All aboard for another round of bailouts

No matter how much money the US Treasury throws at that country’s failing financial institutions it isn’t enough. Not even the $700bn package approved by the US Senate and House of Representatives could make a dent in investor sentiment. Instead the Dow Jones Industrial Index posted one of its largest single-week losses, down 19% for the week ending 10 October 2008. And the same thing was happening on markets around the world.

At Friday’s close the JSE All Share Index was down almost 40% from its record May close of 32 233 points. The sell off has taken place across the board, with no sector being spared. Why didn’t the US bailout stem the tide? And what has happened since to bring fresh hope?

Enter the Europeans

The good news for global investors is that the rescue plan set in motion by the US seems to be gaining momentum. In recent days we’ve seen frantic meetings between the most powerful organisations and countries in Europe. The European Union (particularly member countries of the so-called Euro-zone) have agreed to a five point plan to ensure the survival of European banks and businesses. And the powerful G7 group of industrial nations have issued statements calling for a cohesive approach to the problem. Agreement means the financial contagion can be fought on many fronts.

Rescue packages are now being announced thick and fast. The United Kingdom has already agreed to provide £450bn to boost liquidity between banks, with a further 50bn in capital assistance to eight major banks. Germany has also approved a package worth up to €480bn (with €400bn for inter-bank liquidity and €80bn to prop-up its banks) while France has followed its example with a pledge of €350bn. Spain became the latest country to come on board with a €100bn package – though it said there was no need for its government to nationalise any banking assets. It’s as if a rallying cry has sounded throughout Europe: “All aboard the ‘rescue package’ train.

There are, as always, a number of detractors of this type of financial bailout. They feel that the banks (and other financial institutions) are being allowed to get away with poor management practices. They also believe the free-market system is being compromised as more and more private banks become effectively nationalised. But they’ve missed the point. There are simply too many institutions on the brink of collapse. The rot has set in so deep that to allow free-market forces to run their course would result in the collapse of the entire global monetary system as we know it. Governments cannot allow this to occur!

South Africa is not immune

The lesson we’ll take from this round of financial instability is that we’re not (and probably never will be) immune to problems that affect the rest of the globe. Those who believe there’s a growing disconnect between developed and developing economies will have to change their thinking. It’s become quite clear that Russia, China and Brazil have suffered as their major Western trading partners take strain. And South Africa is no different. A quick look at our trade data confirms that China, the United States and several European Union countries top our list of imports and exports. When these economies struggle so does our domestic trade –with our export book usually suffering most.

Another quirk of modern-day finance is the resilience of the US dollar during times of stress. Everyone thought investors would rush to the safety of gold or other precious metals. Instead they ran back to the dollar, confirming it as the preferred currency to ride out an economic storm.

We’ve felt this on our markets too. The investors who were pouring billions of rand into our stock exchange in the last few years have suddenly disappeared. They’ve pulled the plug on their paper investments in emerging economies – withdrawing their money as we feared they would – with the click of a mouse button.

Editor’s thoughts:
We pity the fund managers who have to make portfolio decisions in today’s volatile markets… Daily swings of 5% or more are commonplace – and even corporate giants like Arcelor Mittal have shocked with single-day moves of 25% or more. The latest wave of financial bailouts will hopefully steady the ship. Do you think locally listed equities have hit bottom – or is there more pain to come? Add your comments below, or send them to gareth@fanews.co.za