How Our Financial Markets Look to Overseas Observers : Reactions: The Oct. 13 plunge has fueled debate in European and Asian capitals about whether new restrictions are needed to protect investors from increasing price volatility.
No sooner had the dust begun to settle from the latest stock market crash scare the other day than one of Britain’s largest banks launched a public defense of the controversial “Made in the U.S.A.” financial strategies at the heart of the fright.
In the right circumstances, corporate takeovers financed mostly with borrowed money and even so-called junk bonds can be useful in shaping more efficient companies, Brian Pearse, finance director of Barclays Bank, told British reporters.
The bank decided to go public, Pearse explained in an interview, because Wall Street’s 190-point Friday the 13th plunge had left the widespread feeling that “there’s a disaster looming. What we’ve been trying to say is that we don’t think that’s so.”
No doubt Barclays was influenced by the fact that it has more money committed to highly leveraged corporate buyouts than any other British bank--about $6.4 billion, of which $4.8 billion is committed in the United States.
But, as the bank’s actions suggest, the “crash that wasn’t” earlier this month has nevertheless triggered an international debate on the issue of leveraged buyouts and their potential impact on the global economy.
A Times sounding of reactions from leading European and Asian financial capitals found mixed feelings about whether new restrictions are needed to protect the markets from such deals and from increasing price volatility. However, overseas investors mostly agreed on these Oct. 13 lessons:
* Much of the volatility on world markets is the inevitable consequence of improved global communications and the growing interrelationship of those markets as national barriers to capital movement come down;
* The development of stock trading technology that turns too much decision making over to computers can make markets less reflective of underlying economic reality;
* The latest scare has bolstered the Japanese market’s reputation, particularly on the small, continental European exchanges, as a beacon of stability.
Wall Street’s Oct. 13 nose dive was blamed on news that the world’s banks had failed to ante up enough credit to back the $6.75-billion bid by an investor group for UAL Corp., parent of United Airlines. Combined with earlier troubles in the junk bond market, the news acted like a cold shower on the takeover fever that had previously helped drive stock prices to record heights.
Highly leveraged buyouts and junk bonds are much more widely used in the United States than in the financial capitals of Europe and Asia, but they have been making inroads abroad as well, especially in Britain. And Japanese, British and French banks are among those with big stakes in financing such corporate takeovers in America.
Even though world stock markets recovered quickly from the worst of their losses, the doubts that Oct. 13 raised over leveraged buyouts have therefore continued to reverberate overseas.
Japan has put takeovers and leveraged buyouts on the agenda of its so-called Structural Impediments Initiative negotiations with the United States. The talks are meant to air each side’s complaints about business practices and customs in the other that impede smooth trade relations. Tokyo cites takeover fever as one “structural problem” weakening the ability of the United States to manufacture and export and thus to reduce its trade deficit with Japan.
In what may mark a turning point in Japanese thinking about financing takeovers, Satoshi Sumita, governor of the Bank of Japan, urged that country’s bankers last week to show more self-restraint in such loans.
“Banks must carefully weigh risks in each case and carry out loans in line with their strength to manage them,” Sumita told a news conference. “Although each bank has the right to decide to make a loan or not, I expect banks to refrain from extending excessive loans.”
In Frankfurt, the director of the Working Group of German Stock Exchanges, Rudiger von Rosen, commented: “Buyouts are not necessarily bad. But junk bonds weaken the whole economic system and were one of the reasons why the crash hit Wall Street. . . . It is not a healthy situation and should be corrected.”
“The phenomenon of junk bonds is basically unhealthy,” agreed Paris stockbroker Jean Jacques Perquel. “It incites stockholders to speculate on the next LBO instead of investing for the long term. It gives the public the impression that you can have high rates of return without risk and causes them to panic when the risks appear.”
Andrew Sentance, director of economic affairs for Britain’s Confederation of British Industry, said leveraged buyouts are viewed by manufacturers here “more as a form of financial engineering that doesn’t necessarily help achieve greater investment and long-term growth.”
And in the midst of this month’s market turmoil, a new study was announced into the question of whether Britain’s own takeover boom has been in the public interest. Financed by a trust that was formerly the biggest shareholder in Rowntree, the New York-based chocolate manufacturer bought by Nestle last summer, the report is expected to land provocatively in the midst of the build-up to Britain’s next national elections.
One of this country’s best-known authors and social commentators, Anthony Sampson, wrote in the Observer newspaper that the latest scare was a fitting climax to what he termed the “greed decade” in which Western finances have become increasingly detached from productive reality.
But the respected Economist magazine lampooned those who depicted the market tremor as heralding “the end of capitalism as we know it.”
“Take the greed and villainy of financial types, add the wickedness of junk bonds, leveraged buyouts and all that, toss in the Japanese blueprint for world domination . . . and you have the outline of the next best seller,” the magazine editorialized. “Western governments stand idly by while yuppies drive their economies to bankruptcy; the sly Japanese, who rig their own markets, stir the chaos and bide their time. It will be a great read. Quite wrong, but with distinct movie possibilities.”
In fact, several analysts argued, Wall Street’s Oct. 13 plunge only reflected a more realistic view of America’s economic situation. And with the Fed willing to inject cash into the market, some observers were clearly impressed with what they saw as a successful first test of measures introduced to strengthen Wall Street in the wake of the 1987 stock market debacle.
Overseas observers remain particularly concerned about America’s persistent trade and budget deficits.
Writing last weekend in Tokyo’s Asahi Shimbun, Mitsubishi Research Institute Director Josen Takahashi described both October, 1987, and October, 1989, as “manifestations of distrust in, and a warning to, the economy of the United States, which has become the world’s largest debtor nation.”
But there were more immediate concerns at work as well, said a Japanese banker who requested anonymity:
“The U.S. economy was slowing down, corporate profits were falling, but stock prices alone kept rising. From the viewpoint of the overall American economy, it was only natural that the plunge occurred.”
The difference, added the Assn. Francaise des Societes de Bourse, is that in today’s markets “instant availability of information played a primordial role: Corrections and recovery are made a lot faster today than they were during the crash of 1929.”
“Policy-makers may have to accept that we have entered a more volatile world in which instantaneous communication in markets worldwide and freer movement of capital mean that wide fluctuations in prices become routine,” editorialized the London Times.
Other problems are created when computers begin reacting to momentary inconsistencies that arise between markets in what is now essentially a 24-hour trading day.
Small, continental European markets, especially, feel increasingly whipsawed by price movements in New York and Tokyo. “If Europe had only one stock exchange, there would be more stability,” said Paris stockbroker Jean Pierre Pinatton. “But as this is not the case, Wall Street and Tokyo have much more weight on the European markets.”
As a result, market performance in Europe may be less closely tied to economic realities than elsewhere.
“You can almost ask whether markets have become sui generis (unique),” said a senior economist at the European Commission in Brussels, who spoke on condition of anonymity. Because wild gyrations in the markets no longer translate into large-scale economic crisis, he added, politicians and the public are able to view them more philosophically.
While the politicians may be philosophical, however, brokers and financiers are not. And while it may be wishful thinking, some of them even suggested that Friday the 13th may mark the end of Wall Street’s predominance in pointing the way for the world’s stock markets.
Most European markets followed the New York plunge when they opened for business Monday, noted these analysts, even though they already knew that Tokyo had seen a much smaller drop.
“After this, I think you’ll see Europeans watching Wall Street less and concentrating more on Japan,” predicted Paul Piguet, head of portfolio management at Unigestion SA, a Geneva-based financial holding company. “What happened on Wall Street was almost childish. It’s made us more careful. The next time something like that happens on Wall Street, you may see a strong reaction here, but not a crash.”
Japanese businessmen used to say that when the United States sneezed, Japan caught pneumonia. But now, commented Yasuo Miyakawa, deputy manager of Sumitomo Bank’s economics department, “when the United States sneezes, Japan might come down with a light fever, at worst.”
Miyakawa said Tokyo has the potential for becoming “the epicenter” of financial influence, so that “when Japan sneezes, the United States too might come down with a slight fever.”
Staff writers Tyler Marshall in London, William Tuohy in Bonn, Rone Tempest in Paris and Sam Jameson in Tokyo contributed to this story.
