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GLG: Italy and Greece deserve a central bank

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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.

Latest from GAIM

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Our reporters have been scouting round the halls at the GAIM hedge fund conference in Monaco today. Here’s a taste of what we’ve seen so far:

Man Group CEO rules out big deals after GLG buy

Hedge funds to manage $3 trln by 2013-consultant

FACTBOX-The European hedge fund industry

PREVIEW-May losses cloud hedge fund summit in sunny Monaco

And some links from Reuters Insider coverage:

FRM’s de Gentile-Williams

Blackstone’s Wien

Lombard Odier’s Kohler

Long-haired Lagrange brings star culture to Man

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In our investor profile of GLG’s Pierre Lagrange, we highlight two very different sides of London’s hedge fund industry and a potential culture clash in Man Group’s surprise takeover of GLG this month. RTXRM45

REUTERS/Stefan Wermuth

In many ways, Lagrange symbolises the informal, star manager culture that GLG has based its growth on (although also suffered from after Greg Coffey’s departure and Philippe Jabre’s FSA fine).

from DealZone:

In man vs machine, GLG has Manly appeal

Hedge fund firm Man Group apparently pricey deal to buy GLG Partners gives Man – the world’s biggest listed hedge fund -- better access to the large and lucrative U.S. market. It also counts as a small win for the human race in its apocryphal war for investors' funds with cheaper, faster and -- many would argue -- far more dangerous algorithmic trading machines known as black boxes.

The $1.6 billion cash-and-shares deal represents a heady 55 percent premium to GLG's closing price on Friday. Clearly some investors are worried it's a little too rich. It has so far driven the shares of Man – which had already lost about a fifth of their value since mid-April -- down by a little more than 8 percent.

Hedge funds: Greece is the word

This week’s Reuters Hedge Fund and Private Equity Summit gave us some new insights into how hedge funds are betting on Greece’s debt crisis and their attitude to talk that politicians and regulators may clamp down on their activities.

According to Cheyne Capital, for instance, buying Greek CDS is an “old trade” that many hedge funds have moved out of. Many have instead moved to short bets on the euro, as the single currency comes under pressure from the debt of some southern European countries.

Morning line-up

Clear thinking in an opaque industry

News and views on the hedge fund sector from Reuters and elsewhere:

tea.jpgMorgan Stanley to raise capital for hedge fund clients – Reuters

GLG Partners opens offices in Asia - Reuters

Cadbury deal to start debate on hedge funds’ role in takeovers – Times

Morning Line-Up

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 News and views on the hedge fund industry from Reuters and elsewhere:

Veritas offers UCITS III-compliant hedge fund - Investment Adviser

GLG MMI appoints BNY Mellon as fund administrator - Hedgeweek

Banks boost lending to hedge funds – Wall Street Journal

Hedge fund manager Jim Chanos sounds warning on China - Seeking Alpha

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