Director - Wealth Management at Financial Partners
paul.ramscar@financial-partners.biz
"George Orwell did well out of anticipating the future, although he had the advantage of fiction rather than fact."
Testing times 08/03/2010
George Orwell did well out of anticipating the future, although he had the advantage of fiction rather than fact. Squealer, a character from Animal Farm, advises his comrades: "Do not imagine, comrades, that leadership is a pleasure. On the contrary, it is a deep and heavy responsibility. The leader would be only too happy to let you make your decisions yourselves. But sometimes you might make the wrong decisions, comrades, and then where would you be?"
Fund managers and analysts speak about the inevitable West-to-East movement of economic power. Not so well covered is the need to understand economics. Economics and Double Dutch appear to be among the languages most difficult to understand languages, and interpretation is being left to global leaders so where does this leave us?
Mainly it leaves us to learn economic history as it unfolds in front of us. Greece and how it manages its close to default position is perhaps the next unwritten chapter. The problem with economics is that much of it was rewritten in 2008.
From the global perspective, it seems we remain scarred by 2008, specifically, the failure of the likes of Lehman. Overreaction to these failures is leading to outcries against bankers and their bonuses and confusion between successful trading strategies within banks and the legacy of unsuccessful lending strategies.
Analysts at Viewpoint (RMB research), say: "Lehman's did not go belly up because of its trading activities. It bit the dust through overleveraging its balance sheet by lending to poor creditors."
Focus on bringing balance sheets under control, says Viewpoint.
It is easy to think that those financial storms in the United States and Britain have nothing to do with us here in Hong Kong. But it seems any hint of bad news at the moment has the potential to start off a negative chain reaction in the markets. The Dubai contagion grew from absolutely nowhere.
So, whilst difficult to understand, there were three big economic lessons in 2008. Rule one: don't borrow more than what you can repay. Don't overleverage. Rule two: if you ignore rule one, you can't be too big to fail. Rule three: if you are big, and ignore rule one, then everyone else might panic.
Within all of this, Greece is a litmus test of a mini-crisis. So what will Europe and the world do about Greece? Back to Orwell. "All animals are equal, but some animals are more equal than others.'' A significant discrepancy between the debts of Europe's first-tier nations and their perceived ability to repay sovereign debt, and those of PIGS (Portugal, Ireland, Greece and Spain).
The perception of their ability to repay being generally measured by credit default swap contracts. Or the cost of insuring against the default of a sovereign debt issue.
One piece of good news is that governments find it easier to reschedule debts than the average person. A second piece of good news is that PIGS all have plans to work towards managing rule one, and to live within their income. The credit default swaps rates however show Greece as closest to a default.
What happens next might be another chapter in understanding today's economics, because anything can happen. One extreme would be that the Europeans agree to give capital to Greece to help the Greeks to maintain a cohesive eurozone financial strategy.
However, won't the other PIGS seek the same helping hand? Alternatively, the chapter might unfold into the Greeks' deciding that maintaining allegiance to euro financial politics and strategy is not worth the hassle and it might decide to devalue its currency, leave the eurozone and manage its own affairs. If that happens, will Greece be seen as having not been too big to fail, and what will the collateral panic button show us? These are questions for our global economic leaders to answer.
