At the beginning of this year, who would have bet on the potential disintegration of the euro?
Yet now, discussion of a possibility, which only a few months ago would have been classed as purely academic, is being raised by the leader of Europe’s largest economy.
However, it is not just the possibility of the end of the single currency investors have had to deal with. The unexpected ban on some shorting activities by the German government has added to the sense of general eurozone panic.
Markets reacted with alarm as regulators and governments joined potential sources of surprise volatility. After all, does the unilateral ban on naked shorting of eurozone government debt and German institutions mean there are nastier surprises out there the government is trying to protect itself from?
What last week’s events have underlined for investors is that it would be a mistake to address the financial crisis in the past tense.
In fact, the outlook for regulatory change and intervention remains very high. Here in the UK, the coalition has yet to rule definitively on the future of the FSA, and in Europe, EU restrictions on hedge funds look set to be on course for ratification.
While the German government’s actions last week were condemned by many, there must be a strong temptation for politicians to pander to popular perceptions of financial-market participants.
The fact is, governments and politicians will always react when they believe themselves to be under attack. The German regulator is in fact not the first to ban naked shorting. Hong Kong outlawed the practice during the Asian financial crisis of 1997 and has no plans to reverse the ban.
Amid all the volatility and market turmoil, an investment commentary by Hasley Investment Management sparked a little optimism last week. It noted that in 1995, just prior to the Asian financial crisis, world foreign currency reserves amounted to $1,389bn with developing economies holding $472bn or some 30%. Global reserves now amount to $6,645bn, of which 60% is accounted for by developing economies.
While this reflects the growing economic might of the developing world, it also indicates once a generation has been through a debt crisis it never wants to go through one again, and embraces a savings culture. On this basis, our industry is due for a golden age when it comes to asset inflows.
Of course, this is as long as we protect these savings, lest we encourage people to save their money under the mattress – an option offering very little in the way of fees.
