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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.
Morning Line-Up: Hedgies, ETF providers prep new funds
News and views on the asset management industry from Reuters and elsewhere:
Emerging market bond boom at new highs - Reuters
Star trader to run GLG’s new Newcits fund - FTfm
Latest from GAIM
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:
Long-haired Lagrange brings star culture to Man
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.
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).
Being neighbours with Lakshmi Mittal, and a backer of both comic book action film Kick Ass and a modern art gallery, the long-haired Belgian may find being part of Man Group something of a culture shock.
Man is dominated by its black box AHL fund and has always avoided the star manager culture in its multi-manager unit.
CEO Peter Clarke is a smartly-dressed ex-finance director, not a fund manager.
But with AHL still struggling, even as the hedge fund industry as a whole recovers, Man may have felt it needed more strings to its bow.
GLG, for its part, saw big outflows in the credit crisis and Man offers it access to an enormous global sales force. As Lagrange told me, “bigger is better for us”.
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.
London-based Man has long been seen as needing more inroads into the U.S. market to take on industry leader JP Morgan. As Joel Dimmock and Laurence Fletcher report, the purchase would also dilute Man's reliance on its flagship black box fund AHL which badly lagged rivals last year. What do you do when the black box fails? Start investing in people again.
It is easy to see how the deal would have to be rich, since it pays up for talent that it needs to keep interested. A $500 million payout in shares, locked up for three years, ensures GLG principals Noam Gottesman, Pierre Lagrange and Emmanuel Roman don’t take the money and run. The message needs to be just as clear for the rest of GLG’s talent, which has numbers for super-rich clients and sovereign wealth funds.
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.
Then again, two managers from GLG, ranked by Eurohedge this week as Europe’s 6th biggest hedge fund firm, said they are actually long the euro.
The rationale, according to fund manager Karim Abdel-Motaal, is that the euro is the least ugly major currency and hasn’t seen the same quantitative easing used elsewhere.
In addition, the strength of France and Germany’s economies coming out of recession means interest rates could rise sooner than expected, boosting the single currency.
They were also quick to dismiss the idea that banning or limiting CDS would somehow improve the situation.
“Let’s assume you ban credit default swaps, and Greek spreads automatically go to the same level as German spreads … Would you rather hold a German bond at a spread of 1 percent or a Greek bond at a spread of 1 percent? You’ve just made Greek debt unfinanceable.”
The perks of Greece have simply gone away,
Their money’s down the drain,
It’s such a crying shame.
The EU nations now just turn their face,
With nothing good to say,
The friends of yesterday,
Greece is the word.
Not long ago the youth groups ruled the streets,
Hurt cops and then they ran wild,
Just like an angry child.
The Reds took government but nothing’s changed,
They whipped up quite a stir,
But things are still as they were,
Greece is the word.
Morning line-up
News and views on the hedge fund sector from Reuters and elsewhere:
Morgan 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
US bank clamp-down rattle hedge funds – FT
Morning Line-Up
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
Morning Line-Up
Hedge fund stories from the past 24 hours from Reuters and elsewhere:
Former BOE Deputy Governor John Grieve joins GLG - Times
Marshall Wace returns 26 pct with Japan fund- Bloomberg
Rajaratnam investigated a decade ago – WSJ
Co-founder Blochet exits Brevan Howard – Reuters
Morning line-up
Hedge fund stories from the past 24 hours from Reuters and elsewhere:
Hedge funds slash costs to win back investors – Daily Mail
Ex-GLG fund head to set up in Paris – FT
John Paulson tops list of most admired hedge fund managers – Absolute Return
FRM Capital invests in Asia hedge fund – WSJ
Hedge funds threatened by redemption requests – Hedge Funds Review
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.