Jeremy Warner's Outlook: Thai crisis has echoes of the late 1990s, but this time around it is more farce than tragedy

LSE battles to make its valuation case; Shell: best to admit Russian reality
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The Independent Online

So is this the giant popper that will finally puncture what many see as the over-exuberance of world stock markets? Even those of relatively short memory will recall that it was Thailand which sparked the last Asian markets crisis back in the late 1990s.

What began in Bangkok soon spread to other developing economies of the Far East, prompting a collapse in currencies and an economic contraction that makes our own, more distant, experience of recession look like a mere flea bite by comparison. The contagion eventually spread to Russia and Latin America as well, and prompted a mini-crash even in our own Western markets.

Is history about to repeat itself? The parallels are unnerving, with the Thai stock market plunging nearly 20 per cent, its worst one day fall for 16 years, after an ill-judged attempt by the interim military government to impose capital controls. The currency, the Thai baht, took a severe battering too. Nor do the similarities end there. As in the mid-1990s, there has been a huge inflow of Western capital into these markets in recent years, much of it hot money chasing speculative returns. Such money has a tendency to leave as quickly as it arrives. When it does, it causes the currency to collapse and interest rates to rocket, driving the economy into recession.

However, that's where the parallels end, and although there is still plenty of scope for the stir fry in Thailand's financial markets to turn into something much more serious, at this stage it looks more like farce than tragedy.

The crisis, if that is what it should be called, is in fact the mirror image of what happened in the late 1990s. Back then, the task for central bankers in these developing economies was to defend the dollar peg that underpinned their currencies. It was feared that without the peg, the foreign capital which supported economic growth would take flight and output would plummet. Unfortunately, their reserves were no match for the George Soroses of this world and the endeavour ended in tears.

Today, the perceived problem is the other way around. The challenge for policy makers is rather to keep the currencies from further appreciation. In the endeavour, central banks have accumulated vast reserves of foreign currency. Yet still the currencies keep rising, making exports less competitive. It was to try to discourage these inflows of capital that the interim Thai government slapped on exchange controls, the reasoning being that if it was made harder for foreigners to take their money out, they would be less keen to put it in. Yet all these actions have done is demonstrate to the capital markets how exposed to the arbitrary actions of governments many such smaller, emerging-market economies still are. The damage done to the stock market and the currency had within hours forced the Thai government into humiliating retreat.

Sometimes governments can buck the markets. By imposing capital controls, Malaysia managed to avoid the worst consequences of the last Asian financial crisis. The International Monetary Fund was eventually forced to eat humble pie over the strictures it had issued against Malaysia at the time. The austere remedies it had imposed elsewhere in the region were made to look unduly harsh. It seemed that the poor were being punished to benefit the rich.

But most of the time the markets are generally correct. The last Asian crisis exposed profound weaknesses in many of the things we take for granted in the developed West - banking, oversight, accountancy and standards of business probity. The whole region was an accident waiting to happen. It was hard to figure out who was most to blame - the crony capitalism of these countries, or the naivity of foreign investors and bankers in feeding the avarice of the region's business leaders.

Most of these failings have since been addressed, and today the fundamentals are much sounder. This is perhaps the biggest reason for thinking that, despite the parallels, the situation is less dangerous today than it was back then. The size of the capital inflows, strongly suggestive of another bubble in the making, seem to indicate that investors have yet to learn their lesson. Perhaps so, yet many of these economies today give cause for genuine confidence in the future, even if the actions of their governments do not.

LSE battles to make its valuation case

The battle between the world's leading stock exchanges for global domination sometimes seems like the modern-day equivalent of the Hundred Years War. On and on the manoeuvring goes, with apparently no end in sight.

Yet at least we reached one important milestone yesterday, with news that the New York Stock Exchange's proposed merger with Euronext has finally been voted through by shareholders. Full regulatory clearance has yet to be extracted from reluctant governments, but we must assume the deal is now pretty much in the bag.

The same cannot yet be said about Nasdaq's assault on the London Stock Exchange. The point made by the LSE's defence document yesterday is eloquently illustrated by the NYSE's acquisition of Euronext. The multiple being paid in shares for the owner of the Paris and Amsterdam bourses is substantially higher than that being offered in cash by Nasdaq for the LSE. Can the LSE's chief executive, Clara Furse, hope to see off her own American pretenders?

The problem she's got is that most of the original stock exchange users, together with traditional long only fund managers, have already sold, leaving much of the stock in the hands of hedge funds and other short-term traders. They have very little interest in the unarguable merits of her argument about long-term value. For them her clarion call of "don't let Nasdaq transform itself at your expense" is water off a duck's back. They couldn't care a fig about the rights and wrongs of the valuation so long as they make their turn.

Nasdaq already owns 29 per cent of the company. It only needs another 21 per cent to win. For hedge funds, the game therefore becomes that of forcing the LSE board to the negotiating table so that terms can be agreed at 5 to 10 per cent above the present offer. Having already declared its offer "final", Nasdaq is barred by City takeover rules from increasing the bid unless it can reach agreed terms. Yet the LSE board thinks that even 10 per cent more would hopelessly undervalue their charge.

The battle for the LSE has already been filled with so many twists and turns that even at this advanced stage a white knight shouldn't entirely be ruled out. Why stop with Euronext? Might not the NYSE take in the LSE too? An interesting thought, but unwise to bet on it. The Government has likewise washed its hands of the affair, despite the dangers a Nasdaq takeover poses for the City's competitiveness as a financial centre. Ms Furse cannot look for help from the regulators. Her valuation case, powerful though it is, may not be enough to protect her either. Hedge funds, eh?

Shell: best to admit Russian reality

The precise terms under which Royal Dutch Shell will surrender control of the Sakhalin-2 oil and gas venture in eastern Russia to Gazprom have presumably already been as good as agreed. Yet how to explain this blackmail to incredulous investors will still be giving the chief executive, Jeroen van der Veer, sleepless nights.

His best option is simply to admit the truth - he had no option. Other foreign investors in Russia, existing and potential, can look at what's happened to Shell and the jailed oil tycoon Mikhail Khodorkovsky, and vote with their feet. Best not to risk it, and choose China and India instead.

Yet oil companies have no choice but to invest in Russia. It is where some of the world's biggest sources of hydrocarbons lie. They must accept whatever crumbs fall from President Vladimir Putin's table, and be grateful for them. Mr van der Veer cannot put it quite like that, for he may be denied even the crumbs if he's so candid, but this must be his underlying message.

j.warner@independent.co.uk

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