Fighting words from Sarkozy, but can he match our Donald?

PUBLISHED : Tuesday, 11 May, 2010, 12:00am
UPDATED : Tuesday, 11 May, 2010, 12:00am

... but President Nicolas Sarkozy of France insisted the bloc could defend the euro by attacking speculators. Sarkozy vowed to confront speculators mercilessly and warned that they would soon know once and for all what lay in store for them.

South China Morning Post May 9

Have you ever heard of the aseo? Be grateful if you never have and rest content that this misconceived notion of an Asia-wide currency along the lines of the euro has now been put off for a long, long time.

Yes, the idea has actually been mooted at talkshops of Asian central bankers and these gatherings did in fact create a formal structure for Asian countries to lend each other large sums of money. Our own monetary authority has signed up for it. If Bank Negara Malaysia turns mad punter again, we may pick up some of the bill.

Europe went further, as we all know. It created its own currency with its own central bank but left individual countries to run their separate fiscal affairs restrained only by promises (ha-ha) not to run themselves into the red too far.

Along came the Greek government with a bloated civil service, a penchant for wasting money on frivolities (2004 Olympics) and economical only in parting with the truth about its fiscal affairs. The inevitable happened. Interest rates on Greek sovereign debt rocketed, and guess who is to blame?

You have it. It's not Greece. It's not the European Central Bank. It's not the Brussels bureaucrats who paid insufficient attention to the weaknesses of their single currency structure.

No, the culprits are professional investment managers who decided on behalf of their clients that it may be wisest to go underweight on the euro at present. Their crime is to worry that the Greek government may not repay its debts and that this will weaken the whole euro enterprise. They are scoundrels, evildoers, speculators. Nicolas Sarkozy says so and he is going to attack them and confront them mercilessly. They will soon know what lies in store for them.

Well, let me suggest to you that you may wish to thank your own pension fund manager if he looked after your interests by shorting the euro as the extent of the Greek mess became known. He will have done you a real service.

But let's also take this story further. The world has previously seen an economy facing an international crisis of confidence with a currency that it could not adjust. It happened only 12 years ago. That economy was ours and the currency was the Hong Kong dollar.

We were in a better position than Greece is now, of course. Instead of being hugely in debt our government was hugely in credit and running a consistent surplus.

The vultures thought we were dead meat, nonetheless. They had just succeeded in forcing other Asian countries to devalue rigged currencies and they thought our peg to the US dollar was just such a rig.

It wasn't. The speculative attack briefly drove up local interest rates but the peg held and eventually the vultures gave up and flopped their way back into the sky.

The incident did, however, show us that our local consumer inflation rate had moved too far from the underlying US rate of inflation for a currency pegged to the US dollar. We made up for that with six years of disinflation.

I draw the parallel with Europe at the moment to make two points. The first is that if a country is intent on making its poor people carry a disproportionate burden of any financial crisis, there is no better way than trashing the currency and robbing them through inflation.

We didn't do it that way. Our burdens post-1998 were more equitably spread across all levels of society. Greece may find that the same will happen.

In the old days the Greek government would inflate the drachma while protecting the civil service with cost of living adjustments. This time the Greek civil service is screaming about cuts, too. It is not only the working class that pays when that payment is denominated in euro.

My second point is made to Sarkozy. At the height of the Hong Kong crisis in 1998, Donald Tsang, then financial secretary, decided that the speculative interest had overplayed its hand by trying to short the stock market as well as attack the currency.

He didn't scream and shout. He just got busy and bought up HK$120 billion worth of stock. He flinched a little at one point but he stuck to it.

Less than one year later the market had bounced right back up and the portfolio was worth HK$250 billion. Our Donald is the most successful institutional investor of Hong Kong's history. He doesn't talk about it much but it's fact.

Come on, Nicolas, put your money where your big mouth is. Did I hear you say you were going to beat up the vultures? Let's see you do it then, big boy. Money talks, bovine fecal production walks.

Go on. Or just shut up.