{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Galapagos reading - the"Eeiifibnii§i--fiiat...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: the"Eeiifibnii§i-§-fiiat__ Financial markets Still wobbling The credit drought continues to cast a pal] over markets HE rescue of Bear Stearns has been greeted in some quarters as the salva- tion of the financial markets. The Federal Reserve’s commitment to lend money to investment banks has revived sentiment towards them; American financial stocks rose by 11% in the week ending March 21st, according to Dresdner Kleinwort. There has been a strong rally in investment— grade bonds. Volatility has fallen in both share and currency markets. But the rebound still looks vulnerable. First, there is the continued logjarn in the money markets, where banks are still struggling to find funding. Three-month rates for euro-zone interbank loans hit 4.7% on March 251b, their highest level this year. In Britain bank borrowing costs touched 6%, three-quarters of a point above official rates. Banks may be desperate to hold on to their own money, lest they suffer the same fate as Bear Stearns, and investors may be suspicious about the financial health of the industry. Second. there are signs of stress in emerging markets. Iceland has long been a favoured destination for the “carry trade”, whereby investors borrow in lower-yield— ing currencies to invest in higher-yielding ones. But the country’s central bank this week raised interest rates to 15% and in- jected liquidity into the banking system, after Icelandic banks faced difficulty get— ting foreign financing following a 22% drop in the krona against the euro this year. Other carry-trade beneficiaries, such as Turkey, have also seen their currencies weaken and their financing costs rise.Join- ing the trend. Romania raised rates on March 26th to support its currency. These moves suggest investors are becoming more risk averse, not less. Third, there is the evidence that inves- tors are choosing to "deleverage”—or re— duce their market positions in order to re- pay their debts. Deleveraging by hedge funds was blamed for the sharp fall in commodity prices that followed news of the Fed’s latest interest rate cut. It may be that hedge funds decided to reduce their riskiest positions after the central bank in— dicated that it was still worried about infla— tion; a beliefthat theFedwas“asleep atthe wheel” had previously been pushing raw materials prices up and the dollar down. More humble investors than hedge funds are also having their access to credit restricted. IG Index. a British spread-bet- ting firm. says it has increased the margin requirements for ordinary punters want- ing to gamble on bank stocks, from 5% to 10%, and to as much as 20% for four more volatile stocks (Alliance 3? Leicester. Anglo Irish, Bradford 82 Bingley and Lehman Brothers). And Gavekal. an economic con- sultancy, says that American farmers are having problems hedging against changes in the wheat price. because of the cost of meeting margin requirements. The problem with deleveraging is that it can create a self—perpetuating cycle. Tighter credit standards lead investors to sell assets, forcing down prices and mak— ing otherlenders nervous about the credit- worthiness of their borrowers. It can also cause some panicky price movements, as sellers, fearing further losses, unload their assets at almost any price. As banks tighten credit, businesses and consumers will face pressure to cut spend- ing [witness the latest fall in American dur- able-goods orders}. The economic effects of that restraint will then feed back to the markets. “The Fed may have underwritten the solvency of the banks but the econ- omic problems haven’t gone away," says Peter Oppenheimer, a strategist at Gold— man Sachs. What the world’s monetary authorities have yet to show is that they can influence the banks’ willingness to lend, as well as the rate at which they do business. Until they do, financial markets will continue to be vulnerable. I Ecotourism and economics Shellshock The Galapagos Islands show the mixed blessings of greener TOURISM has a long history in the Ga- lapagos Islands. An early visitor was Charles Darwin nearly 175 years ago, on a trip that inspired his theory of evolution by natural selection. A lot has changed (“let the years. Visitors are new central to the future of the isolated archipelago. In— come is needed to raise standards of living and create incentives for local people to conserve the fragile natural environment. Edward Taylor, an economist at Univer- sity of California, Davis, and colleagues re- port on ecotourism and economic growth on the islands in a forthcoming paper in Environment and Development Economics. They say the conservation strategy of rely- ing on income growth in the islands has failed owing to uncontrolled migration from mainland Ecuador. Between 1999 andzoos, one increased by an estimated 78%, from a base of $41rn— giving the archipelago an annual growth nuance.assessments; 97 Speed camera rate of around 10% and making it one of the world’s fastest—growing economies. Tourism provided 68% of this growth. De~ spite this, average income per head rose by only 1.8% annually. This is because Ecua— dor’s economy collapsed in 1999 and large numbers of migrants sought opportuni- ties elsewhere. Because of migration, the islands’ population rose by 60%. More people have put increased strain on the islands‘ water supply. sewerage and waste dispOsal, not to mention its fragile wildlife. Exploitation of fish from the ma rine reserve is increasingly intense and there is plenty of antagonism between fishermen and conservationists; the fish- ing fleet doubled during the study and ille- gal catches are common. However, fishing is a relatively minor contributor to GDP. Just'under 4% of the recent growth can be attributed to sales of fish. Even the conservationists and scien- tists are making things worse—they, too, are an important source of GDP growth. Although their spending is focused on environmental protection, it also injects millions of dollars into the economy each year, further stimulating migration. The authors say that the slow growth in GDP per head creates even more political pressure to explore development options for the economy. whether through com- mercial fishing in the nature reserve, or ad- ditional numbers of tourists. Wsitors to the islands who hope to help the Galapagos may want to bear in mind that every $3,000 more the islands earn— every three extra visitors, in other words— sucks in another migrant. Not very eco— friendly. I Correction: In our story on foreign exchange ("The yen also rises”, March 22nd) we wrongtyimplied that foreign reserves are necessary to intervene to weaken a currency. This is nonsense: you simply print yen and buy dollars. ...
View Full Document

{[ snackBarMessage ]}