoff for this kind of increased financial clout, he warns. Developing countries are increasingly disgruntled about the the richer world's strangehold on global policies via the International Monetary Fund and the World Bank and most have responded coolly to the call for additional funds for the IMF which is fighting to stem the euro zone malaise. An attempt last year to install a representative of the developing world at the helm of the IMF for the first time ever fell apart, with Europe retaining the position. But emerging countries could make a bid for the World Bank chief's position this year, a position traditionally held by a U.S. citizen. O'Neill said the West had to bow to the new reality:
"You can't have it both ways...This game of 'You have the IMF and I have the World Bank' has to stop or these institutions are going to lose their relevance."
He is also dismissive of fears China is headed for a so-called hard landing, a sharp slowdown of growth, potentially leading to unemployment, a property crash and social unrest in the world's No. 2 economy. "A lot of people (in the West) want China to have a hard landing, " he said. "And that's because it isnt us."
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: Pru’s shareholders, Greek crisis, Goldman faces Senate
News and views on the funds sector from Reuters and elsewhere:
Pru faces shareholder revolt over Asian deal - Reuters
Greek crisis spills over to Europe - WSJ
Goldman Sachs traders face U.S. Senate - Telegraph
Morning line-up: Merkel on Greece, U.S. financial reform, hung parliament
News and views on the fund sector from Reuters and elsewhere:
Merkel tells Greece it must cut costs more to get German help – Reuters
Finding a buyer
Another day and another report of a company looking to exit its hedge fund operation.
According to a report in today’s FT, Germany’s Commerzbank has put its $900 million fund of hedge fund manager Comas up for sale, although it may close it down if no buyer is found.
Only last week Spanish bank BBVA said it would close down its alternative investment businesses, including hedge funds, and give investors their money back.
It is unlikely to be the end. A report this week from Hedge Fund Intelligence, whose estimates for the size of the hedge fund industry tend to be at the higher end of the scale, said global assets fell more than 30 percent to just over $1.8 trillion at the end of last year, but further redemptions mean this figure will already be lower, putting further pressure on hedge fund-related businesses.
The FT’s report says Commerzbank is already in talks with funds of hedge funds and family offices about a deal.
In this environment there are bound to be some good assets coming up for sale at attractive prices.
The issue is, who has the financial strength or inclination to take advantage?
