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September 2004

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  • The Shariah-compliant debt market has grown rapidly, with interest from issuers and investors outside as well as inside the Muslim world. The next development is likely to be more corporate issues using Islamic structures.
  • Banks in Arab countries enjoyed much better results in 2003, especially during the second half. In 2002 earnings fell on the back of weakness in global investment markets, tight margins, and higher provisions. Net profit bounced back in 2003, rising by over 15% for the top 100 Arab banks.
  • Iran's economic liberalization programme has shown impressive results. But the victory of conservative forces in the latest elections threatens further progress. Meanwhile the country's banks are incapable of funding its corporations, which are turning instead to the capital markets.
  • Lack of volatility and narrow spreads have driven investors to seek out yield in the structured credit market. New products built on transparent, non-proprietary credit derivative indices have fed this demand but participants worry that not all investors have a clear idea of what they are getting into.
  • There's an obvious appeal in linking your brand with the Olympic ethos of excellence and achievement, as the likes of John Hancock, Visa and Greece's own Alpha Bank did at last month's Athens Games. Other sponsorships are harder to work out. Standard Bank of South Africa, for example, is sponsoring a dead whale. Misty is, or was, a southern right whale (Eubalaena australis) that came off second best in a collision with a ship and washed up near Cape Town. As Standard Bank says in a grisly press release: ?Decomposition set in and her rotting 70-ton body became a source of controversy. It was decided to implode the carcass but [residents] persuaded the powers to allow them to remove the rotting flesh to preserve the skeleton.
  • Investors ask tough questions these days about companies' ability to honour their commitments. After all, no-one wants to fall victim to the next corporate scandal. But Toys “R” Us shareholders and bondholders are safe, aren't they? Surely official “spokesanimal” Geoffrey the Giraffe and chums won't let them down.
  • Sandy Nairn loves a good challenge. After 10 years at Templeton Investment Management he took on the task of reviving Scottish Widows Investment Partnership, Lloyds TSB's languishing Edinburgh-based investment business in November 2000.
  • The appointment of former deputy central bank governor Jammaz Al-Suhaimi as chairman of Saudi Arabia's Capital Markets Authority looks set to accelerate the liberalization and broadening of the kingdom's financial markets.
  • In 20 months as governor, Alfonso Prat-Gay built a credible central bank from almost nothing, managed the money supply brilliantly, oversaw currency stability, kept rates low and even began whipping the banking sector into shape. For these achievements, he is Euromoney's central bank governor of the year. But he also strove for greater independence for the central bank. Now, on the eve of the country's crucial bond exchange, president Nestor Kirchner has chosen to dispense with Argentina's most internationally respected policymaker.
  • Slovakia boasts the fastest growth rate in central and eastern Europe as it turns from regional laggard to leader. It has boosted growth, controlled government spending and attracted FDI with a tax policy some of its larger neighbours dislike. They won't intimidate finance minister Ivan Miklos.
  • Argentina is facing an invidious situation. It has strong motives to resolve the default on its foreign debt but its offer could be strangled at birth. Many creditors seem unwilling to accept it. The proposed bond exchange, the world's largest ever, is just the beginning of the road back to international acceptance.
  • Real money investors such as mutual funds, as well as credit hedge funds, prop traders and other specialist investors, are finally treating credit risk as an asset class to be managed like any other. They bring new liquidity to the markets in default swaps and credit indices that have made this possible.
  • Having been heavily overweight on Russia last year, many emerging-market equity investors are now scaling back their positions. Some investors are making a fundamental reassessment of Russian equity risk.
  • The prospect of next month's European Commission decision on EU membership for Romania has concentrated the minds of the country's politicians and bankers. A flurry of reforms have been accompanied by an acceleration of privatization to get the country into shape for a 2007 accession target.
  • The mini bank crisis Russians faced in the summer has underscored the urgent need for bank sector reform and the creation of a system that can respond to the credit needs of businesses and individuals.
  • The EU's decision in December on Turkey's bid for membership will have dramatic effects on the country's economic development. But even if the formal accession process begins, major reforms will still have to be undertaken.
  • Russia's economy is roaring up the growth curve but dependence on oil revenues, insufficient diversification into other activities and a growing gap between the well-off and the poor give cause for concern.
  • Deflation is on the way, summoning up a long and dreary financial winter. But it should be preceded by a burst of autumn sunshine
  • A well-executed privatization programme, carefully directed investment in education, valuable trade agreements and astute management of debt and inflation have underscored the growing health of the Jordanian economy, symbolized by its graduation from IMF programmes.
  • New tools such as credit default swaps and index products have changed the ground rules of hedge fund activity in emerging markets. They are paying off now but will sophisticated pricing and technology be able to cope with the next emerging-market debt crisis?
  • There has been an unseasonal tension on some of Spain's more exclusive beaches over the past month. August is usually a time for the great and the good of industry to leave the stresses of the cities behind them and unwind by the sea. But for the chairmen of some of the biggest companies, the holidays were spoiled by the knowledge that in the autumn they will be fighting for their jobs.
  • Germany breached the EU's budget deficit limit of 3% of GDP over the first six months of this year and will almost certainly break the terms of the European stability pact that underpins the euro for the third year in a row. In fact, the government managed to run a 4% budget deficit over the first half of this year, slightly higher than the 3.9% for the end of 2003, federal statistics office Destatis revealed last month.
  • It's late on a Thursday night and the party cognoscenti are headed for one of Asia's slickest nightspots. From the exterior, f.bar, a bunker-like building with an unpromising squat black façade is guarded by serious-looking security personnel clad head to toe in matching black.
  • Following a period of sustained economic growth, the Caribbean is faced with a new challenge. Recent developments in international legislation might reduce capital inflows and put more pressure on the region's financial sector.
  • Analysts are growing increasingly concerned about rising problem loans advanced to SMEs by Korean banks. The banks' track record inspires little confidence. They lent unwisely to the conglomerates in the late 1990s and then hit problems with consumer credit cards. Have the Korean banks learnt their lesson or is a third bad debt crisis looming?
  • Google's decision to use an auction for its IPO sprang from a desire to get what it regarded as a fair price, avoid post-issue upsets and offer fair investor access. Did it succeed in these goals and might it have done better had it shown more respect to its bankers?
  • Iraq and Argentina's debt problems will dominate this month's IMF/World Bank meetings, with the size of their liabilities casting doubt on the international financial system's ability to cope.
  • The new coalition government led by Indian prime minister Manmohan Singh will kick off privatization sales with a billion-dollar initial public offering in September.
  • No-one disputes that China's growth rate needed reining in. While investors worry over the possible consequences of a sharp slowdown, most economists believe that, contrary to global historical precedent, the Chinese authorities might have pulled off the trick of a relatively painless cool-down. But serious structural flaws in the economy remain and make China a perilous place to invest.
  • In the lull between the fundamentals of European companies improving and their expanding or acquiring rivals, there's been a dearth of new credit issuance. Hence the interest investors have taken in liability management deals. Investors claim to see good returns from these, but this is by no means guaranteed.
  • Bulgaria cleared an important hurdle when it finally approved the sale of mobile phone company BTC to a consortium led by Advent International in February, in one of the region's largest leveraged buy-outs. Financing for the deal finally closed in June. Gyuri Karady of Baring Private Equity Partners says: ?It tested the legal framework in Bulgaria, and it looks like the rule of law prevailed, which is a triumph for Bulgaria.? Progress on the deal was one of the factors that helped the country obtain an investment-grade rating later in the year.
  • Foreign investment sentiment was already being battered by the Yukos affair, the Kremlin's attack on what was Russia's biggest oil company. However, waning confidence was dealt a fresh blow in August when a Duma deputy officially called for an investigation into ?grey? schemes used by foreigners to hold billions of dollars-worth of Gazprom shares.
  • A slowdown in the growth of China's asset pool is not deterring new entrants among fund managers.
  • www.breakingviews.com
  • By Camilla Palladino
  • www.breakingviews.com
  • www.breakingviews.com
  • MBNA Europe's delinked programme should help Europe's ABS issuers to respond to investor demand
  • German savings banks are using credit default swaps to reduce their credit risk concentration for the first time.
  • If your competitors are beating you to the most lucrative deals, it could be they're better at pressing the flesh. Wooing potential clients over drinks or dinner is as much a part of a banker's job as making formal pitches.
  • Nordea has become the first bank anywhere to completely outsource its company equity research. It is unlikely to be the last. The pan-Nordic bank is to cease its own coverage of stocks in the Nordic region and will instead buy research on 200 regional stocks, including buy, sell and hold recommendations, from Standard & Poor's. This follows a similar deal with S&P last year in which Nordea outsourced all its US, European and Asian company equity research coverage to the US group.
  • European and US equity markets have mirrored each other for years but macro trends could force a decoupling over the next two years. ABN Amro strategists see several factors paving the way for this. The first is that productivity growth in the US and Europe has passed an inflection point. The US has experienced two years of strong productivity growth, but the rate is unlikely to be sustainable. European productivity still has room for improvement.
  • You're a populist left-wing politician in South America. Your country's elite doesn't like you, and Wall Street is scathing. Your reputation could do with a bit of help. What do you do? Why, take out an advertisement in the New York press, of course. The trend started in July, when an advert appeared in the New York Times. "Argentina," it blared: "A responsible country, a responsible proposal". A list of the great and the good followed, attesting to Argentina's "sincere and realistic proposal to creditors" (see Argentina's creditors brace for lowball offer). U2's Bono, Mikhail Gorbachev and actors Emma Thompson and Viggo Mortensen were prominent.
  • Wait long enough and anything comes back into fashion. Even flares. Now it's high-yield cash collateralized bonds, or CDOs.
  • When it comes to picking stocks and beating the market, women are better, says DigitalLook.com. In a study of 100,000 portfolios from July 2003 to July 2004, the company found the average woman's portfolio grew 10%, beating the FTSE All-Share by 3% and the average man's portfolio by 4%.
  • First Wit dumped its attempt to build a retail platform. Next, it dumped its name, and moved out of its Silicon Alley headquarters in New York to Connecticut. Then last year Charles Schwab Capital Markets bought it. At least Wit, by then Soundview, the name of the boutique it bought in 1999, was joining a like-minded firm with ambitions to change how markets work.
  • New approaches to instilling high standards have fed into this year's Euromoney corporate governance survey. Initiatives include activist fund managers taking on mandates to advise other investment groups and the incorporation of governance criteria into bond ratings.
  • Country risk index: The latest Euromoney country risk survey, which for the first time incorporates data on perceptions of corruption, reflects continuing upheaval in the Middle East and Africa that is only partly compensated for by a favourable global trade environment.
  • Low interest rates and improvements in financial stability and management in large parts of Latin America are putting banks on the path to increased lending capacity as demand for credit increases.
  • Emilio Botín knew that launching a frontal assault on the UK banking market was never going to be a bed of roses. But the 70-year-old chairman of Grupo Santander, Spain's largest bank, and his team were knocked for six by the furore that was unleashed in response to their £8 billion-plus bid for Abbey, the sick man of British banking.
  • The youthful managers of Kazakhstan's financial sector are determined that oil and minerals wealth will be used to create a strong mixed economy. A well-regulated banking system and controls on the inflationary effects of oil earnings have been established but diversification and financial markets development still face significant hurdles.
  • South African banks are working out how to structure and finance the Black Economic Empowerment (BEE) deals that are altering the ownership structure of the country's financial services industry. Under South Africa's voluntary Financial Sector Charter, direct black ownership in financial institutions should reach 10% by 2010.
  • Citigroup's trading on European government bond platform MTS on August 2 has provoked a lot of hyperbole. Citigroup sold e11 billion of European government bonds on MTS and bought e4 billion back a few minutes later at a lower price, making a profit and causing losses at other primary dealers. According to one financial newspaper, Citigroup has "systematically targeted other market makers' mandatory price quotes", which has "shocked rivals". Consequently, the eurozone government bond market has been "thrown into turmoil" and apparently national debt agencies have been forced into a period of "intense soul searching".
  • To date, securitization in eastern Europe has been a very occasional affair. Turkey has seen a few future-flow transactions, Hungary has a relatively developed domestic mortgage bond market, but you can count the number of other transactions on the fingers of two hands. However, the market should pick up this year.
  • South Africa has built stable macroeconomic foundations since the overthrow of apartheid but its potential as a regional leader is still hampered by corporate rigidities, untapped talent reflected in high unemployment, an Aids epidemic and a failure to attract inward investment.
  • Argentina has over half a million creditors, while Iraq has comparatively few. But dealing with $100 billion of Iraq's debt has given everyone from the IMF to the Paris Club a tough problem to resolve. The US government will urge generosity but a happy solution for all interested parties is next to impossible.
  • CEE private equity, after a tough period that saw many funds go out of business, is enjoying a surge in activity, thanks to access to leveraged finance. Some funds are making big returns. Others, however, are still struggling.
  • Hedge funds are suddenly receiving high allocations in IPOs even though their participation can sometimes reduce issuers' proceeds. Are they suitable buyers or are investment banks favouring the clients which pay them the most?
  • Senior bankers who quit their jobs on the pretext of pursuing new interests often quickly emerge in a similar role. Not so Manfred Schepers, who left UBS last June after 17 years. He said he was leaving to consider new banking roles but that his first priority was a good break. He meant it.
  • For years, Deutsche Bank's Asian equity business was little more than an also-ran. The bank had a reputation for aggressive tactics and profligate hiring but failed to build a credible business, to the amusement of rivals. But with new management hired to fix the problems, Deutsche seems to be getting it right.