There are many vaguely plausible reasons for the euro, despite its drawn-out crisis, remaining so firm against the dollar so far. Louisa / Gouliamaki / AFP
There are many vaguely plausible reasons for the euro, despite its drawn-out crisis, remaining so firm against the dollar so far. Louisa / Gouliamaki / AFP
Although I appreciate that exchange rates are never easy to explain or understand, I find today's relatively robust value for the euro somewhat mysterious.
Do the gnomes of currency markets seriously believe that the euro-zone governments' latest "comprehensive package" to save the single currency will hold up for more than a few months?
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The plan relies on a mix of financial engineering gimmicks and vague promises of modest Asian funding. Even the best part of the plan, the proposed (but not really agreed on) 50 per cent haircut for private-sector holders of Greek sovereign debt, is not sufficient to stabilise Greece's profound debt and growth problems.
So how is it that the euro is trading at a 40 per cent premium to the US dollar, even as investors continue to view southern European government debt with great scepticism?
I can think of one good reason for the euro to fall, and six not-so-convincing reasons for it to remain stable or appreciate. Let's begin with why the euro needs to fall.
In the absence of a clear path to a much tighter fiscal and political union, which can come about only through constitutional change, the current halfway house of the euro system appears increasingly untenable. It seems clear that the European Central Bank (ECB) will be forced to buy far greater quantities of euro-zone sovereign (junk) bonds.
That may work in the short term, but if sovereign default risks materialise - as my research with Carmen Reinhart suggests is likely - the ECB will have to be recapitalised.
And if the stronger northern euro-zone countries are unwilling to digest this transfer - and political resistance runs high - the ECB may be forced to recapitalise itself through money creation. Either way, the threat of a profound financial crisis is high.
Given this, what arguments support the current value of the euro, or its further rise?
First, investors might be telling themselves that in the worst-case scenario, the northern European countries will effectively push out the weaker countries, creating a super-euro. But surely any break-up would be highly traumatic, with the euro diving before its rump form recovered.
Second, investors may be remembering that even though the dollar was at the centre of the 2008 financial panic, the consequences radiated so widely that, paradoxically, the dollar rose in value.
Although it may be difficult to connect the dots, it is perfectly possible that a huge euro crisis could have a snowball effect in the US and elsewhere. Perhaps the transmission mechanism would be through US banks, many of which remain vulnerable, owing to thin capitalisation and huge portfolios of mortgages booked far above their market value.
Third, foreign central banks and sovereign wealth funds may be keen to keep buying up euros to hedge against risks to the US and their own economies.
Government investors are not necessarily driven by the return-maximising calculus that motivates private investors. If foreign official demand is the real reason behind the euro's strength, the risk is that foreign sovereign euro buyers will eventually flee, just as private investors would, only in a faster and more concentrated way.
Fourth, investors may believe that, ultimately, US risks are just as large as Europe's. True, the US political system seems stymied in coming up with a plan to stabilise medium-term budget deficits.
Whereas the US Congress's "supercommittee", charged with formulating a fiscal-consolidation package, is likely to come up with a proposal, it is far from clear that either Republicans or Democrats will be willing to accept compromise in an election year.
Moreover, investors might be worried that the US Federal Reserve will weigh in with a third round of "quantitative easing", which would further drive down the dollar.
Fifth, the current value of the euro does not seem wildly out of line on a purchasing-power basis. An exchange rate of $1.40 to €1 is cheap for Germany's export powerhouse, which could probably operate well even with a far stronger euro. For the euro zone's southern periphery, however, today's euro rate is very difficult to manage.
Whereas some German companies persuaded workers to accept wage cuts to help to weather the financial crisis, wages across the southern periphery have been marching steadily upwards, even as productivity has remained stagnant. But because the overall value of the euro has to be a balance of the euro zone's north and south, one can argue that 1.40 is within a reasonable range.
Finally, investors might just believe that the euro zone leaders' latest plan will work, even though the last dozen plans have failed.
Abraham Lincoln is credited with saying, "You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time." A comprehensive euro fix will surely arrive for some countries at some time, but not for all of the countries any time soon.
So, yes, there are many vaguely plausible reasons for the euro, despite its drawn-out crisis, remaining so firm against the dollar so far. But do not count on a stable euro-dollar exchange rate - much less on an even stronger euro - in the year ahead.
Kenneth Rogoff is a professor of economics and public policy at Harvard University and is a former chief economist at the IMF
* Project Syndicate
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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