Over and above the general comments I set out in my column the day before yesterday, discussions and negotiations on aspects of the pressing review of the management of the financial markets are continuing apace. By reading this newsletter, our readers are regularly kept up to the minute (this week alone there have been articles on the meetings of the Eurogroup and the ECOFIN Council, and the gist of several documents and opinions expressed by leading figures on the European stage), and I would like to add some of my own comments to this invaluable, broad coverage of events.
1. Evaluation and forecasting. Financial circles and the responsible bodies are trying to put figures on the global losses in the current crisis. The International Monetary Fund (IMF) has a penchant for round figures and has announced the headline-grabbing sum of a trillion (thousand billion) dollars-worth of losses. It would, however, be useful to calculate the share of this sum that is made up of losses at banks that went over the top in their investment in high-risk speculation, which led to them making spectacular and sometimes scandalous gains. To quote comments by Valery Giscard d'Estaing yesterday, these assets were used by bank chiefs to give unacceptably high bonuses and make unacceptably high profits. The collapse of these financial and speculatory shenanigans does not hurt the real economy - the opposite in fact. This should be borne in mind.
The IMF report talks about a collective failure of market players, urging governments to be prepared to react fast in the event of problems in particular financial institutions. We know, however, that banks that avoided the wildest speculation and monitored their risks have managed to protect their balance sheets and, more importantly, most EU authorities (headed by the president of the Eurogroup) do not share the prognosis of recession in Europe. Growth predictions have been toned down somewhat, of course, because the slowdown in speculation is reducing the amount of liquidity that is available for the moment. But the Fed in the United States and the ECB in Europe have demonstrated that they can intervene where necessary. One might well ask whether the IMF couldn't help out. It has huge coffers at the moment because big debtors of the recent past (Russia, Argentina and Brazil) have settled their debts and there is only one country left which still owes the IMF a fair whack, namely Turkey.
The doomsayers tend to be washing their own dirty linen in public.
2. Surveillance. Everyone agrees that transparency is required along with better surveillance of the financial markets, but there is no meeting of minds on how to actually do this. Simplifying matters, one can say that in the EU there are three broad trends - the demand for an EU system of surveillance tools; improving coordination and cooperation among the member states' instruments and bodies; and the bulk of surveillance should remain the prerogative of the country in question.
It would be oversimplifying matters to talk about good and bad Europeans battling it out. Analysis shows that there are valid justifications for each of the three options. One has to arrive at a compromise, taking account of all the pros and cons, but while the form the surveillance would take remains an open question, ideas about its nature are agreed upon by all, namely moving in the direction of a radical beefing up of requirements to be met by market operators, and the principle that common rules have to apply uniformly throughout the EU, irrespective of the actual structure of the surveillance authorities. Some nonsense has to be rectified, removing, for example, the application of different rules to the subsidiaries of the same bank depending on which member state they are located in.
As soon as they reach multinational proportions, it is the financial bodies themselves that call for this. As an example, I could quote the views of a manager of Nordea, a merger of banks from four different member states. It has its headquarters in Sweden but does nearly 70% of its business outside the country it is legally domiciled in, with key operations decentralised to different countries. The manager believes there can be no alternative to a European control authority for international financial institutions and their subsidiaries and branches in the EU and elsewhere. He does not think this means the end of national regulators, who would work in partnership with the European regulator. National banks would still be supervised by the surveillance authorities in their own country and consumer protection would also be the remit of supervision at national level.
Much hard work and head-scratching is still required to reconcile the various options and views outlined in issue 9637 of our newsletter, but agreement will be found if the objective is really, as it should be, the same for all member states, in a similar manner to the way the need for transparency has now been recognised and admitted by all.
3. Rescue operations. In the United States and the United Kingdom, the competent authorities recently intervened, as everyone knows, to 'rescue' two banks facing financial meltdown. IMF Director General Dominique Strauss-Kahn justified intervention of this ilk in terms of the general interest. He commented in a recent interview that there are times when the dangers for the whole of the economy are so great that measures have to be taken and that was why the Fed intervened in the Bear Stearns case. If it had failed to act, he said, the repercussions further down the chain would have been immense, but that does not mean that the lion's share of losses should not be borne by those responsible for making mistakes in their risk evaluation. It has to be recognised that the two banks in question (Bear Stearns and Northern Rock) were helped in the name of the general interest and both lost a heap of money and their independence in the process.
It is significant that these two high-profile rescue operations were decided upon by the two big countries which have always argued that the state should keep its nose out of the financial world. I can remember some po-faced addresses in Brussels by high-ranking members of the City of London, looking down their noses at intervention by state authorities in such domains. But the situation on the markets has already generated a lot of soul-searching and this is but the start.
I would add a further comment - in the United States, the decision by the responsible authority closed the case legally. In the EU, the British decision to rescue Northern Rock is under investigation by the European Commission's competition authorities to determine whether the rescue is allowed under EU state aid rules (see issue 9634 of this newsletter). European law ensures that rules are respected and there is a fair playing field, even in circumstances such as these. I expand on this below.
4. Sovereign wealth funds (SWFs). Europeans run the danger of being a bit naïve about sovereign wealth funds. Boiling this down to its essence, Europe's attitude has evolved in three main stages: a) initial enthusiasm for the arrival of virtually unending supplies of cash; b) fears that China, a few Arab states and Russia would gain control of entire swathes of the EU economy, including areas of strategic importance; and c) an attempt to balance out the new opportunities and dangers. To avoid repetition, I refer readers to three documents: 1) the European Commission's communication of 27 February 2008, published in issue 2479 on 29 February in our Europe/Documents series and summarised in issues 9610 and 9611; 2) the final paragraph (paragraph 36) of the conclusions document of the European Council of 13/14 March 2008, published in 2479 of Europe/Documents; and 3) the summary by Mathieu Bion of debate around this issue (see issue 9635 of our newsletter).
The European Council tried to strike a balance while highlighting: the very useful role of SWFs as suppliers of capital and cash for long-term investment projects; concerns raised by the fact that the SWFs' investment strategy and objectives are not very transparent, which implies the risk of non-trade practices; the need for a common EU approach based on the five principles set out in the Commission document; and backing for inter-institutional agreement on an ethical code that SWFs would have the option of signing up to.
Predictably, wealth fund managers have denied any political aims behind their investment, saying their aim is only to make the most of the vast dollar reserves held by their countries, arising from the sale of oil (Russia, Arab states and Norway) or their trade surplus (China). They have no political aims and their investment is beneficial for the countries they invest in. The wealth funds absorb a share of the risks on the financial markets. The political authorities of the countries in question are prudent and keep their views under wraps; the SWF financial managers less so. At the meeting reported upon on page 11 of issue 9635, the president of the Commercial Bank of Kuwait said market forces should be left to decide, adding that there was no need for regulation. A Lebanese entrepreneur argued that we should not throttle something that is positive for everyone.
Much water has passed under the bridge since then, and I will be returning to this in my next column.
(F.R.)