Out of the Eurozone frying pan: into the emerging markets fire

Will current account deficits across Asia, should we worry about contagion to weak peripheral Eurozone countries?

With the Indian Rupee, the Indonesian Rupiah, the Turkish Lira all selling off 10 per cent or thereabouts versus the USD since the beginning of August, July and May respectively, one is beginning to be reminded of the Asian Crisis of the late nineties, when current account deficit currencies lead the collapse to a full-blown disaster.

Then, as now, hot money had flooded in, as a desperate search for excess returns lead investors to boldy go where a few had never been before. After all, current account deficit countries need that flow of money to stay solvent and now, classically, the flow is suddenly drying up, as the returns on ‘risk-free’ investments, such as US Treasuries, have risen dramatically, (well, risk-free in the sense that you’ll get all your money back if you hold to maturity).

Lack of policy credibility and slowing growth don’t help. The former took a dent last week in India, when the  central bank introduced controls over the amount of money Indian residents and companies can send overseas. The trouble with partial capital controls is that then everyone fears the imminent implementation of full capital controls, and gets their money out as soon as possible, thus weakening the currency, etc, etc. This in addition to three gold import tax hikes this year.

Personally, I feel the chances of a full-blown repeat of the Asian crisis are quite slim-generally speaking, hard lessons were learned then and impressive FX reserves have been accumulated during the good years, also public debt levels are lower and savings rates higher, although Indonesia’s FX reserves are not as impressive as some, but even there the better performance of the economy should mean that a quick dose of higher interest rates will calm things down.

Should we worry about potential contagion to weak Eurozone peripheral countries? I don’t think so, as the current-account balances of Greece, Italy, Portugal, and Spain have all virtually improved to zero, compared to India’s 4.8 per cent deficit.

There’s no doubt that the rising tide of global QE experiments, and Chinese overseas investment, had floated many ships, and that some of them will be left marooned in the mud as the Fed begins to taper down its Quantitative Easing, but whilst a repeat of 1997/98 is probably not something to lose too much sleep over, severe stress in such massive economies as India and Indonesia may, however, have a deleterious effect on regional and even global growth.

At the moment I’d still classify this as a low probability, Black Swan event, given the obvious growth in strength of the recoveries in the US, UK, Eurozone and China. The latter evidenced by the latest The Markit/HSBC flash manufacturing PMI for August of 50.1, versus market expectation for 48.2, (last month 47.7).

Remember, however, the generally accepted definition of a Black Swan event; low probability, sure, but high impact if it comes to pass.

Indian sand artist Sudarsan Pattnaik puts the finishing touches to his sand sculpture of a rupee coin in front of the Hindu Goddess Lakshmi. Photograph: STRDEL/Getty Images.

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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Arsène Wenger: how can an intelligent manager preside over such a hollowed-out team?

The Arsenal manager faces a frustrating legacy.

Sport is obviously not all about winning, but it is about justified hope. That ­distinction has provided, until recently, a serious defence of Arsène Wenger’s Act II – the losing part. Arsenal haven’t won anything big for 13 years. But they have been close enough (and this is a personal view) to sustain the experience of investing emotionally in the story. Hope turning to disappointment is fine. It’s when the hope goes, that’s the problem.

Defeat takes many forms. In both 2010 and 2011, Arsenal lost over two legs to Barcelona in the Champions League. Yet these were rich and rewarding sporting experiences. In the two London fixtures of those ties, Arsenal drew 2-2 and won 2-1 against the most dazzling team in the world. Those nights reinvigorated my pride in sport. The Emirates Stadium had the best show in town. Defeat, when it arrived in Barcelona, was softened by gratitude. We’d been entertained, more than entertained.

Arsenal’s 5-1 surrender to Bayern Munich on 15 February was very different. In this capitulation by instalments, the fascination was macabre rather than dramatic. Having long given up on discerning signs of life, we began the post-mortem mid-match. As we pored over the entrails, the curiosity lay in the extent of the malady that had brought down the body. The same question, over and over: how could such an intelligent, deep-thinking manager preside over a hollowed-out team? How could failings so obvious to outsiders, the absence of steel and resilience, evade the judgement of the boss?

There is a saying in rugby union that forwards (the hard men) determine who wins, and the backs (the glamour boys) decide by how much. Here is a footballing equivalent: midfielders define matches, attacking players adorn them and defenders get the blame. Yet Arsenal’s players as good as vacated the midfield. It is hard to judge how well Bayern’s playmakers performed because they were operating in a vacuum; it looked like a morale-boosting training-ground drill, free from the annoying presence of opponents.

I have always been suspicious of the ­default English critique which posits that mentally fragile teams can be turned around by licensed on-field violence – a good kicking, basically. Sporting “character” takes many forms; physical assertiveness is only one dimension.

Still, it remains baffling, Wenger’s blind spot. He indulges artistry, especially the mercurial Mesut Özil, beyond the point where it serves the player. Yet he won’t protect the magicians by surrounding them with effective but down-to-earth talents. It has become a diet of collapsing soufflés.

What held back Wenger from buying the linchpin midfielder he has lacked for many years? Money is only part of the explanation. All added up, Arsenal do spend: their collective wage bill is the fourth-highest in the League. But Wenger has always been reluctant to lavish cash on a single star player, let alone a steely one. Rather two nice players than one great one.

The power of habit has become debilitating. Like a wealthy but conservative shopper who keeps going back to the same clothes shop, Wenger habituates the same strata of the transfer market. When he can’t get what he needs, he’s happy to come back home with something he’s already got, ­usually an elegant midfielder, tidy passer, gets bounced in big games, prone to going missing. Another button-down blue shirt for a drawer that is well stuffed.

It is almost universally accepted that, as a business, Arsenal are England’s leading club. Where their rivals rely on bailouts from oligarchs or highly leveraged debt, Arsenal took tough choices early and now appear financially secure – helped by their manager’s ability to engineer qualification for the Champions League every season while avoiding excessive transfer costs. Does that count for anything?

After the financial crisis, I had a revealing conversation with the owner of a private bank that had sailed through the turmoil. Being cautious and Swiss, he explained, he had always kept more capital reserves than the norm. As a result, the bank had made less money in boom years. “If I’d been a normal chief executive, I’d have been fired by the board,” he said. Instead, when the economic winds turned, he was much better placed than more bullish rivals. As a competitive strategy, his winning hand was only laid bare by the arrival of harder times.

In football, however, the crash never came. We all wrote that football’s insane spending couldn’t go on but the pace has only quickened. Even the Premier League’s bosses confessed to being surprised by the last extravagant round of television deals – the cash that eventually flows into the hands of managers and then the pockets of players and their agents.

By refusing to splash out on the players he needed, whatever the cost, Wenger was hedged for a downturn that never arrived.

What an irony it would be if football’s bust comes after he has departed. Imagine the scenario. The oligarchs move on, finding fresh ways of achieving fame, respectability and the protection achieved by entering the English establishment. The clubs loaded with debt are forced to cut their spending. Arsenal, benefiting from their solid business model, sail into an outright lead, mopping up star talent and trophies all round.

It’s often said that Wenger – early to invest in data analytics and worldwide scouts; a pioneer of player fitness and lifestyle – was overtaken by imitators. There is a second dimension to the question of time and circumstance. He helped to create and build Arsenal’s off-field robustness, even though football’s crazy economics haven’t yet proved its underlying value.

If the wind turns, Arsène Wenger may face a frustrating legacy: yesterday’s man and yet twice ahead of his time. 

Ed Smith is a journalist and author, most recently of Luck. He is a former professional cricketer and played for both Middlesex and England.

This article first appeared in the 24 February 2017 issue of the New Statesman, The world after Brexit