Marketplace Middle East - Blog
9/10/09
Mind the Gap
As I went for my morning espresso macchiato this week I glanced at a newspaper stand and saw the British headline “Recession is officially over”.

A think tank here in London used the calculation of manufacturing output rising for two months in a row to support their premise. Everyone, including this writer, wants to call an end to the nasty times, after all this month marks one year since Lehman Brothers was allowed to go bust, which was the last nudge for the global banking system over the cliff.

The Dow Jones Industrials index is reaching out for the 10,000 mark and the FTSE 100 has recently passed the 5000 threshold, both technical and psychological barriers for investors. But no one really wants to address the ten thousand pound elephant sitting on the table: the recovery in the West will be tepid at best.

This past week on our programme we illustrated that point by suggesting we should all mind the gap — recalling the famous electronic audio call one hears in the London Underground marking the space between the train and the platform. But in this case, I am suggesting we should mind the gap of some of the global economic projections for next year.

For example, the International Monetary Fund has upped its projection to three percent, from an earlier, more cautious call of two and a half percent. The United Nations division on trade and development UNCTAD is suggesting something much less – just above one and a half percent.

Hold on a second; one is about the half level of the other which reflects the uncertainty that still hovers over next year. In the region, the outlook is brighter with the most populous country, Egypt, projected to grow about four percent and the UAE around three percent. This is where conservative banking rules and deeper pockets for the Gulf oil producers pay off.

G20 finance ministers met in London to try and work out the more delicate issues before their leaders meet in Pittsburgh September 24. Devising formulas to cap and stretch out bonuses are still on the cards as is a drive to create global regulations for derivative products that got us into this mess.

Sticking with our theme this week, there remains a gap that bankers are currently filling on their own. Current national rules governing those products don’t keep pace with those who are creating them. During the go-go days of the past decade that was okay when money was flowing in, but similar to life after 9/11 and the security that was introduced, rules to govern financial security need to evolve.

The G20, with Saudi Arabia and Turkey as members representing the region, want to finalize the rule-making by the end of next year and aim for implementation by 2012. In sum, lawmakers want to make sure the recovery is well in place and that there is no rush to legislate, with the approach being “let’s get it done right or not get it done at all”.

That is the positive way to view that approach. Dominique Strauss-Kahn the Managing Director of the IMF took a different view. Empowered to re-design the institution and play a leading role in the new global architecture, he said the consensus forming was impressive, but that the world is still awaiting stronger measures and definitive leadership.

The consensus seems to be moving towards boosting capital requirements to match the risks taken on by banks. This formula would provide - as U.S. Treasury Secretary Timothy Geithner suggested - shock absorbers to buffer future downturns. What seems to be missing in this equation is the ability to rein in banks during the boom times when they are taking on all the risks. Who will play the “bad cop” if you will? No one seems to have the answer to that just yet.

But that concern goes back to the failure of Lehman Brothers. In an era of globalization and consolidation, there are ever more powerful universal banks that combine commercial and investment banking activities under one umbrella. If they are indeed deemed to big to fail, will they curtail taking all that risk if big brother – the government – is willing to step in?

Probably not, but not putting safeguards in place to prevent that would mean we would be asked yet again to mind the gap in expectation of future financial shocks.

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ABOUT THIS BLOG
John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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