Sell to the Rich and Live Like a PoorKrishna Limsakdakul12 November 2011

As the eurozone drama is being unfolded to us with all the twists and unexpected turns, we don’t need to stretch our imagination to see that more frenetic suspense behind the scene are going on to save not least the euro system as a whole but the much needed confidence from the markets that the euro authority, still have a strong hold over the situation.

Greece is already a lost cause. Attempts to form a new government serve only to appease the eurocrats’ latest bailout deal and prevent contagion that could arise from heated political discontent and social unrest.

Silvio Berlusconi finally gave in to political pressure within his party and has to reluctantly support a caretaker government led by technocrat Mario Monti, former European commissioner.

Italy, from an economic point of view, can and has the ability to shoulder the debt burden in the short run. The country’s current debt to GDP ratio is 120%. However its annual deficit among eurozone countries is relatively small and manageable if the new interim government has the will and clouts to impose necessary austerity package. The country won’t crumble down overnight as many fear for the fact that it is the third largest bond market in the world with significant ties to major creditor banks across the EU. At $2.2tn, the country’s total debt is well over 25% of the eurozone GDP.

On Thursday, a technical glitch on rating agency S&P’s website resulted in lowered France’s triple A rating sparked a sell-off of the country’s government bonds. Yields on French 10-year bonds and Germany 10-year bunds widened to 167 basis points with French 10-year notes at one point rising over 6%. If there were to be any real threat this definitely is the one. The European Central Bank cannot possibly buy French debt in the secondary market without downgrading France’s credit rating. Currently the yield on French 10-year bonds is just under 3.5%, compared with 7% for Italy, 2.2% for the UK and 1.8% for Germany.

If productivity and financial stability are needed to revive growth in the eurozone, any structural adjustments within member countries are going to be very painful indeed.

Growth forecast for the region as a whole for the remaining of 2011 was slashed down to 0.5% from a previous 1.5%. This comes as untimely news because growth is the vital element that could lift the ailing member economies out of current predicaments.

Latest figures by Deutsche Bank showed France’s industrial production shrank 1.7% month-on-month against a -0.7% estimation. Italian production fell 4.8%, much lower than the predicted -3% month-on-month.

Hoping to steer the ship on course, on Friday Jean-Claude Juncker, president of European Commission, brushed aside the idea of “two-speed” Europe that would leave weaker countries to sort themselves out to protect the core economies. Political credibility is needed to restore economic stability affirmed Christine Lagarde, IMF managing director. She believed that she has gained China’s confidence from her meeting with Premier Wen Jiabao last week when she praised the world’s second largest economy’s leading role in the G20 and IMF, whatever that means.

However, global business leaders don’t seem to see that shade of light - their confidences have fallen sharply. Latest Economist/FT survey of over 1500 senior executives for Oct 2011 shows that overall confidence, those who think the global economy will improve over the next six months, dropped from positive 19% in May 2011 to negative 39% in October. Although nearly 80% are confident in the future of the eurozone, Asian executives are the most pessimistic with 30% expect the breaking up, compared with only 4% of their eastern European counterparts.

Just like the weather we might be able to forecast but no one could possibly tell what is going to happen next.

Now the eurozone, a Franco-German proud project, is arriving at a critical juncture: Chancellor Merkel strongly opposes to President Nicolas Sarkozy’s two-tier Europe that gives the European Central Bank full power to bail out frail members.

From an economic point of view if the ECB were allowed to adopt Quantitative Easing (QE) measure, the equities markets would shoot up following by high inflation across the EU. On the other hand, if it weren’t permitted to print more money, weaker countries will have to leave the eurozone resulting in a deflationary pressure and a possible collapse of the banking system.

In any case, government intervention is urgently needed in Greece and Italy, with a sturdy “faith” that austerity measure would reduce deficit and eventually raise growth, not vice versa.

Jose Manuel Barroso, European Commission president, warned on Friday that collapse of eurozone would wipe out half of Europe’s economy and send the continent into depression.

That very much sounds like a threat. Still, whatever the outcome, from my crudely calculated anticipation, we probably would all in the very near future be able to afford a very nice holiday in the Mediterranean. But that, of course, wouldn’t be in the interest of the US, China, and the UK who would be first to receive the fierce blow from the disintegrating euro system.

Emerging economies wouldn’t be spared either. From the Economist (12Nov2011), according the Bank of International Settlements Europe’s banks are owed US$3.4 trillion by emerging economies, $1.3trillion of which has been exposed to eastern Europe. In Asia the impact of eurozone crisis appears to have already been felt in Hong Kong as the governor, again, warned that the country is sliding into a recession. Latest GDP figures showed a Q3 contraction with economy growing only 4.3%, down from 5.1% in Q2 and 7.5% in the first quarter of this year.

Although China export in October also slowed from 17.1% to 15.9%, strong domestic economy had pushed imports up 28.7% from 20.7% over the same period. With inflation down to 5.5% the authority last week rushed to inject more liquidity into the market to avert any credit crunch. The country might not be facing a hard landing but any hope of China coming to rescue the eurozone is dissipating.

So what should businesses do during this global economic turmoil?Before we plunge further into morbid imaginations, let’s explore a livelier and

brighter side of the matter. For those who care to look, the world hasn’t really become poorer after the financial crisis of 2008.

According to the Boston Consulting Group – Global Wealth 2011, global wealth rose by 8% in 2010 to US$121.8tn, $20tn above the 2009 level when we were in the financial

crisis. This represents only a slight drop from average 11% growth of wealth during 2002-2009. The majority of the world’s wealth, 87%, was owned by households.

In the EU and the US the mega-rich appears to have gone richer for some peculiar reasons while those in the middle have to grudgingly bear the heaviest brunt. The anti-capitalism campaigners do have a point when they claim that the gap between the rich and the poor is getting wider. Not because the poor become poorer but for the alarming fact that a huge chunk of the middle class were demoted into a lifestyle once frequented only by those on the marginal line. Forget the now minority middle class. Businesses that are doing well in the developed west are those that cater for the super-rich and the bottom poor.

The opposite couldn’t be starker in emerging economies of Asia. In Indonesia, Malaysia, Thailand, Philippines, Vietnam, and of course China, numbers of newly rich middle class are growing and with them the appetite for a more affluent lifestyle. It is estimated that within two decades there would be well over 350mil high spenders living in Asia, the population which is larger than that of the EU. Of course, this is not a cause for optimistic. While exposing to similar global impacts, each country still has to go through its own unique economic life-cycle.

One thing that we ought to be wary of is the ongoing events in the eurozone that could trigger financial catastrophe throughout the regions. So businesses should be on the safe side - sell to the newly rich and ultra rich and live like a poor.

It might sound insidious but as the eccentric wealthy artist Pablo Picasso said: “I’d like to live like a poor man with lots of money”. Under this uncertain circumstance, we ought to emulate his odd preference and hang on to his paintings if you’ve already got one.

Who knows? Come next round of global downturn there might not be the US, EU, or China to help cushion the fall of many small and vulnerable emerging economies. Krishna Limsakdakulkrishna_limsakdakul@yahoo.co.uk