TUESDAY AUGUST 07 2001 Argentina puts bankers to the test COMMENTARY BY MARTIN BARROW Bankers are worried that another storm of financial instability is upon us. The rest of us should worry too. HSBC, that most global of banks, has a lot hanging on Argentina. But not so much as to warp its corporate judgment. So when Keith Whitson, the chief executive, accuses sinister forces of manipulative speculation in the Argentine financial markets, he is pointing to dangers that can spread quickly round Latin America and, as in 1997, round the Far East and emerging markets too. Others agree.

Argentina has a basic problem. It bound itself to the US dollar after earlier bouts of financial chaos, often internally generated. The dollar has risen by 35 per cent over the past six years and by 15 per cent over less than two. A strong dollar suited a rapidly growing US economy, whose trade deficit needed financing. It has been pure pain for Argentina’s struggling economy, where exports have been stifled, imports cheapened and profits squeezed in the middle.

A high exchange rate can stop inflation emerging. When unemployment is 16 per cent, it also brings austerity and riots in the streets. Speculators should not be blamed for concluding that devaluation is needed, whatever government thinks, as they did when sterling fell out of the ERM in 1992.

The sinister element comes in the echoes of 1997, when nations were ruined by collapses for no better reason than being near to an economy that was ruined the week before.

The currency board system in Hong Kong opened the way to a more pernicious form of manipulation. By selling HK dollars and creating a shortage of foreign currency reserves for the local money, wreckers could push short-term interest rates high, ensuring that they made a killing by selling the stock market short. This vicious little circle was only squared by massive and daring counter-trading by the Hong Kong authorities. They decided that the pain of a high dollar was preferable to instability.

The only agreement about the 1997 domino collapse was it should not happen again. The test may be soon.

By no coincidence, Argentina is the other main country with a currency board system. In this case, however, the wreckers seem to be aiming for their double profit by selling the currency and government bonds. If the crash comes, they will no doubt be keen to finance the clean-up on the penal terms created.

The dominoes are also on the move. Last week, the influential JP Morgan Chase advised clients to sell next-door Brazilian bonds. But there is one key difference. The IMF has voted a precautionary $15 billion to stop Brazil being dragged down with its neighbour and Morgan has been obliged to reverse its sell-Brazil policy.

The hope is that a new generation of international bankers are committed to growing economies, rather than simply viewing them as distant speculative counters. Standard Chartered is anxious to stand up and be seen in Hong Kong. HSBC is committed in Argentina too. Their interest is increasingly to support, not to hit local banks and buy them on the cheap. Maybe we shall pass the test.

THOSE OF A NERVOUS disposition should look away now. Investors tempted back into the market by what appear to be bargain basement prices could be in for an unpleasant surprise.

It is tempting to believe that shares have reached a level from which some sort of recovery is inevitable, and for those who can afford to take a longer- term view that may be right. But there will be many a shock along the way.

COLT Telecom weighed in with its own horror story yesterday. Against all odds, the company’s shares have staged a modest recovery in recent weeks. For a share that peaked close to £25, a gentle bounce to 370p may not seem much to cheer about, but at least COLT has held on to its FTSE 100 status at a time when a number of its peers have been running out of cash. Then came COLT’s quarterly numbers and the recovery was halted in its tracks. Revenue growth is weak and pre-tax losses continue to increase. No surprise there, then, yet some investors clearly believed the worst was behind us.

Marconi shares also slipped when Standard & Poor’s reduced the company’s credit rating. Lord Simpson has been doing his best to keep out of the headlines these past few days and the stock had edged forward, more in hope than in any real expectation that the company has turned the corner. Yet S&P puts Marconi’s woes into perspective with its talk about the company’s limited “financial headroom”. The downgrade sliced 6 per cent from Marconi’s stock market value.

Is COLT fair value at 313p? Has Marconi hit rock bottom at 89p? Such is the uncertainty, that each snippet of news, good or bad, will drive the share price one way or the other, with scant regard for the underlying strength or weakness of a business. Private investors may feel they are being kept in the dark, but the truth is that the professionals are no better informed.

By the time this recession runs its course the FTSE 100 will have refocused on some old favourites, with the technology sector relegated to a bit-part role. And by the time the next fashionable sector is identified, the market’s current woes will have been forgotten.

IN THE PRE-INTERNET WORLD, the FTSE 100 was dominated by the privatised utilities, whose bosses gained notoriety by awarding themselves hefty pay rises when their businesses left the public sector.

It all seems rather quaint now those high-profile utility bosses have left the stage to enjoy the fruits of their labour and most of their companies have disappeared.

The Yorkshire Waters and Seeboards survive largely as subsidiaries of faceless corporations run by American business school graduates with no grasp of their UK offshoot’s local roots.

Takeovers, mergers, disposals and asset swaps have transformed the ownership of UK utilities far beyond the modest targets of the godfathers of privatisation. Yesterday Innogy, formerly known as National Power, struck a deal with Northern Electricity, which these days is an outpost of Warren Buffett’s investment empire.

National Power was conceived as a generator of electricity but in its current incarnation is assembling a distribution business to rival Centrica. Born out of British Gas, Centrica has evolved into a power company with 17 million customers for its gas and electricity. More change is inevitable: Seeboard is up for sale, and so is Southern Water. These days water companies would rather be doing anything but supply water.

Does it matter who owns these utilities? The real test is whether consumers have benefited from lower prices and an improvement in the quality of supply, and in that sense the answer is probably yes, although regulators may claim most of the credit. But gosh, haven’t the investment bankers done rather well out of it too?

EMPLOYMENT TRIBUNALS HAVE quietly dropped plans to name, on a website, employees who use their services to seek redress. Alan Johnson, the minister responsible for employment relations, claims credit for halting the plan by the tribunals, which operate under the auspices of the Department of Trade and Industry. Will his Government’s proposal to make applicants pay for using tribunals go the same way? Not very likely.

http://www.thetimes.co.uk/article/0,,37-2001271250,00.html

-- Martin Thompson (mthom1927@aol.com), August 09, 2001

Answers

Just a few days ago here I read where Argentina's bank deposits had shrunk 7.4% in the first three and one half weeks of July. Now, today, on C-NBC, some New York banker was saying they lost 10% of their deposits in July. This would mean that twenty five percent of the decline happened in the last three to five days of the month.

There's a real bank run developing there. Little doubt about it. The question is, how quick will it fully develop, how far will it spread, who will it envelope. The contagion factor seems to becomig serious.

-- Uncle Fred (dogboy45@bigfoot.com), August 09, 2001.

I believe Aregentina is one of the world's leading beef and wheat exporters. If they go belly up, important question is, what will happen to these vital commodities?

-- RogerT (rogerT@c-zone.net), August 09, 2001.