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When Germany
tightened the screws
Sarkozy, Berlusconi would show statesmanship by praising
anti-inflation move
published in the Financial Times
on 2nd July 2008
Sir, Ralph Atkins' article "ECB
careful not to repeat mistakes of the past" (June 24) made
fascinating reading. Bundesbank veterans are conjuring up the ghosts
of inflation past to stiffen the sinews of the European Central Bank
as it prepares to raise interest rates. However, there is a new
twist. Unlike during the two oil shocks in the 1970s, Germany shares
a single currency with its neighbours. Economic disparities in
Europe are a lot less than 30 years ago, but have not disappeared.
The message from German history is that turning the monetary screws
can spark unsettling results.
At the time of the
first oil shock in 1973, the Bundesbank had already got in its
anti-inflation retaliation early by increasing interest rates well
ahead of other countries. UK prime minister Edward Heath protested
to chancellor Willy Brandt, the French franc was forced to leave the
snake currency mechanism and the Werner plan for monetary union by
1980 was buried. The Bundesbank's tightening in 1979-80 was
motivated by a sharp increase in US interest rates as well as the
second oil shock. The consequences included French president Valéry
Giscard d'Estaing's election defeat, devaluations of the franc and
even the political demise of chancellor Helmut Schmidt, who blamed
the Bundesbank for producing deflation.
Nearly 20 years later, with
Germany again arguably better placed economically than most economic
and monetary union partners, higher euro rates may suit Germany but
will disappoint France and Italy. If and when the ECB raises rates,
President Nicolas Sarkozy of France and Italy's prime minister
Silvio Berlusconi would show statesmanship by praising the ECB's
anti-inflation resolve. We will see whether this happens.
A Fair wind blows on the Bosphorus
Despite its struggle to join the EU, Turkey is drawing foreign
investment and is a land of opportunity
published in Financial News on 18th
February 2008
Recep Tayyip Erdogan, the
Turkish Prime Minister, has returned from an image-building tour to
Germany. But, unlike many leaders of emerging industrial nations,
the Turkish leader did not visit Europe’s largest economy primarily
to bid for investment in this high-growth land straddling Europe and
Asia.
Instead, the media highlight of
Erdogan’s visit was his speech to 16,000 Germany-dwelling Turks in
Cologne, in which he warned against “assimilation”of Turks living
abroad and called for Turkish-language schools and universities in
Germany.
Erdogan’s address sparked
controversy among many German politicians ill-disposed to Turkish
membership of the European Union. The episode may have represented a
missed opportunity tohighlight some positive aspects of Turkey’s
political and economic position.
Turkey weathered a spell of
political uncertainty last year in a tussle between Erdogan’s
neo-Islamist Justice and Development (AK) party and the country’s
secular establishment and powerful military. Yet the hiccup did
nothing to dispel foreign investors’ rosy view of Turkish prospects.
Since the AK was first elected in late 2002, when Turkey was
suffering the aftermath of a financial crisis, the Government’s
pro-business line has won over the foreign investment community.
With Erdogan returned as Prime
Minister with a convincing majority in last July’s election, and
another AK stalwart, former Foreign Minister Abdullah Gul installed
as President, Turkey’s main political contours are settled.
The country is a land of
opportunity for east and west. Although it has tailed off from 2006
highs, foreign investment is still flooding in. Investors from
fast-expanding Asia view Turkey as exceptionally stable; those from
slow-growing Europe see it as exceptionally exciting.
From an investor’s view, the
main buy factors are galloping growth – the Organisation for
Economic Co-operation and Development is forecasting an increase of
about 6% in gross domestic product this year and next after 6.1% in
2006 and 5.1% last year – and dynamic demography.
Turkey’s youthful population
will rise from 73 million to 89 million by 2020. An expansion of the
middle class foreshadows support for consumer industries and banking
services such as mortgages, credit cards and asset management.
Against these positive factors,
the thousands of secular Turks taking to the streets to protest
against a constitutional amendment allowing women to wear the
Islamic headscarf to university was no more than a blip on
investors’ radar screens.
Turkey has profited from a
build-up of world liquidity and a restless search for returns in
emerging markets. Foreign direct investment has been running at
$19bn to $20bn annually in the past two years, a sharp rise from
$1bn to $4bn a year up to 2003.
Foreigners own an estimated 70%
of the Istanbul stock market’s free float. Several western private
equity firms have set up operations in Istanbul, adding to
investment outposts from Gulf firms. Turkish construction and
development groups, in particular, are on the look-out for funds
from the Middle East to finance ambitious infrastructure projects.
UK firm BC Partners last week
bought Turkey’s largest retailer Migros Türk from the family owned
Koç Group for $3.2bn, Turkey’s largest buyout.
In other recent transactions,
French insurance group Axa has moved to purchase the 50% it does not
already own in Turkish insurer Axa Oyak, while Abraaj Capital, a
Dubai buyout firm, has been active in the hospital operator market.
Late last year, Dutch financial group ING finalised the takeover of
Oyak Bank for $2.7bn, which will benefit from a further $1bn of
investment over the next two years as it is rebranded and
integrated.
In October, KKR sealed an
inaugural deal in Turkey with the acquisition of Turkish shipping
company UN Ro-Ro, valuing the company at 910m on a cash and
debt-free basis.
Investors from Russia and
Kazakhstan are regularly on the prowl. And large investment banks,
including Lehman Brothers, Credit Suisse and Morgan Stanley, have
bought Turkish securities firms over the past 18 months to profit
from growing stock market activity.
Real estate interest from
foreigners is booming. Although property yields are mainly about
10%, yields for prime Istanbul office space fell last July to an
overheated low of 6.5% before rising again as the effects of the US
sub-prime mortgage crisis worked through to debt markets.
The debate about whether Turkey
belongs to Europe or Asia appears increasingly irrelevant.
Turkey’s long-stalled efforts
to join the European Union took a modest step forward before
Christmas with a resumption of negotiations in Brussels, but whether
EU membership takes place is no longer a subject on investors’
minds.
Turkey’s decade-old customs
union with the EU appears to be enough to please both the Erdogan
government and international financiers.
The one cloud on the investment
horizon is Turkey’s large current account deficit, estimated by the
OECD at 7% to 8% of GDP in the next two years. Even though the
inflation rate has settled down to about 8%, the need to attract
large capital inflows necessitates high interest rates of more than
15%. These have contributed to an overvalued Turkish lira – making
life difficult for exporters.
Last week the Turkish central
bank took advantage of recent Fed easing to make a cautious cut in
its benchmark rate from 15.5% to 15.25% – but the Turkish lira still
rose on the foreign exchanges.
The market’s benevolence sums
up the optimistic mood in Istanbul. At least for now, a fair wind is
blowing across the Bosphorus.
Price rise is bad news for gold sellers
Britain was not alone in making the mistake of cutting reserves
published in Financial News on 10th
December 2007
Gordon Brown, the
UK Prime Minister, oversaw, while Chancellor of the Exchequer, the
sale of about 395 tonnes of gold from British reserves at prices
that appear now to have been exaggeratedly low. The disposals took
place between 1999 and 2002, when the gold price was trading between
$250 and $330 per ounce. This was a long way below the short-lived
peak of $850 reached in January 1980 after the Soviet invasion of
Afghanistan, and less than half the current trading range. The 70%
increase in the dollar price of gold in the past two years has made
many central banks’ calculations look distinctly awry.
An appraisal of
the gold price needs to take into account inflation, the fall of the
US dollar and the lack of interest receipts on bullion holdings.
Taking these
factors into account, from the standpoint of an investor from the
euro area, the present gold price would need to be about $2,600 to
match the 1980 price in real terms. Even allowing for these caveats,
however, the timing of the UK bullion disposals appears flawed.
Although the UK
action attracted considerable publicity in the City of London and in
British politics, it is by no means the most important disposal. The
World Gold Council, which monitors market trends for the
international bullion community, reported that governments and
central banks reduced total holdings from about 35,580 tonnes at the
end of 1990 to 30,380 tonnes at the end of last year – a 15% fall.
The UK sales
make up only 8% of
total official disposals during the past 17 years. The world’s
central bankers appears to have made a collective bet during the
past decade that the gold price would continue to fall. Thus far at
least, they have been proved spectacularly wrong.
Individual
countries have shown great disparities on gold policies. Sellers
include Switzerland, whose reserves declined from 2,590 tonnes at
the start of 2000 to 1,242 tonnes in the third quarter of this year
– 40% of total Swiss foreign reserves, which also include currency
holdings and assets at the International Monetary Fund. The
Netherlands fell from 912 tonnes to 641 tonnes – 56% of total
reserves; the UK from 588 tonnes to 310 tonnes – 13%; and Austria
from 408 tonnes to 282 tonnes – 43%.
France, one of the
largest world gold holders, has joined in the selling since 2004.
French stocks declined from 3,024 tonnes in 2000 to 2,658 tonnes
this year, 55% of total French reserves. Some countries have made
great efforts to phase out use of gold altogether. Canada, which had
653 tonnes in 1980 and 459 tonnes in 1990, now has only three tonnes
– less than Mongolia or Bangladesh.
Other industrial
countries, on the other hand, have conserved their gold stocks – and
appear to have carried out the right policies. The US, the world’s
largest gold holder (8,138 tonnes in 2000, 8,133 tonnes now – 76% of
total reserves), and Germany, the number two owner, (3,468 tonnes in
2000, 3,417 now – 63% of total) have kept their stocks steady, as
has Italy (number four national holder after France) with 2,452
tonnes, unchanged from 2000, 64% of total reserves.
Central banks from
developing countries have been selling, partly for balance of
payments reasons. China stands out from the trend with official
reserves estimated to have risen from 395 tonnes in 2000 to 600
tonnes – only 0.9% of total reserves.
International
central banks have an important interest in gold price developments.
Central bank and government holdings make up about one fifth of all
the gold that has been mined. The European Central Bank has emerged
as an important gold holder. When the euro was set up at the
beginning of 1999, about €39bn of foreign reserves were transferred
to the ECB from the central banks of participating countries, of
which 85% was in foreign exchange – predominantly dollars and yen –
and 15% bullion. The ECB’s stocks have declined from 747 tonnes in
2000 to 605 tonnes – 24% of the total.
The ECB has joined
other central banks such as Austria, Belgium, France, Portugal,
Spain and Sweden in making relatively small sales in recent years,
mainly to smooth reserves as well as for minting commemorative
coins. These sales have been well within the latest official central
banking gold agreement signed in 2004, limiting overall official
sales to 500 tonnes per year, and have had no discernible impact on
the gold price.
What will happen
next? At the time of the 1980 gold price spike, annual inflation in
industrialised countries was running at 12%, international military
tension was rising and some bullion market watchers foresaw an
imminent price rise to above $1,000. In fact, the price declined
persistently during the ensuing two decades as a result of a
continuous fall in inflation and the ebbing of the Cold War.
Many central banks
were so confident of their success in defeating inflation during the
1990s they believed the gold price would remain under downward
pressure.
The gold price
sellers – particularly those within the euro area which exchanged
their bullion for dollar holdings – should be ruing their collective
misjudgment. One reason why the UK and other countries sold gold was
to reduce bullion’s importance in relation to currency holdings in
their foreign reserves. As a result of the price rise, the gold
component of Britain’s reserves is higher than in 2000, despite the
intervening sales. In view of the price miscalculations of the past
decade, it is unlikely that Brown will ordain any further sales from
UK gold reserves in future.
Growing activity by reserve-rich economies could
exacerbate European tensions
published in Financial News on 5th
November 2007
The debate about the influence
of sovereign wealth funds is a rerun of controversies that flared
more than 30 years ago after the first oil price shock in 1973.
Last week, the International
Monetary Fund called for more transparency from the funds, which are
pools of assets controlled by public sector investment vehicles from
reserve-rich economies, mainly from the emerging world. The IMF
wants to ease concern that the funds are creating undue influence in
the west through fast-growing stakes in companies in the US and
Europe. The move parallels efforts made in 1974 by West German
Chancellor Helmut Schmidt to control the swell of participation by
oil-rich countries led by Kuwait in companies such as Daimler-Benz
and Hoechst, the German motor and chemicals groups.
The difference is one of scale.
In 1974, West Germany was by far the world’s largest reserve holder
with about $25bn in official foreign exchange reserves. The Germans
then accounted for about 15% of overall world foreign exchange
reserves of $160bn. Fred Bergsten, the American economist and later
US Treasury Under-Secretary, now director of the Peterson Institute
for International Economics in Washington, in 1974 said West Germany
was the world’s second superpower after the US because of its
international assets.
The contrast with today’s
picture is remarkable. Enormous reserves wielded by China and other
emerging economies such as Russia, South Korea and Taiwan far
outstrip the official holdings of Germany and other industrialised
countries. Germany’s published foreign exchange reserves of more
than $40bn make up only 0.7% of declared global foreign exchange
reserves, which mushroomed to $5.7 trillion as of mid-2007,
according to the IMF. Figures for official foreign exchange holdings
understate the amounts at the disposal of emerging economies.
Studies from Standard Chartered and Morgan Stanley put the funds’
size at $2.2 trillion and $2.5 trillion respectively, double total
official currency reserves. Some of the best-known funds have been
around since the 1970s.
The Abu Dhabi Investment
Authority, with about $875bn under management, was founded in 1978;
the Government of Singapore Investment Corporation ($350bn) and the
country’s Temasek Holdings ($100bn) in 1981 and 1974 respectively,
Norway’s Government Pension Fund ($300bn) in 1990 and the Kuwait
Investment Authority ($70bn) in 1960.
Attention in the past few weeks
has focused on episodes such as the Qatar Investment Authority’s
backing for a potential bid for UK retailer J Sainsbury, the
possible purchase by China’s Citic Bank of a stake in US investment
bank Bear Stearns and the deployment of a new $40bn investment fund
from Libya.
China remains the main focus.
China’s currency reserves are growing by about $1bn a day and total
between $1.3 trillion and $1.4 trillion. China has been active for
some time in acquiring high-profile oil assets in Africa, signalling
its shift into such investments by subscribing in May for $3bn in
the initial public offering of US private equity group Blackstone.
Schmidt, the world’s oldest
senior commentator on global and monetary affairs, is following the
development of the emerging world’s riches. He believes China will
deploy more of its wealth in companies in the US, Europe and Africa.
Schmidt said China will also take further steps away from buying US
treasury bills, thought to account for about 75% of its reserves up
to now. Schmidt said the Chinese strategy of relying on the dollar
is a “ridiculous mis-investment”.
More active management of
Chinese foreign exchange holdings creates a conundrum for US Federal
Reserve chairman Ben Bernanke and Jean-Claude Trichet, president of
the European Central Bank. Much American international monetary
diplomacy has been directed at persuading the Chinese authorities to
accept a higher rate for the renminbi as part of an effort to lower
the enormous Chinese trade surplus with the US. American policy on
the renminbi is inciting a larger role for the euro in overall
reserve currency holdings. If the Chinese central bank lowers its
purchases of dollars, allowing the renminbi to float higher on the
foreign exchanges, the assumption must be that the share of euros in
the Chinese central bank reserves will rise in time. According to
the IMF, the euro makes up an estimated 26% of world reserve
holdings against 64% for the dollar, down from 69% when the euro was
introduced at the start of 1999. Capturing a greater share of world
reserve currency holdings was one of the goals for the Europeans,
particularly the French, when the euro was established. However, a
further rise in the European currency caused by more aggressive
reserve management by reserve holders and sovereign wealth funds
would inflame tensions within Europe.
The balance of payments of the
euro nations is on par with the rest of the world. But this masks a
large current account surplus from Germany and growing current
account deficits from the other lending euro economies of France,
Italy and Spain. A further rise in the euro might not be unwelcome
for Germany and the Deutsche Bundesbank would see it as a means of
shielding the country from higher inflation caused by climbing oil
prices. However, further euro revaluation would set alarm bells
ringing in Paris, particularly after last week’s fresh Federal
Reserve interest rate easing.
If the Chinese heed Schmidt’s
call to channel more funds into the euro, Trichet can expect still
more clamouring for lower euro interest rates from the French
Government.
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