Some global snapshots from Societe-General Asset Managem, kicking off with concern that bond insurers or monoliners will be the next US trouble spot . . .
Monoliners (bond insurers) have taken centre stage with fears running high that another financial market domino is about to fall, ultimately impairing banks’ already damaged balance sheets. Monoliners developed in the US for the purposes of insuring municipal bonds. This fundamentally low-risk activity has since expanded to include the realm of structured products which, when guaranteed by monoliners, benefit from the latter’s traditionally AAA credit ratings.
Structured products accounted for approximately one-third of debt insured when the sub prime crisis erupted. As losses in sub prime and the liquidity crunch hit, monoliners suffered losses and half of the US monoline insurers have already been downgraded, others have been placed on watch for downgrades. A private sector financed bail out plan is currently being studied, but the risk is that ultimately the US taxpayer could be on the hook.
Inflation targets – challenging times
Soaring commodity prices and rising downside risks to growth have raised some uncomfortable questions about the trade-off between inflation targets and growth.
With a growing number of central banks in both the developed and emerging economies currently targeting inflation, it’s well worth discussing the problematic aspects of this approach to monetary policy. In the near future, we see central banks exercising patience about inflation pressures as the focus shifts towards the downside risks to growth. We still propose, though, a constructive view on the accomplishments of the inflation targeting framework, on its reputation, and on its future outlook as a central feature of monetary policy.
The insolent economy of Australia
Australia is not what one would ordinarily describe as an emerging economy. Indeed, with a GDP per capita of AD36 400, it ranks 15th highest of the world’s economies. However, the dynamics of the Australian economy today look more like those of its emerging Asian neighbours and contrast sharply with most other developed economies. With GDP growth of 4 per cent in 2007, Australia has enjoyed 16 consecutive years of economic growth. Now, as the global slowdown of late 2007 drags into 2008, Australia is holding up well — albeit with inflationary pressures steadily mounting.
This has pushed the Reserve Bank of Australia to go against the grain in recent months, most recently by hiking its key rate to 7 per cent in January. Unsurprisingly, the RBA rate hike has contributed to further strengthening of the Australian dollar. With the global economy slowing, the RBA is facing a dilemma.
Is Eastern Europe on the verge of a financial crisis?
The newest EU member states have enjoyed several years of high single-digit economic growth, partly thanks to the very favourable global liquidity conditions. As global credit standards tighten, however, the economic outlook for these economies has turned less rosy. Moreover, during the booming years, many of these countries’ economies have accumulated a number of worrying features.
Against this backdrop, fears are mounting of a hard-landing which will be either triggered or accompanied by a financial crisis. In our view, these fears appear overdone – at least for the biggest economies among the new EU member states.
Bobbing on a sea of imbalances in EMEA
For the past several years, investors and analysts have nervously anticipated possible violent corrections in asset prices in a number of EMEA economies where fast rates of growth have been intensified by imbalances — either large current account deficits, large fiscal deficits, or both.
As global markets continued to wobble in the first weeks of 2008, investors appear to be picking through the numbers in countries such as South Africa, Turkey, and Hungary — trying to ascertain whether the imbalances that have prevailed in these countries for several years now rise to the level of crisis in the making.
While some emerging economies have actually seen their currencies appreciate (Brazilian real +3 per cent YTD), South Africa’s rand (-14 per cent), Turkey’s lira (-3 per cent) and Hungary’s forint (-5 per cent) have all depreciated due to structural weaknesses. What’s afflicting the rand right now is the perception of rising country risk that goes above and beyond the problem of structural imbalances.