March 9, 2016


In some ways, India can be a much crueller society than those of Africa.

On Sunday, I was in Mumbai visiting the Haji Ali Dargah mosque, located on an island just off the coast in the south of the city.

As I walked along the causeway linking the islet to the mainland, I must have passed nearly 50 beggars, many with various deformities and almost all in a desperate state of poverty. There was an even space between each of them, in the same manner that market stalls would be laid out.

Thirty minutes later I walked back along the same causeway and they were all gone.

At the start of my journey back, I saw two policeman – a man and a woman. The woman was looking fierce and determined. The man was kicking newspaper and cardboard, which the beggars had been using as makeshift seats, into the sea; this is what is pictured above.

The beggars had all been successfully removed from their perches, to a place where they wouldn’t offend the sensitivity of any passing tourists.

This must happen on a regular basis.

During my five days in Mumbai, this is the scene that stuck most in my head and deeply saddened me – but it was so upsetting mostly because it was emblematic of India’s wider poverty problem.

It seems that, if you are disabled, deformed or desperately poor, you are all but forgotten by society. The cast system, something about India I’ve never been able to properly appreciate, simply makes things worse: if you are at the bottom of the pecking order, then you simply have to live with that. Everyone has their own place in society. But somehow this just doesn’t seem right.

I love India. But the poverty, desperation and unhappiness is deeply troubling.

Of course, Africa has many of the same problems. But through the poverty and hardship, you’re never really alone in Africa. At least not in the same way.

The dangerous game of regime change

June 29, 2015

There can be little rationale behind the decision not to throw Greece a lifeline other than a clumsy bid for change of government. Tsipras is a difficult man to deal with: let’s try and get someone new. We have been here before.

Remember that irascible Italian clown Silvio Berlusoni, who “acquiesced” to step aside in favour of the dour though competent Mario Monti? He had little choice when borrowing costs shot up to dizzying levels, on the back of ebbing enthusiasm for government bonds. Even the great cavallo couldn’t survive this.

A decision by the Frankfurt-based European Central Bank (ECB) not to continue purchasing Italian government debt directly contributed to this sudden hike – and spelled the end of Berlusconi. Which may not, of course, have been a bad thing – depending on your political inclination. Some Italians I know think he did a lousy job for the country.

But allowing a supposedly independent European body to overthrow a leader of a sovereign nation simply because they might not like his economic policy – or for that matter his sexist jokes – is quite clearly undemocratic.

And now we have Greece.

With fairy shoddy conditions attached to the latest bail out aid from the EU – “blackmail”, I think was how Tsipras described it – the Greek leader chose, quite rightly, to take the latest demands from creditors to the people that he serves. After all, it was the Greeks that invented democracy.

But in response did the ECB throw the Greek banks a badly-needed lifeline. Hell no. Instead, the ECB imposed a cap on the amount of money that banks can borrow from the country’s central bank, forcing Tsipras to announce capital controls on the banks from today.

It was a poor decision from Greece’s creditors, and could well push Greece towards – and out of – the exit door.

But to my mind this move is reminiscent of the cat-and-mouse game that the EU has been playing all along. Having to impose capital controls is frustrating and worrying for the Greeks, ominous for the eurozone – and a clear affront to Tsipras’ capability of charting a passage for Greece through this crisis.

Ah! – and therein lies the rub.

Should the majority of Greeks deem Tsipras to be responsible for this mess, they may very well seize the opportunity that he has provided them with and take control for negotiations. They may side with the creditors and agree (albeit reluctantly) to the terms of the bail-out – and then boot Tsipras from office.

That may very well be the thinking behind refusing to extend credit to the banks, at least until the referendum is done away with it.

But it is a dangerous game to be playing.

True, Tsipras has certainly made some mistakes since taking office earlier this year. He was perhaps a little clumsy with his negotiations at the start, and has earned something of a reputation as a double-dealer by telling the EU one thing and then the national parliament another.

But these mistakes pale into insignificance when it comes to the litany of cock-ups that the EU / ECB mafia have made. Things needn’t have got this bad, but they have – and things are pushing perilously close to a Grexit.

Which would be a good thing for Greece. Perhaps less so for the rest of Europe. But we’ll survive.

If I was Greek, I know where I’d put that ‘X’. It might be followed by a ‘V’ sign, too.

Greece Part II

June 25, 2015

Ok, so Greece should leave the euro. My position on that has not changed in the five years. My love of German sausages and my dislike of Angela Merkel also remains the same.

What has changed is that Europe’s leaders now don’t have any time to sort out this impending crisis. Five years ago they did, and could have rationally – as I argued then – allowed Greece to leave the euro-block in an orderly fashion, with the view to bringing it back in at some later date. Like when Greek politicians were mature and honest enough to play the euro game (let us not forget, in case anyone has, that Greece should not have been allowed in in the first place because they deliberately and not very elegantly massaged their figures to comply with the Maastricht criteria – both Athens and Brussels should be slapped on the wrist for that).

The panic-stricken cry to counter this argument has always been one of: “contagion!” If Greece is allowed to leave, then Spain and Portugal would shortly follow, possibly even Italy.

That’s quite possibly the case now. It wasn’t five years ago. Five years ago, European leaders could have chosen to draw up a firm plan that would allow Greece to structure an exit from the euro, get its house in order and – should conditions so permit – return. The banking union that European leaders were so hell-bent on creating could then have been applied to the remaining members of the Eurozone, including Spain and Portugal, and thus prevented contagion spreading. Greece was too far gone.

The case for leaving the euro is clear in its simplisticity: the Greek currency – which will become the drachma – will devalue and competitiveness will return to the country. Because the euro-tragedy isn’t simply one of dodgy Greeks and tax-dodging. That’s only half the story. It is one of a country robbed off its competiveness by being tied to a ludicrous half-baked financial experiment.

People may argue that, should it leave the euro-zone, Greece would become a pariah state, shunned by investors and shut out of the world’s financial markets. But investors have short-term memories and, once Greece’s house was in order, they would return. Probably in droves. The pain would be short-lived.

There is of course a precedent for this. Argentina defaulted on its debt in 2001 and was forced to abandon its peg with the dollar (the separate 2014 default of Argentinian debt is quite different and doesn’t have a place in this blog entry). True, the short-term pain was acute: businesses went bankrupt and there was widespread capital flight. But quite soon competitiveness returned and the country actually started to do rather well, growing at enviable levels (an average of 9% a year between 2003 and 2008).

Of course, I don’t think Greece will leave the Eurozone. It’s going to be touch and go, but eventually Angela Merkel and her counterpart Alexis Tsipras will trump their respective finance ministers, who have been spitting venom at one another. What did IMF boss Christine Lagarde say a few days ago – the talks needed “the adults in the room”?

From a very early age, one starts to understand that the adults don’t always know best.

India – right to be cautious

February 18, 2015

DSCN5118Narendra Modi came to power on a business-friendly ticket, determined to market India to the rest of the world as the Asian country to do business in. Well, he needed to do something after his predecessor, Manmohan Singh, instigated a number of perplexing moves that seemed to thwart foreign business interests in the country – the retrospective Vodafone tax is perhaps the best known example.

And it seems to be working – with the bulls singing India’s praises, and foreign investment in the country definitely on the up.


But Modi’s government has a tricky balancing act to follow.

The country badly needs foreign cash to flow in – “this is an investment-starved country”, Ananth Narayan, head of financial markets at Standard Chartered, told me, citing a 2012 government report that said infrastructure alone needed an extra 1 trillion USD by 2017.

But, on the other hand, too much cash could upset the rupee’s exchange rate, which for the time-being is faring pretty well in what are pretty turbulent FX markets. When former US Fed chairman Ben Bernanke hinted at a possible end to quantitative easing, Indian currency markets went haywire, forcing the then-Indian government to slam on the brakes to foreign investment. Modi’s government certainly don’t want a repeat of this.


Which is why the regulators are trying to make it easier for foreigners to invest in the country – but only up to a point.

To a large extent, the country’s central bank, the RBI, has reversed some of the curbs on foreign exchange derivatives that were imposed under the previous regime. FX derivatives are necessary for companies on the Indian market that have both rupee and foreign – usually US dollar – exposure, as many foreign entrants do.

Many players currently hedge their currency exposure in the offshore market and, despite the easing of restrictions by the RBI, may continue to do so, simply because the cost of onshore hedging is prohibitively high.

The RBI is visibly frustrated by the lack of foreign participation in the onshore FX derivatives market, and has been forced to admit that, despite its best efforts, market participants are still hedging their exposure via Singapore, London or New York. This isn’t good for developing the market and bringing costs down; but then the RBI is being cautious about the incentives it could give. It could for example, reduce the risk weight for foreigners using derivatives to (safely) hedge their currency exposure. But it doesn’t look as though it is about to do this.

The next big change is likely to be allowing foreigners to use commodity derivatives, which is imporant for import/export companies who want to limit the fluctuation of the price of the commodity that they are trading in. But it is determined that this will only be a tool of risk mitigation – the possibility to speculate will most definitely be out. Some might welcome such caution, though detractors say that this will also limit participation and thus the development of an efficient market (making it, of course, more expensive).

But Modi and his henchmen are doing the right thing.

Macro stability – which the RBI is sworn to uphold – is crucial to the success of India as an investment destination. and allowing foreigners to meddle too much in Indian affairs will not achieve this.

A recent report from Standard & Poor’s, a rating agency, says: “The stable outlook for the next 24 months reflects our view that the new government has both the willingness and capacity to implement reforms necessary to restore some of India’s lost growth potential, consolidate its fiscal accounts and permit the Reserve Bank of India to carry out effective monetary policy.”

But it cautions: “We may lower the rating if the government’s structural reform agenda stalls such that economic growth does not accelerate, or fiscal and debt ratios fail to improve.”

A lower rating from the world’s leading rating agencies could see capital suddenly take flight, particular as many institutional investors (e.g., pension funds) are not allowed to invest in sub-investment grade debt.

“Given the backdrop of what has been happening in global markets over the last few years – specifically the run on the currency we saw in 2013, with the movement in the rupee from 60 to 68 – some regulatory caution is warranted, particularly as the macro situation is improving right now,” Tushar Mahajan, head of derivatives at Nomura India, told me. “But what is the right amount of caution? It is tough to say where you draw the line.”

The right amount of caution is probably where we are now.

I wrote a feature piece for Asia Risk on this last month – but you can only access it if you have a subscription.

You can see me briefly talk about the piece here:

Is the ICC really needed?

January 31, 2015

It is a good question and one that I have spent the past five years thinking about. This will probably be the last blog post that I write about international justice for awhile. I am now in Hong Kong investigating tyranny of another kind. I am penning this from the 25th floor of our tower block apartment, with eagles circling below.

The court that I first came to write about – back in 2007 – was in far worse shape than it is today.

The prosecutor, of Argentinean stock, was dangerously incompetent and seemed to lack the fundamental judicial mores that keep most in the legal profession from saying outrageously daft things, verging on contempt.

The registrar, hailing from southern Italy, was a poor communicator and displayed, whenever I interviewed her, an arrogant disregard for victims which was not in line with the mandate of the court. (The ‘victims participation’ element of the court has always been controversial, but the fact remains that it is there and, in my opinion, rightly so. Those that don’t like it can, as with a lot of things, blame the French. It was them that bought it in.)

The Trust Fund for Victims – now one of the most worthwhile endeavours of the court (if only it could get any money!) – was a shambles, paralised by a particularly unpleasant form of infighting.

Like now, the ICC was badly strapped for cash. But even worse – it’s paymasters, the 100+ countries that had signed up to the Rome Statute – were not prepared to lend it a dime more, until it stopped squandering money and came clean about exactly where all this money was going.

The whole place stank of an unpleasant arrogance that spelt failure for the court and failure for ending injustice around the world.

And yet it was hard to argue against the validity of having a universal court (insofar as universality can be claimed when Russia, China and the US steadfastly refuse to join). For too long, the powerful and the rich had managed to escape justice, whilst the poor and voiceless have suffered. Now, with this shiny new court, the wrong-doers would be punished and the voiceless could at last shout out that they were being listened to.

At least, that was the theory.

But, the more that I wrote about it, the more that I started to realise that things didn’t seem to work as the idealists thought they should.

I was once told by a journalist friend of mine, who had been covering international justice for five years or so, that there was no way the court could ever work. At the time, still in the grips of a misplaced ideology, I scoffed at this and countered by enumerating all the wonderful things that the court could achieve if only certainly people that were running it would go. Now, three years on and with a whole new set of people at the helm of the ICC, I no no longer believe that the ICC is a good body to have in the world.

The criticism of the court is well known – and often valid – but I’ll include a few key examples here.

The ICC is beholden to too much political influence. Why did it go after members of the Lord’s Resistance Army, a Ugandan rebel group, rather than also investigate the national military? (A: they needed government help to carry out their investigations) Why is President Bashir of Sudan a wanted man, whilst that other Bashir – he of Syrian colours – has not yet been indicted? (A: Look who’s on the UN’s security council)

Investigations at the ICC are flawed. Investigators get their too late, fail to use proper forensics (their budget for this is disappointing, though this may change), rely too much on witness testimony and tip-toe around situations because they are afraid of nasty men doing nasty things (er, conclusion, get another job; one UN investigator once told me that “ICC investigators should have more balls” and he’s right, if ICC investigations are actually to mean anything). There is a new investigation strategy, but implementing its recommendations is likely to be fraught with difficulties.

The ICC is a Western institution based on European civil law (mostly thanks to French influence again). It is often in conflict with the laws or procedures that operate in the countries that it investigates, and makes no mention of local traditional justice in its mandate, which in some circumstances is a perfectly valid way of conducting business. Whilst I don’t hold with the argument often made by African leaders that the ICC is an imperialist venture out to get the blackman, I do agree that the West isn’t always right and is often very wrong.

And on the list goes.

But, for all these criticisms, the fact that what the ICC is trying to achieve – and what the likes of the much-admired Ben Ferencz, the last prosecutor of Nuremburg, have spent all their lives fighting for – is a noble goal indeed.

But the dilemma remains: how do you achieve that?

And that brings me to what I see as the fundamental flaw of the ICC as it stands at the moment: why is it that, in order to justify their existence, those behind the ICC insist that war criminals must be tried in The Hague at the hands of a judicial body that was set up by former European colonialst powers under the legal system that has governed those colonialist powers for centuries and which, for centuries, they have tried – with varying degrees of success – to impose on their vanquished colonies.

The answer reveals itself in the many conversations that I have had with American lawyers about Libya. America and the UK never wanted Libya’s wrong-doers hauled before the ICC, largely because they knew that this would be a terrific platform for Saif al-Islam – the Gadaffi heir – to strut his stuff, and also undoubtedly reveal one or two rather inconvenient secrets. They always wanted – and they still want – Libya to hush things up.

But there’s a big movement among American lawyers to lend legal assistance to the country, and help bolster its rather weak judicial institutions, so that it can try these heinous crimes in a fair and impartial way.

That is exactly what an organisation like the ICC should be doing. It is true that complimentarity (the idea that a sovereign state should try its own criminals if it has the capacity and the willingness to do so) exists. But exactly what is the ICC doing to make sure that justice can be done in these situation countries? The people of Uganda, of Sudan, of Kenya, of the Congo, of Mali aren’t stupid. They want peace and justice just as much as – and perhaps than – we want it for them. So why shouldn’t they be given the chance to make this happen.

The world doesn’t need an ICC, hewn from European law and weighed down by bureacracy, mediocrity and a strong hint of arrogance.

The world needs a very different type of organisation. An organisation that has at its heart the concerns of the victims that have suffered these terrible crimes, and who helps the people of these countries work together to see justice done.

The ICC just gets in the way.

South Sudan deserves better

August 26, 2014

As an avid Sudan enthusiast, I have found it extremely disheartening to see South Sudan slide into a cacophony of tribal fighting and political squabbling. So much so that it has been difficult to find the words to write a blog entry about this – and, besides, there have already been so many authoritative voices chiming in with their take on what’s been happening.

I remember travelling around northern and southern Sudan, just before independence, and could not help but be caught up by the euphoria sweeping the country. Here was a real chance to build a bright future – for both the North and the South.

I think that is why the slide into virtual civil war – which some might, with hindsight, say was inevitable – has been so very painful. A dream, a vision torn asunder – by the very men that brought the dream before the people in the first place.

A month or so ago, I was in the offices of the Juba Monitor, talking with its esteemed editor Alfred Taban. I well remember Alfred from my days as a correspondent in Khartoum. This was before independence and at that time Alfred was editor of the now defunct Khartoum Monitor, which gave southerners a voice across the country.

“I didn’t foresee any of this,” Alfred told me. “If I had done, I wouldn’t have been so keen to rush towards independence. I would still have been of the same opinion – [that we needed to separate from the north] – but I would have been in favour of delaying a bit.”

When he lived in Khartoum, Alfred repeatedly ran up against the government censors, who would often turn up at Monitor’s offices and vet the copy before it was published. If they wanted to be really mean – and they often were – they would wait until the newspaper had been printed, at considerable expense, and then seize all the copies, saying that some article or other violated some preposterous screening law.

But in Juba things are no better. Alfred is still repeatedly facing the censors, and often having his papers seized.

“Press censorship was actually better in the north. It was more predictable,” admitted Alfred. “If a journalist wasn’t accredited with the NCP – National Press Council – then you knew you were taking a risk in using them. But here the government just has a list of names, journalists or not, which can’t be used.”

The frustrations that Alfred faces daily point to what is lies at the route of South Sudan’s current problems: South Sudan really isn’t all that different from North Sudan.

I always favoured separation. When I first encountered Sudan, in 2007, the country had already lived through two bloody civil wars – and the south had endured more than forty years of repression at the hands of Khartoum. Bitterness was too entrenched for there ever to be reconciliation.

Not everyone agrees, of course. Some think the US-led push for independence – the US wanted the countries to separate at whatever cost – exacerbated tribal divisions across the country. Perhaps. But by the time this was all set in motion, it was too late to do anything else.

I am the eternal Sudan optimist and I like to think things will eventually get better, but few people I speak to seem to think they will.

We are about to publish a new edition of our guidebook to South Sudan, and I have been speaking to a number of knowledgeable tour operators involved in the country. Many have decided not to renew their tour licence, others have done so but don’t know whether they’ll actually be able to make good use of it.

More than one person has suggested that the only thing likely to make things better is for both Salva Kiir – current incumbent president – and Riek Machar – former vice president, summarily sacked by Kiir last December for an alleged coup plot – to bow out of the political scene.

I don’t disagree with that sentiment, but it seems extremely unlikely to happen. Politicians rarely do what’s in the best interest of their people if it conflicts with their own.

When do those that voted in favour of independence start regretting their inky thumbs?

Why free is not always good

August 14, 2014

Does anyone need any proof that paying for a well-edited, well-researched book – rather than going to a free review website – makes sense?


This guy from Russia, posting on freelancer.com, is looking to pay someone to write 30 positive reviews of a restaurant.

You can’t trust non-edited, free review sites.

Amazon and consumers

August 13, 2014

On a purely emotional level, it is difficult not to get frustrated with Amazon’s corporate arrogance.

The monopolistic company repeatedly say they are good for consumers. This is blatantly untrue. Whilst they are ruthlessly driving down prices, which some book-buyers might appreciate, they are also limiting choice, because both publishers and authors need to be able earn a decent return on their investment in producing and marketing a book.

We sell a large number of our books through Amazon, for which they take a whopping 60% – and we have to pay for postage. This means that we are barely able to earn anything through Amazon, and survive on our agreements elsewhere. By taking such an unfairly large cut, Amazon is ensuring that many very worthwhile projects never actually see the light of day. Would you want to publish a book if most of your money was going to go to Amazon, who effectively do nothing except exist?

Amazon repeatedly say they support small publishers. We are a small publisher, and our success has come in spite of Amazon and not because of Amazon. Amazon does not support the little guys. We would do extremely well if Amazon did not exist and we could market directly to other distributors.

Gardners and Bertrams distribute our book to bookshops in the UK, and do not take nearly as large a cut.

And now this: Amazon are fighting a very public battle with Hachette, a French publisher, over the price of e-books.

Because I don’t follow Amazon on a daily basis, the first I heard of the dispute was when Amazon sent this rather bizarre letter to publishers of Kindle books. I was astonished, yet again, by Amazon’s sheer arrogance – that it was actually claiming to want to drive down the price of ebooks on behalf of the consumer.

This is what is really going on.

All our guidebooks are available on Amazon Kindle, of course. When we publish an e-book, we set a price for it. But Amazon caps the maximum we can charge. In the US, this is set at $9.99. From this, Amazon take either 30% or 70%, depending on what rights we cede.

Right, now go on to Amazon and search for our Kindle book to The Hague. You will not find it for $9.99, which is what we get paid royalties on. Amazon add a good few dollars on to the list price, which they pocket as a tidy profit. At last check, the price was $12.09. It’s often more.

So for Amazon to claim in their pompous letter that they are actually fighting for lower e-book prices – rather than bigger corporate profits – is pretty despicable.

For them to continue to claim that they are good for consumers… well, does anyone really believe that any more?

Consider boycotting Amazon. We do.

(And here, for completeness, is the letter that a group of authors, backed by Hachette, published in the New York Times)

The economics of fracking

June 10, 2014

It’s difficult to ignore the hype surrounding hydraulic fracturing – this, assures the government, is going to help revolutionise the energy industry in much the same way as has happened in the US. Gone will be the dark days of energy dependence on Russia. But do the economics stack up?

On May 23, the government came forwards with new rules that will make it easier for companies to get access for fracking on land. This coincided with a report from the British Geological Survey (BGS) that suggests there is a great deal of shale oil locked away in the southeast of England.

Some think that now might be the time for a dose of American-style frackonomics – understanding the key figures, both in terms of costs and benefits, behind all the rhetoric.

Earlier this year, Ben van Beurden, CEO of Dutch-British oil company Shell, admitted that “some of our exploration bets [on fracking] have simply not worked out”. The company admitted that it had lost a chunk of the $80 billion that it had invested in the industry in the US.

Shell has developed its own actuarial models on the value and risks of fracking, according to company insiders, although it is keeping such models close to its chest.

The problem is that there are so many intangibles when it comes to fracking that it is difficult to put a price on either the costs or the benefits.

Hiscox, one of the largest specialist insurers in the UK, is prepared to underwrite damage from earthquakes – not a particularly common occurrence in Britain – but not if those are caused by fracking, largely because an insufficient amount of data makes the risk difficult to price.

But Ed Dolan, an economist and visiting professor at the Stockholm School of Economics in Riga in Latvia, argues that it is important to get a handle on some of the economic costs, as well the benefits in fracking, if only to make sure the public does not end up footing the bill.

“I don’t think a knee-jerk ‘for’ or ‘against’ makes sense,” he said. “You have to look at this from an economic perspective, and it is possible to isolate and study certain criteria.”

He points out that things like water quality before and after fracking, the rise in local pollution and health hazards can all be measured.

Some studies have been attempted in the US, which Dolan argues can help understand the British situation, but there is one important proviso: little research has so far been carried out in places as densely-populated as parts of the UK are.

It is one thing to study the environmental cost in the middle of Texas – a state that is twice as big as the UK, with less than half the population – and quite another to study the impact of a site in Lancashire. Even where fracking has been attempted in more densely-populated places in the US – such as Pennsylvania or New York State – there have been few studies done.

But there are signs of a growing awareness in the UK.

Susan Christopherson, a professor at the Department of City and Regional Planning at Cornell University in the US, says that conversations she has had with people during a recent lecturing tour of the UK, shows that people in government are finally starting to appreciate the need for a clear valuation of the economic costs and benefits of fracking.

A House of Lords Committee is currently looking at the implications of fracking across the UK, with the intention of selling the benefits of shale gas to a sceptical British public. Christopherson says that it won’t be able to do that with more robust economic figures, noting that recent studies show that support for fracking in the country has slipped below 50%.

But the costs involved in fracking may turn out to be a moot point if, as suspected, the hype around fracking turns out to be a speculative bet, fuelled by cheap debt.

“We’ve seen this in the US for the past 200 years,” said Christopherson. “Oil is discovered, industries move in to exploit the natural resource. When they move out, the communities are worse off than they were before – smaller populations, more income inequality and less diversification.”

Low-interest rates could be driving the speculative nature of fracking exploration, since companies can fund new wells relatively cheaply.

Deborah Rogers, head of the Energy Policy Forum, a think tank, and former financial analyst, says that new wells are being drilled to service the debt used to fund previous wells.

When interest rates rise, as they are expected to at some point next year, signalling the end of cheap debt, things could come to an ugly end.

“The important thing is to look at what might be lost, not just what will be gained,” said Christopherson. “If you start fracking in Tunbridge Wells and the area is damaged as a tourist site because of perceived industrial activity, you would lose tourism jobs and, if fracking turns out to be a short-term boom, you will have to rebuild the ‘Tunbridge Wells’ brand. That should not be overlooked.”

Getting that djinn out of the system

May 15, 2014

Think of the tomatoes.

A hosepipe pours a constant stream of water on them, which comes directly from the tap. Then one day an evil djinn clamps his hand around the middle of the hose. Two things happen. Firstly, the water pouring on to the tomatoes suddenly stops. Secondly the pressure at the top of the hose, which is connected to the tap, builds up to such an extent that the hose ruptures and bursts; water all over the place!

Still thinking of the tomatoes?

The tomatoes are getting dry and there’s now no more water that can feed them. The solution? To take a bucket and fill it with the water now gushing out of the ruptured nozzle of the hose, then manually take this to the tomatoes. Empty. Return. Refill. Back to the tomatoes. Empty. Return. Refill. And so on.

At least the tomatoes are getting watered, but is it the best way of doing things? Water splashing everywhere, some getting lost as you jog back and forth to feed the tomatoes, an exhausting manual exercise to bypass a hole in a hose pipe that perhaps you ought to think about fixing.

Oh well, some other day.

This parable was told to me by the CEO of a mid-sized French insurance company as we sipped cappuccinos outside a Parisian café, marvelling at how deserted the city’s streets are on VE Day.

The tomatoes are equities. The tap is the banking system. And the ruptured hose is the line of credit that once flowed so freely from lender to borrower.

In France, the story is no different from the rest of Europe. Banks have slashed lending, stemming the flow of credit upon which many small enterprises depend.

Enter shadow banking – lending by any institution that isn’t a bank. Like life insurers, who not only have a bit of extra cash but have predictable liabilities that are pretty long-term in nature.

Shadow banking is starting to become a big thing in France, as it is in many other European countries.

Until August last year, it wasn’t possible for insurers to engage in shadow banking, but thanks to a highly-successful lobbying effort by industry it now is.

The veteran insurance chief reflected upon this for a moment. With persistently low interest rates – though they may go up in the next year or two – the lure of lending to business for an insurance company is obvious: better returns, which they need to meet policyholder commitments. But the CEO reflect that this was not the best approach for the market in general.

“It’s like those tomatoes,” he said, a little wistfully. “The buckets of water go everywhere, and sometimes you get wet yourself. It would be so much better to get the djinn out of the system instead.”

But of course the temptation for better returns remains, and this particular insurance company is working on its own shadow banking initiative that should be launched in the next few months, despite this particular CEO personally thinking it not a good idea.

This may not be the most efficient way of doing things, and there is concern that it could be transferring additional risk to insurance companies, risk that they are not being adequately regulated for, but as long as they can turn a quick buck by fulfilling an obvious need they will.

The CEO pushed the meringue that came with his coffee towards me. He said he didn’t want it. I took it. I hadn’t had breakfast.

Of course, not everyone agrees that shadow banking is a bad thing. At the airport, waiting for a flight down to Naples, I caught a glimpse of the cover of this month’s Economist. Coincidentally enough it was about shadow banking and can be found here. In the article, the correspondent was trying to show what a wonderful thing shadow banking could be, if only properly regulated – it finally allows businesses to get those loans that the traditional banking system is currently denying to them.

But are we – as this CEO suggested – perhaps missing the point. Wouldn’t it be better to focus on why the system is broken in the first place? Even if it means that everyone only has one meringue.