In view of the continuing troubles in the financial markets, what are your reflections on the anniversary of the Lehman Brothers bankruptcy, which happened almost exactly three years ago?
I suppose you would have hoped that the Lehman Brothers issues and the problems that we all had at the time would be part of history. Unfortunately, there is a rerun of the financial crisis at the moment and so I commented the other day that the difference between this financial crisis and the previous one is that this one is happening slowly. But it has really accelerated over the last week, with the problems with Greece.
Among recent challenges in Europe was extreme volatility of share prices in some big European banks. Could these developments in any way impact banking in the UAE and the region?
I think there will be an impact but it will not be as grave as it was during the previous crisis particularly here in Dubai. The reason being is that the banks in this region have largely rebuilt their capital bases and are not heavily exposed in the Eurozone. The only thing is that in a world of risk aversion, people will be less likely to lend money to the banks or provide capital to the banks in this region and therefore if any of these banks have to recapitalize over the next couple of years or replace debt by issuing new debt, you might see some stress or inflated interest rates being paid. It is only pure risk aversion and I don't see too much damage to the sector.
Noting that risk management is the essence of your game in banking, how much risk aversion is healthy and where would it become dangerous?
You are absolutely right. Sensible risk aversion is making sure that you limit your lending to certain entities on one level and are prudent in the way you run your own business. What we are seeing at the moment is more animal instincts where when people are worried about something, they don't invest in it at all. I think the worries around the world are the withdrawal of day-to-day credit lines, which is certainly damaging the banks in Europe. I would say, adding that this has been experienced only over the last few days, that this is actually benefitting to banks in the region. Where banks are starting to worry about the Société Générales and the BNPs, some of those deposits or investments and custodianship of investments are coming to the Middle East. It is at the margin but it is an interesting trend that this region could benefit from.
Is it true that markets are driven presently by animal spirits rather than by level-headed calculations?
I think if you look at the core problem, there is a very logical explanation for what is wrong. But at the periphery where, say, the cost of debt for the French government has gone up by 200 basis points in the past six months, you can say, yes, animal spirit is driving it to a certain degree. At this point in time, clearly Greece is bust and the Greeks do not appear to have the policies or the ability to deliver the cuts in spending and the increases in taxes that would be required to get back into balance. In my mind, the only way they can solve the problem in Greece is to allow the currency to devalue very substantially.
And you have said earlier in September that the threat of a breakup of the euro is still there?
Absolutely.
What does that danger or possibility mean for the economies in the GCC?
The worry is that the problems are not being addressed in a speedy fashion. The longer the problems persist, the more people around the world start to delay things, whether it be their consumption, their investment or their employment of staff. Therefore I think we are on the cusp of seeing signs that the global economy is going into recession. If there is a global economic recession, this region will be impacted. But if they solve the problems or come up with some kind of solution in the next few weeks, we could just about hold on to the little bit of growth that we already have.
Decoupling of GCC markets from world markets is pure fantasy?
It's wishful thinking, yes. I don't think the impact will be as big as we saw last time, because last time, there was a big property bubble and huge leverage in the banks; this isn't the case this time.
When we look at the crisis we are facing, is it a passing event, a structural occurrence or even a systemic problem that will require creating some new form of capitalism?
It happened in every decade and century in the last 2000 years. There are countries and regions that are on the rise and there are some in decline. I think this is the structural issue. What has happened was that the growth rates were in decline in Europe and in the United States. Companies were being pressured to achieve very high returns, so they took a small number and leveraged it. And although trade flows have improved, part of the problem is that those European businesses should have opened big businesses in China, India and Brazil. Unfortunately, the market access has been very poor. You can't go and open a bank branch in India or in China. The market is just not open to you.
How about in the Arab League countries?
It's difficult everywhere. Let's be honest.
What do the MENA countries have that could help with the shifting geographies and make things more balanced on a global level?
You have seen the region as a big supporter in capital flows. They are continuing to put money into European businesses and to some degree, US businesses. We have certainly seen support for some of the sovereign bond markets from the sovereign wealth funds here. That is the first level. The MENA region in aggregate will also still be a very healthy region for businesses to come into and set up. You are seeing some of that but there is clearly a poor distribution of income. It is all concentrated in certain hands and therefore you don't get the middle classes with a lot of wealth in the same way that you would see in a developed country. So it is more difficult to come in with your typical business plan and work here.
Can you tell us something about the development of governance in the region's banking industry?
I think governance and regulation are growing at a different pace to what the banks would wish. However, there is a good, healthy debate and discussion in our own private banking world, with the central bank as regulator looking largely at retail banking and they are working very hard at developing a perspective on how to regulate investment. It is all about growing up. If there is anything to be said about regulations here, it is that they are sometimes too tight. But with what we are seeing in the rest of the world, there is no harm in that and I am quite comfortable with it.
© Executive 2011
