Global power shift is real crunch

 

We are so preoccupied in this country with the impact of the credit crunch on house prices, retail spending and jobs that we tend not to notice its geopolitical impact.

But this week we received a timely reminder when Russia's Vladimir Putin and China's premier Wen Jiabao both delivered none-too-tactful rebukes to the West for getting into the mess in the first place, together with a timely reminder that when things eventually return to normal, that normal will be different.

In particular, the West should not assume that countries in surplus will not go on blindly buying American debt to allow it to continue to run massive budget deficits that suck up the bulk of the world's savings.

It is worth remembering that the credit crunch did not just happen, but was born of the economic imbalances created by the US budget and trade deficits - and provided the glut of cheap capital that allowed bankers to drop their lending standards so disastrously.

But those imbalances in turn reflect a shift in economic power from the West to Asia in general, and from the US to China in particular.

This and the oil and commodities boom have resulted in a massive transfer of resources to these producer countries, with the result that they now hold the bulk of the world's surplus capital.

It is to their sovereign wealth funds that the West has had to go cap in hand for funds to recapitalise our banking system. There is a price to be paid for this.

For years, the developed nations have controlled the leading economic forums - G8, the World Bank, the IMF - and worked on the basis that the new nations might be invited to join provided they showed suitable respect and followed the rules.

But the more perceptive Western participants have realised that when they sought solutions to the world's problems, the wrong people were sitting round the table.

The power was shifting elsewhere, and the elsewhere were not represented - yet it was impossible to conceive a solution without their active engagement and help, as they were the ones with the money.

One hope was that the creation of G20 as a body to include most of these newly rich or otherwise significant nations would prove sufficient to defuse the issue and provide a forum to steer a way through the crisis.

The tone of the comments from Russia and China suggest it will not be enough. We had better get used to it.

How to spot a recession

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Fingers crossed for funds hunt

A £4bn rights issue is a major fund-raising exercise even in a good market, so the fact miner Xstrata felt it could go for this amount in London yesterday says a lot about the underlying resilience of the £4 trillion investment pool that is the London equity capital market.

Despite the turmoil elsewhere in the financial system, the gloomy forecasts about the world economy, institutional shareholders are doing their bit to keep the wheels turning.

The mistaken perception of the London Stock Exchange is that capital-raising has come to a halt because, with the exception of Resolution which raised more than £500m just before Christmas, there has been a shortage of large initial public offerings. people just don't float companies in difficult times.

But, as was pointed out by the Director of Equity Markets for the London Stock Exchange Group Martin Graham at a conference yesterday, capital-raising is not done just through Ipos.

Although there were more Ipos last year than is commonly thought - a total of 73, raising £7bn - this was insignificant when set against the sums raised in secondary offerings.

Count in all the rights issues and placings, and the total capital raised soars to a breathtaking £63bn. This is serious money even in an age when banking bailouts have dulled the sense of size.

This resilience of the equity market, and the willingness of investors to support companies, are crucially important now, and will be even more so in coming months. Word is a stream of rights issues is currently being worked on that will hit the market shortly.

When credit is squeezed as it is now, companies have to find money from somewhere. Let's hope the market can absorb what is about to be thrown at it.

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