Keith, re: fallout in Europe, I ran across this article in Newsweek International regarding ill winds blowing over Europe. Is there any good news? Mon dieu! There's that schadenfreude word again. - Karen
The Next to Fall? Europe. European companies face a massive credit crunch and banking crisis, bringing with it the prospect of a Japanese-style deflation By Richard Medley[NL]NEWSWEEK INTERNATIONAL Aug. 5 issue - In the late 1990s, no European moneyman could meet with U.S. Treasury Secretary Larry Summers, among others, without enduring a lecture on the virtues of American capitalism as compared with their own pathetic markets. And their only defense, in the face of Nasdaq, was to mutter darkly, "Wait till the bubble bursts, then we'll see..." FAST FORWARD TO 2002. Europe's dream of revenge has become its nightmare. The U.S. bubble has indeed burst. Stock markets are down half or more. CEOs are led away in handcuffs. Voters doubt the virtues of unbridled capitalism. Everything a schadenfreude-loving European could want has happened. Except, Gott-in-Himmel , that European markets are getting trashed even more soundly than American markets. Worse, it's not just equities. European companies face a massive credit crunch, bringing lending to a screeching halt, throwing banks and insurance companies into crisis and, ultimately, saddling Europe with the prospect of a Japanese-style deflation. What a spectacle! Just weeks ago the European Central Bank was talking about a rate hike. Suddenly, a cut's more likely. The rebounding euro now looks set to reverse. And from big insurance companies, which had been lending like crazy, come weak assurances that, never fear, they'll survive. Probably, anyway. Could it be that after funding the long-running U.S. bubble by sending trillions across the Atlantic, and after patiently waiting for the overly aggressive Americans to run themselves on the rocks, the Europeans will be the ultimate losers in the Meltdown of '02? The answer is yes. And that's because markets are not punishing risk and restructuring and flexibility. They are punishing the sins they punished in the Asian financial crisis of 1997 and in the long-running Japanese economic disaster-too much debt, opacity and crony capitalism. Start with debt. When the bear market started 18 months ago, European smugsters said the United States was in deeper trouble because of the extensive "equity culture" in America compared with the "debt culture" in Europe. And it's true, so far as it goes. Because more Americans own shares than do Europeans, they've been harder hit. But there's an ugly flip side to this euro. Thanks to that same "equity culture," coupled with America's love affair with venture capital during the '90s, U.S. corporations are saddled with a lot less debt than European companies. So while the market's fall has cut their valuations, they're not struggling to repay massive loans in their efforts to stay alive. Unlike Europe. The damage is compounded by the fact that what few equities did get issued in Europe tended to be held not by the public, but by the very banks and insurance companies that also hold the now beleaguered corporate debt. Companies won't borrow more when they can't repay what they owe, and banks won't lend when terrified that what they already lent won't be paid back. The result: a serious credit crunch. For a not-so-pleasant look at what this one-two punch does to economic systems, take a look at Japan. It suffers exactly the same combination, with a banking system and economy so weighed down with corporate debt it cannot get off the mat. The second deadly bear-market sin is opacity. When investors are making money, it doesn't matter what they know about companies. Who cares? They're making money. But when investors start to lose money, what they know (and what they fear they don't know) becomes crucial. As we often said during the Asian crisis in the late 1990s, opaque reporting and accounting standards put the paranoids in charge. If you can't trust the numbers you see, then whatever number the most paranoid analyst comes up with is as good as the most reasonable number a company puts out there to calm investors down. The result is a cascading crisis of lowered expectations that cause markets to seize up and that punish even good companies. The same thing is happening now in Europe. Asked if European assets were starting to look attractive, one Italian fund manager last week replied, "I would love to buy European stocks, but I cannot tell what they are worth. With U.S. stocks, if you read the footnotes, you can get a decent idea of what is going on at a company. But what is Allianz worth? I have no idea." And that brings us to our third sin: crony capitalism. Business leaders work with people they know and trust. They don't look as closely or critically at people's plans when working together has paid off in the past. Trouble is, what look like normal business practices on the way up look like irresponsible and greedy glad-handing on the way down. Japanese and many other Asian corporate cultures strongly reward personal relations, massively entangled corporate supply chains, debt obligations and cross-shareholding stock arrangements. Similarly, European corporate culture, with its heavy dose of very large, privately held companies and tight linkages between banks and borrowers, breeds an atmosphere of trust and informal reliance on personal assurance. Again, all this works fine on the way up. But in hard times? Think Enron. It's coming to Europe, only more so. http://www.msnbc.com/news/786651.asp Subject: Consequences of Sarbanes Now that the Sarbanes Act has been passed by both Houses of Congress and signed by Bush it might have some interesting consequences before too long. Among other things, it may mean that the UK directors of large businesses with subsidiaries in the US may be hauled across the Atlantic to face criminal charges. Hands are being raised in horror over here by the accounting profession (self-regulating and entirely honourable, of course!) and some senior directors because we, over here, could never be as naughty as the Americans. Nonsense, of course, and there have been two recent high-profile cases to show this. In the Sotheby-Christie's commission-conspiracy affair, the American director of one of the companies has now been given a prison sentence. The English Director (a Sir Somebody) is too frightened to go to America because he'll be arrested. Then again, Lord Wakeham, a past member of Enron's auditing committee (and an accountant by profession) has already faced Congressional Committees over his responsibilities in Enron's collapse. He may well face prison or at least a hefty fine in the coming months. (Lord Wakeham, a past member of Thatcher's Cabinet, is such a high profile person in the English establishment -- President of the Press Commisssion among other many other things -- that he couldn't simply refuse to go to America to face charges like the dishonourable Sir Somebody above.) Me? I'm all in favour. Not that I want to advance America's hegemony even further, but we badly need international rules of business and accounting practice. (And, I might add, since governments began printing money arbitrarily with no basis on gold or other redeemable value, then the quicker we move onto an international currency the better. It doesn't really matter whether it's the US dollar or the Chinese Renminbi so long as it can rid us of violent exchange rate fluctuations which are not only a source of profit for speculators but also remove the objective checks and balances that a country needs in order to keep its accounts in order.) Keith Hudson ---------------------------------------------------------------------------- -------------- Keith Hudson,6 Upper Camden Place, Bath BA1 5HX, England Tel:01225 312622/444881; Fax:01225 447727; E-mail: [EMAIL PROTECTED] ________________________________________________________________________
