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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.

UK universities eye and keep an eye on new hedge fund punts

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Pension schemes are moving away from the usual equity/bond/real estate mix to put their eggs in as many baskets as possible. No wonder then that the USS — the 31.6 billion pounds UK universities pension fund — is putting an extra 1.5 percent of its assets, or about 474 million pounds, into hedge funds, as its CIO Roger Gray tells Reuters.

If you are rushing to the phone to pitch business with Mr Gray, however, STOP a minute fund manager: be prepared, the USS is not only eyeing alpha, it is going to ask a few questions about how alpha is distributed and how investors are protected.

Know your hedgie – Pix from Monaco

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Reuters snappers have been grabbing some headshots of hedge fund managers at GAIM this year. Thought we’d showcase a few here: Leda Braga, President of BlueCrest Capital Management, attends the GAIM International (Global Alternative Investment Management) hedge fund conference in Monaco, June 15, 2010. REUTERS/Sebastien Nogier (MONACO - Tags: BUSINESS HEADSHOT)

Leda Braga, President of BlueCrest Capital Management, attends the GAIM International (Global Alternative Investment Management) hedge fund conference in Monaco, June 15, 2010. REUTERS/Sebastien Nogier (MONACO - Tags: BUSINESS HEADSHOT)

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