Outlook: Lessons from Asia in money and miracles
Tuesday 13 January 1998
The currency board system introduced to Hong Kong in the early 1980s has survived worse crises than the collapse of Peregrine, so why should it crumble now? The obvious riposte is because Hong Kong cannot afford to maintain the peg when all around are devaluing with such abandon. But neither could this special administrative region withstand the collapse in international confidence and property values that would flow from devaluation. Hong Kong is damned if it does, damned if it doesn't, damned to recession if it clings to the peg, and to economic oblivion if it dismantles it. Of the two, the former would seem the lesser evil.
Even so, the damage involved in maintaining the peg under present circumstances is obviously bad enough. Part of it is a plummeting stock market, for if the currency cannot respond to the pressures around it, something else has to give.
The biggest danger would appear to be that of recessionary conditions sweeping from Hong Kong into China. That would make present guesses about the damage crisis in the Far East is doing to the world economy look worryingly optimistic. Add to this growing signs in the US of political opposition to the International Monetary Fund's package of aid to the region, and to the top ups being handed out like confetti by the US, and the situation begins to look very serious indeed.
No wonder policy makers and bankers are looking anxiously around for signs that the contagion sweeping South-east Asia might spread to other emerging markets too. The parallels between Latin America, Eastern Europe, the Indian sub-continent, even Russia, and the stricken economies of the Far East, are obvious and many. In all these regions, growth has been heavily dependent on foreign capital, attracted in by tales of fabulous returns and limited currency risk.
A self-feeding emerging markets industry has developed around the business of directing capital into these regions. European bankers last year became the largest group of lenders to the Far Eastern economies, but what they've sunk into the Pacific Rim is modest compared with Eastern Europe and the former Soviet Union. It is also chicken feed set against US investment in Latin America. There is a danger, then, that the speculative bubble of the Tiger economies is just one of many.
For the time being, Wall Street seems determined to turn a blind eye to this possibility. Fears yesterday that Friday's precipitous plunge in the Dow would turn into a rout were eventually vanquished. And to be frank, Armageddon still doesn't look like the most likely outcome. With luck, the bubble is not yet sufficiently far advanced in Eastern Europe, Russia, India and Latin America to be capable of the damage caused in the Far East.
If so, bankers and investors should count themselves lucky, for they now at least get the chance to learn some lessons. One of these is that Eldorado doesn't exist; there is very little that is miraculous in this world, especially when it comes to money. A second is that capitalism needs to be accompanied by democracy and adequate regulation of financial markets and corporate institutions if it is to function effectively. Nobody in their right mind would think of investing in a company in the developed world which didn't file accounts. Why do they feel so inclined to do so when it comes to emerging markets?
Unfortunately, another aspect of capital is that memories tend to be short - about as long as the next leg of the business cycle to be precise. The Far East may have taught bankers to be wary of other emerging markets, but like earthquakes, there will always be speculative bubbles.
NatWest needs a new helmsman
Gone are the days when the board of a clearing bank was the size of a male voice choir. But even today you still need a decent number of chaps and chapesses to run the shop and few of our clearers seem comfortable rubbing along with anything less than a rugby team's worth around the board table. The board of NatWest is below strength right now, having lost two members recently, and seemingly they may be about to lose another brace if the rumours about Sir John Banham and Sir Desmond Pitcher are true. Only one replacement has so far been found, Pen Kent.
NatWest is therefore in the market for up to three new non-execs. One of them, when he (or she) has been found, will succeed Lord Alexander as non-executive chairman, if everything goes to plan.
Despite weekend press speculation to the contrary, that person will not be Sir Colin Southgate, who had been approached about adding the chairmanship of NatWest to his stewardship of EMI and the Royal Opera House. Sir Colin appears to have decided that he has enough on his plate spinning more life out of the Spice Girls, merging the ROH with the English National Opera and doing battle with Gerald Kaufman before the Select Committee on Culture, Heritage and Sport.
The names of several other candidates have been aired in recent months without any firmer insight into whether they will be offered the job or indeed want to accept it. They include Sir Andrew Large, former chairman of the Securities and Investments Board, Sir Clive Thompson, chairman of Rentokil-Initial and soon to become president of the CBI, and Sir Nigel Rudd, chairman of Pilkington and Williams Holdings.
Many are called, few are chosen, as they say. But the notable thing about those called by NatWest is that none has any record as a banker. Sir Nigel Rudd comes closest, being a non-exec of Barclays. There again neither did Lord Alexander have any experience of banking before he took up the mantle at NatWest in October, 1989 promising (or was that threatening?) not to stay in the job for any longer than 10 years.
Perhaps that is where NatWest has gone wrong. Lord Alexander may have made a wonderful libel lawyer for Jeffrey Archer but his record as a non- banker at the helm of NatWest is mixed. By contrast Lloyds TSB, by far the most successful of the four main clearers, has been run for 15 years by a professional banker, Sir Brian Pitman, who has worked for the bank man and boy. The same goes for Sir William Purves and John Bond at HSBC.
The succession timetable at NatWest runs something like this: appointment of the new non-execs in time for the prelims in February, Lord A announces his retirement at the interims in August and departs a year hence, handing over the reins to his chief executive, Derek Wanless, and turning the chairmanship into a non-executive part-time post. This is how chairmen like to go - not seen to be driven out by discontented shareholders but at their own pace
Unfortunately, it is not clear NatWest can afford such a leisurely departure. It needs new direction right now. Furthermore, if Mr Wanless is to emerge from the shadow of his chairman and prove that he is the professional banker to run NatWest, then Lord Alexander should make way more quickly.
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