The World Is Not Very Flat In Emerging Markets......

The Great Greek Sucker Punch

Mr. Papandreau is a career politician, a true political survivor.  With the announcement of a referendum on the bailout, he has single handedly managed to hand over responsibility of a hard default to the masses.

For those who are wondering what the real spirit behind the referendum is, it is essentially the single most important step toward adopting the Drachma and therefore letting go of the Euro.

Of course, all this comes at the expense of Mr.Sarkozy and Mrs.Merkel. I would argue that this referendum represents one of the greatest sucker punches ever to have been delivered to the EU by Greece (even when you consider how they actually got in to the monetary union in the first place). It’s now time for Mr.Sarkozy and Mrs.Merkel to answer to their respective constituents. I doubt they will be so generous with Greece from now on.

So, what is Greece to do now? I wrote about a Greek default several months ago and in short, there is light at the end of the tunnel… however only after a restructure plan that will hurt much more than any EU bailout. The Greeks have lost at least one (possibly two) generations to debt. In a sense, I guess the Greeks have chosen to pull the trigger themselves rather than have it pulled by the international community.

As a Turk, I know about depression and economic volatility so I’m a bit torn between the virtues of the proposed referendum. On one side, I think that Greece should have taken the EU handout as very few countries in the history of the world have ever received so much benefit of the doubt. On the other side, having forced to report to the IMF or other international institutions every time you sneeze can be extraordinarily humiliating.

At the end of the day, investors must realize that these are the hard facts about emerging markets. Not just Greece but all emerging markets. We will find a way around these crisis and believe me, given the right information and guidance, there will be many investors that will come out wealthier at the end of the process.

 

What if Greece Left the EURO zone?

The extraordinary narrative of Greece’s EURO zone adventures cannot be told without a profound sense of irony and disillusionment. 

At least the next three or four generations of Greeks will be burdened with the heavy austerity measures that are required in order to pull the country out of its debt.  So what if Greece just told the global investment community that it was no longer respecting its debt obligations? What would really happen? After all, it would not be the first time Greece would default on its debts. To examine what would happen, we should really start from why it happened. Anyone who seems to think that no one could have seen this ‘economic freight train’ hurtling directly at them is either blatantly lying or live in a world of absolute denial.

The EU in general has a very schizophrenic (some may even venture to say hypocritical) approach to dealing with its many problems. They seem to systematically ignore (turn a blind eye) to the misdoings of its members, as was the case when Greece and Italy were literally deceitful about their respective financial status to the entire block in their attempts to join the EURO zone. In perfect 20/20 hindsight, it would seem that the Greek government really never stopped misguiding the EU and the rest of the EU never said a word until it was too late to save the country.

What is done is done and at this point in time, Greece has to make some of the toughest decisions in its lifetime.

The default and the ultimate abandonment of the EURO would be a chaotic process at very best.  

The underlying problem with Greece is two-fold: firstly, its tax collection ability/culture is not entrenched and secondly, that the country cannot compete with the more productive nations of Germany or England. The strategy would be to basically take a tremendous hit at the beginning with the hopes of increasing productivity in the future due to a devalued currency. This would however be much more painful (and complicated) than one might think as the implementation would most certainly involve a massive debt default, ultimately crippling the ability of the country to access international finance markets for at least 15 years moving forward.  

The step-by-step implications would be as follows:

Step 1: Leave the EURO and reinstate the old Greek currency, the Drachma.

Step 2: The Drachma would instantly (and severely) devalue against the EURO and other global currencies. 

Step 3: The existing Greek debt burden, which is primarily in EUROs would be virtually impossible to pay off. To this end, Greece would either have to start printing massive amounts of Drachma or go into default. Chances are the country will choose default at this point. 

Step 4:  Short/medium term productivity and would plummet and retail/commodity prices would increase, resulting in severe disruptions in society.

Step 5: If the country can somehow survive through the 5 to 10 years of social and economic chaos, it will slowly start to rebuild productivity through low-priced manufacturing.

If it were easy, Greece would have left the EURO a long time ago. Unfortunately there is no real short cut for the Greeks this time around. Greece would have the benefit of a first movers advantage in that the first country to leave the EURO would be….the winner, if there is such a thing in this situation.

All we are left to do is to wish them patience and strength at this point.

 

Economic Interdependence and the Canadian Elections.

Canadians went to the polls last week to chose their new prime minister for the next four years. It was a hard fought battle that ultimately resulted in a seismic shift in power within the country. Without getting into the specific political details, Canadians elected a majority government that has eluded the country for so many years.

Not only did Canadians elected a majority government, they elected the Conservatives who are often regarded as the ‘business friendly’ party and who are most capable of moving the country forward in a fragile global economic environment.

One would assume that this is great news for the country. There is absolutely no doubt that it is. A majority government means less volatility in a very volatile world. The country is also positioned as one of the top performing developed nations in the world.

One would also assume that the stock exchanges would shoot up against the increasingly better national outlook. Times are certainly changing. The Toronto Stock Exchange (www.tmx.com) was down around 300 point the next day (and ultimately sinking further for another three days straight).  Only ten years ago, an election with such optimum results in any country would result in a strong increase in local exchanges.

It is an interesting example how economically interdependent countries have become. Regardless of how much good news is generated on a local basis, the exchanges (and ultimately the fate of entire economies) are tied so extensively to global issues and events.

I’ve been in Toronto for the past two months and have had an ‘emerging market’ perspective on  many of the national hot topic issues as discussed by politicians since the race began. When we compare the positive results of the election against the volatile backdrop of the global economy, it seems to me that Canadians should concentrate more on how to position the country in a world where power is shifting from traditional leaders to new ones.

I sensed that the general Canadian populace was going through what I call ‘analysis-paralysis’. I believe Canadians need to concentrate on how to develop a solid national resource, financial, economic and energy strategy that will compete and ultimately secure its’ leadership position in the world.

 

 

Economic Interdependence and the Canadian Elections.

Canadians went to the polls yesterday to chose their new prime minister for the next four years. It was a hard fought battle that ultimately resulted in a seismic shift in power within Canada. Without getting into the specific political details, Canadians elected a majority government that has eluded the country for so many years. Not only did Canadians elected a majority government, they elected the Conservatives who are often regarded as the ‘business friendly’ party and who are most capable of moving the country forward in a fragile global economic environment. One would assume that this is great news for the country. There is absolutely no doubt that it is. A majority government means less volatility in a very volatile world. The country is also positioned as one of the top performing developed nations in the world. One would also assume that the stock exchanges would shoot up against the increasingly better national outlook. Times are certainly changing. The Toronto Stock Exchange (www.tmx.com) was down around 300 point the next day. Only ten years ago, an election with such optimum results in any country would result in a strong increase in local exchanges. It is an interesting example how economically interdependent countries have become. Regardless of how much good news is generated on a local basis, the exchanges (and ultimately the fate of entire economies) are tied so extensively to global issues and events. I’ve been in Toronto for the past two months and have had an ‘emerging market’ perspective on many of the national hot topic issues as discussed by politicians since the race began. When we compare the positive results of the election against the volatile backdrop of the global economy, it seems to me that Canadians should concentrate more on how to position the country in a world where power is shifting from traditional leaders to new ones. I sensed that the general Canadian populace was going through what I call ‘analysis-paralysis’. I believe Canadians need to concentrate on how to develop a solid national resource, financial, economic and energy strategy that will compete and ultimately secure its’ leadership position in the world.

Scrutiny between G20 peers?

The U.S., China and five other large economies will face deeper scrutiny from their peers to ensure their policies don’t derail a global expansion that finance chiefs bet is strong enough to absorb recent shocks.

via www.bloomberg.com

We have all witnessed the tragic financial collapse of both global conglomerates as well as global economies over the past four years. As heartbreaking as these events are, it is very important for the international community to learn from its mistakes move forward.

One thing I’ve personally ‘learnt’ from the past four years of the unprecedented economic value destruction is the demoralizing similarities between the G20 and the ECB; two very critical organizations.

Both organizations convene regularly to discuss global issues. Both organizations often seem to pass judgment on those nations (and/or corporations) who have stepped out of line.

…neither organization has the teeth to actually enforce their agenda and to this end, nothing concrete ever comes about from these meetings.

We all continue to see the ineffectiveness of the ECB against the collapse of the periphery EU nations. In addition they continue to raise interest rates, as if to intentionally push the PIGS to leave the Euro zone. The latest comedic initiative comes from the G20. They seem to think that each member state will actually interfere with the economic policy of another member in order to prevent financial instability.

I wonder when we’re ever going to learn from these mistakes and move forward.

Moving forward in EMEA with Private Equity

I am being asked about the social uprisings across the Middle East region on a daily basis and its effects on private equity so I thought to write some of my thoughts on the matter.

The first thing we should remember is that in the long run, what is happening in the Middle East emerging markets are akin to the fall of the Soviet Block in the 80's. They are socially, politically and economically a game changing phenomenon for the region... which is clearly long overdue. The shift, however gradual, of power from the hands of the few to the hands of the many is something we should all cheer for.

The second thing we should remember is that this transformation will not be an overnight event. Even if actual power changes hands, the effort required to transform the social, political and economic constitutions of these states will be difficult. I guess it all starts with the first step.

So, what does this mean for private equity?

Valuations are all over the map and there is a reason for this. It is critical for PE firms to put additional weight in determining the political exposure for each company in the region. There is a chance that those companies with strong state connections may be at high risk. There is also the risk of maneuvering through the liberalization of the economy. No one knows how it will unfold and transitions such as these have historically proven to be filled with a variety of risks for investors.

Having said this, beyond the immediate short-term, there is tremendous economic potential throughout the region. I predict it to be one of the highest growth areas in the world within the next three years... taking it's place next to the Asian and South American emerging economies.

It is time for private equity do its homework and mobilize.

 

NYT: Europe Is Turning Its Back on Keynes’s Cure for Recession

There is an interesting article in the NY Times claiming that most European countries are resorting to severe cost cutting amidst the recession.

"The British economist John Maynard Keynes may live on in popular legend as the world’s most influential economist. But in much of Europe, and most acutely here in the land of his birth, his view that deficit spending by governments is crucial to avoiding a long recession has lately been willfully ignored.

In Britain, George Osborne, chancellor of the Exchequer, delivered a speech on Wednesday that would have made Keynes — who himself worked in the British Treasury — blanch.

He argued forcefully that Britons, despite slowing growth and negligible bank lending, must accept a rise in the retirement age to 66 from 65 and $130 billion in spending cuts that would eliminate nearly 500,000 public sector jobs and hit pensioners, the poor, the military and the middle class because of what he insisted was the overwhelming need to reduce the country’s huge budget deficit.

......Indeed, across Europe, where the threat of a double-dip recession remains palpable, governments from Germany to Greece are slashing public outlays. But even as students and workers in France clash with the police and block fuel shipments to protest a rise in the retirement age, the debate in Europe is more on how fast to cut government spending rather than whether such reductions are the right thing to do under the circumstances."

The act of cutting costs runs against the Keynes's theories of 'spending your way out of a recession'. The problem is that many countries had already turned against Keynes long time ago when they continued to add tremendous debt during the boom years. At some point, continued high deficits are simply not sustainable and they have to be reduced somehow. Unfortunately many countries have to do the cutting during a recession.

I'm from the 'better now than later' camp on this matter. Although this will lengthen the down turn, it will be better for the long-term outlook.

I'm not sure if this will work: E.U. Tightens Spending Rules

As you may have heard, the EU ministers have decided to tighten spending rules by dishing out fines to those members who exceed their deficit limits (NY Times: http://goo.gl/XcYL ). OK. Let's stop and think about this for a minute. A member state goes over the 3% deficit limit (which by the way almost every state is already in violation) and they will be fined? Who believes this will actually work?

Everything about this new law is wrong. It is yet another band aid solution to a very serious spending addiction by member states. The problem is that each state knows that they will always receive a bail out... no matter how irresponsible they act with their budgets. How will handing out fines teach these counties anything? Those countries dishing out the bail out package will have to add and additional 'fine package' to the capital transfer.

The only way to solve this problem is to consolidate power of authority, which is so very unlikely in today's EU environment of 'to each his own' mentality.

The risk of investing in the EU has not changed much with this new law.

Searching for: Economy and Finance Policy of CHP

The elections are only a year away here in Turkey and as always, the entire future of the country is riding on who will win. To that end, I'm in search for a detailed account of the economic and financial policies of the main opposition party (CHP). Unfortunately I have not been able to locate any specific information, but if anyone out there has access to it, I would greatly appreciate it if you could send it my way.

Economist Intelligence Unit - Turkey 2009 Report

Below is a presentation developed by the Economist Intelligence Unit focusing on the Turkish economic outlook. The general outlook is that the country will be faced with a difficult year based on falling exports, its inability to sign a deal with the IMF (although I am hearing that a ‘watered down’ version of the IMF deal will be signed after the general elections on March 29^th) and the upcoming refinancing requirement of about €30-40 billion of public and private debt.

The problem here is that many companies have rallied up significant foreign currency denominated debt over the past several years. Although there is an interesting opportunity for distressed debt funds, there remains a real currency exposure risk as we move forward. This delicate balance being played out by both local and international investors will not be for the faint of heart.

Download Economist Intelligence Unit -Turkey Outlook .