The Euro: What Went Wrong?

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The ‘Endless Euro Crisis’ drags on with one inconclusive meeting followed by another and announcements that seem to be good news but the underlying substance and mechanics to support the Euro are never clear.

Whilst the potential death of the Euro doesn’t seem quite so imminent, the Greece and Ireland problem seemed to be eclipsed by the news out of Spain and Portugal.  And then Italy is always lurking just around the corner.  This week we’re following up our previous FAST-FORWARD episode that took you through the birth of the currency with quick overview of how did we end up in this situation?  How did it all go wrong? This is a quick FAST-FORWARD episode that speeds you through the fundamental market changes that occurred post Euro-launch and the behaviors of the different players that followed leading to the Euro-crisis now in its second year, in less than 5 minutes.

We’ve assembled a few poignant clips cut from a full one hour BBC broadcast presented by Robert Peston which originally aired in the UK on Thu 17 May 2012.  A full transcript follows below.  Send us your comments.

*******************************VIDEO TRANSCRIPT*******************************

The Euro: What Went Wrong?

SCOTT ARNELL:  I’m Scott Arnell and you’re watching Fast-Forward on GenevaRoadShow.TV. Today we’re continuing our discussion on the Euro.  In a previous episode, we gave you a very quick overview of how the Euro came about.  Today we’re going to talk about how it all went wrong.  We’ve cut together a bunch of quick bits out of a BBC presentation made about the Euro that first aired a couple of weeks ago in the UK.  You enjoy.

LOUISE COOPER:  Then the Euro was created. And suddenly everyone said, “Well, does that mean that Greece’s borrowing costs should be the same as Germany’s?”  Well, it’s one currency.  And that’s exactly what happened.  So the idea of credit risk for each individual sovereign state went out the window.  And every Euro sovereign nation could effectively borrow at the same rate as Germany.  What that did for some of these periphery countries is give them very cheap debt.

ROBERT PESTON:   All this easy money fueled a frenzied property boom, especially in Spain and Ireland.

MICK WALLACE:  People were queuing to buy apartments and houses.  And the price was rising as they were queuing.  The people at the front of the queue got them cheaper than the people at the back.

ROBERT PESTON:  One tricky hurdle for joining the Euro club was that a government’s deficit, the gap between what it spends and tax revenues, had to be 3% or less of GDP.

GUSTAVO PIGA:   I got the sense that in that period, some governments were using derivative transactions to reduce their public deficit so as to ensure that the level of the threshold of the 3% required to enter into the Euro area was respected.

ROBERT PESTON:   The first sign it was all going horribly wrong appeared in the US and spread to Britain.  The collapse of huge banks, such as Lehman Brothers and the Royal Bank of Scotland rocked the global economy. European leaders saw it as an Anglo-American mess caused by the recklessness of Wall Street and the city of London. As this global slowdown began to bite, a new Greek government revealed massive hidden debts. Greece disclosed that government debts were €300 billion Euros, 129% of its GDP.  And the debts were to become bigger and bigger because the global recession led to a slump in the payment of taxes.

LOUISE COOPER:   Greece essentially lied about its debt position.  The political class in Greece manipulated the numbers for years.  They manipulated the numbers to get into the Euro zone, and once they were in the Euro zone, they manipulated them for a good few years afterwards.

ROBERT PESTON:  A new boss for the European Central Bank, Mario Draggi, made a dramatic and unexpected intervention.

MARIO DRAGGI: The Governing Council decided the following: first, to conduct two longer-term refinancing operations, otherwise called LTROs, with a maturity of 36 months.

ROBERT PESTON:   This was a banking rescue unlike anything the world had ever seen.  The ECB provided more than €1 trillion Euros of emergency three-year loans at a miniscule interest rate to hundreds of banks.

DAVID MCWILLIAMS:   LTROs are a cash-for-trash scheme so that the European banks are not forced to pay for their own reckless decisions.  The ECB is giving them cash at 1% for three years.  With that cash, they are investing in government bonds.  So bust banks are propping up bust governments with free money and dodgy collateral and calling it success.

ROBERT PESTON:   In 1973, when Ireland joined the common market, it was a farming economy whose income per head was 40% below the average for Europe.  Here’s what’s pulling the euro zone apart: since 2000, the costs of employing workers in Italy, Spain, Ireland and Portugal has risen between 30%  to 40% more than in Germany, which makes their businesses very uncompetitive.  It means that in order for Spain,  Italy and the rest of them to stop living on credit, living standards for their people may have to drop by a third.

HANS-WERNER SINN:   The bitter truth is that some European countries have become too expensive have to devalue within the Euro, becoming cheaper.  This is a very painful process but there’s no way out.

GEORGE SOROS:   The underlying forces are still driving the countries apart.  The divergence is getting wider. And the perspectives of the various countries are more and more at loggerheads.

ANGELA MERKEL:   As we are in Stuttgart, we should ask a Swabian housewife.  In the long run, you cannot live beyond your means.

ROBERT PESTON:   The Greeks have been told to grin and bear it or get out of the Euro zone.  But a Greek exit could kill the Euro and that could lead to a chain reaction of collapsing banks.

TERRY SMITH:   And Spain now has more unsold housing units than the United States of America, which is pretty startling statistic.  British banks are very international and the British banking system is a very large portion of our economy, much larger than other countries.  And if the guarantees that the government’s given for those British banks were called, which they could be in the event that the Euro zone goes down, we are without doubt the most indebted country in the world.

ROBERT PESTON:   The choice confronting the Euro zone looks profoundly unappealing.  If it survives millions of Europeans face years of squeezed living standards.  But if it were to fall apart, well, households, businesses, banks and governments would face the risk of going bust.  Although the cost of saving the Euro may seem high, the price of letting it collapse, well, that could lead to the kind of economic depression and financial mayhem we haven’t seen since the 1930s.

GEORGE SOROS:   Whether the Euro is held together or not, Europe is facing a lost decade, or more.

Why the Euro? From Concept to Currency

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The ‘Endless Euro Crisis’ drags on with another inconclusive meeting in Rome, where Eurozone leaders vowed Friday to defend the Euro with ‘all means necessary’, but with absolutely no agreement on what ‘all means’ actually means. Consensus is quickly growing that in order for the Euro to survive, either the smaller member countries will have to start leaving the Eurozone, or Europe will effectively have to become one country.

Whilst the potential death of the Euro doesn’t now seem quite so imminent given the recent formation of a new coalition government in Greece, we thought it would nevertheless be timely and relevant to put things in context and provide you with a quick look at the birth of this currency, why the Euro exists and how it came about in the first place with a quick FAST-FORWARD episode that speeds you through the history and background of the Euro starting with Winston Churchill’s vision of a United States of Europe, in less than 5 minutes.
We’ve assembled a few poignant clips cut from a full one hour BBC broadcast presented by Robert Peston which originally aired in the UK on Thu 17 May 2012.  A full transcript follows below.  Send us your comments.

VIDEO TRANSCRIPT:

Scott Arnell: I’m Scott Arnell and you’re watching Fast Forward on GenevaRoadShow.TV.  On Fast Forward we try to bring you a very quick high level overview of a current topic.  Today we’re talking about the Euro.   I just came back from a couple of weeks in Asia and many of the people that I spoke with feel like they’re helplessly watching a slow-motion train wreck here in Europe relative to what’s going on with the Euro.  It also became clear to me that many of the people I spoke with didn’t really understand how the Euro came about – probably because they’re younger than me.   A LOT younger.  So in this episode we’ve cut together a few short bits from a BBC presentation about the Euro made a couple of weeks ago in the UK presented by Robert Peston.

David Marsh: Three times great conflicts had erupted from French and German soil. And the idea was after the war that this should never happen again. And money as well as trade and political rapprochement they were all keys to that particular door. Winston Churchill was clearly very keen that France and Germany should come together and no longer cause a problem for everybody else.

Winston Churchill: This is not a movement of parties, but a movement of people. Europe can only be united by the heartfelt wish and vehement expression of the great majority of all the people of all the parties in all the freedom-loving countries. No matter where they dwell or how they vote.

Robert Peston: Churchill was a promoter of the United States of Europe, though with Britain on the outside. The UK wasn’t one of the European pioneers which signed the Treaty of Rome in 1957. At the heart of the new European Community stood the historic enemies: West Germany and France together with Italy, The Netherlands, Belgium, and Luxembourg. As these countries removed barriers to trade, the idea of a single European currency was always in the background but made explicit in the late 1960s.

In 1981 François Mitterrand was elected president of France.

Elisabeth Guigou: During the war, he had been a prisoner in Germany and he escaped three times. Each time he met Germans who helped him. Afterwards he became obsessed with the idea that there should never be another war and that Europe should unite.

Robert Peston: A year later Helmut Kohl became Chancellor of West Germany.

Prof. Hanns Jurgen Kusters: Kohl grew up only a few kilometers from the French border. As a youth he lived through the second world war. He lost a brother during that time. He believed that there should never again be a war amongst the peoples of Europe.

Lord Lamont: Kohl, because of the history of Germany, wanted to anchor Germany into Europe to make war impossible. And Mitterrand had the same objective. And that is what the Euro, and the European Union to some extent, are all about.

David Marsh: The common vision was to have a single currency from the Atlantic maybe to the Urals that in some magical way would do everything.

Robert Peston: The end of communism brought down the Berlin wall and the face of Europe was about to change forever. But a unified Germany would be an even stronger Germany. When it became clear that the momentum towards German unification was unstoppable, the French president, François Mitterrand, needed a way of constraining German power.

David Marsh: The deal that was done, was that the Germans once unified would then do everything  they could to embark towards a single currency.

Robert Peston: For the French, monetary union was as much about politics, about the balance of power within Europe, as about economics. The idea was to strengthen the institutions of the European Union relative to member countries so that the growing power of Germany could be held in check.

Europe’s leaders assembled in a small Dutch town to agree a treaty that would shape and shake the continent.

David Marsh: It was an impossible dream that you could build a single European currency without a single European state. Everybody knew that it was a risk. Everybody knew that you were putting the cart before the horse.

Lord Lawson: You cannot have a monetary union that works without a fiscal union. It was arrogant because they thought that that way they could override the democratic veto and it was irresponsible because they didn’t say “Well this is a high risk project” and I think that was a gamble, if you like, which should never have been taken.

China: It’s not about money – it’s license plates!

Take a top German lawyer who’s been practising for many years with an award-winning international Foreign Direct Investment consultancy in China and you get a unique and valuable take on the wherewithal of doing business in China from an international perspective.  Richard Hoffmann of Dezan Shira in Beijing enlightens Scott Arnell of GenevaRoadShow.TV to such insights as to how money is less of a barrier to buying a car in Beijing than the lottery of securing a license plate.

On the main issue of bringing money in for private investment in China, Richard illustrates the distinction between MOFCOM and SAFE, explains the importance of the government’s five year plans and most crucially, that if you don’t bring the money in according to their rules then the chances are you’ll never get it back.

According to Richard, the Chinese consumer base is underestimated and in Beijing, they are more interested in acquiring their next Apple product than concerned about unemployment.  If you need more information on the business climate in China, contact Richard or Scott through the contact form beside the video window.

Video Transcript:

Scott Arnell and Richard Hoffmann of Dezan Shira

Beijing, China – March 2012

RH:  The Chinese consumer base is still underestimated.  Younger people can afford Gucci, Bulova, you know, you name it, China is still the place to be.  From the people in the street, if you talk with them, they have, pretty much, the feeling that China is, a bit, saving the world.

RSA:  Your watch, is it real?

This is Scott Arnell, GenevaRoadshow.TV.  We’re popping back into Beijing to talk with Richard Hoffmann, working for Dezan Shira.  We’re going to get a few perspectives, and hopefully a few pointers, on how to avoid some pitfalls, tax-wise and legal-wise.  Let’s go.

RH:  I’m a lawyer so I’m working here in China with Dezan Shira.  We help foreign companies who want to set up a business in China, or to optimise their tax efficiency or to do their payroll or accounting.

RSA:   Top 3 issues to keep in mind when bringing your money in for private investment in China?

RH:  So, first of all, make sure that what you do is make it correct and be in compliance with the laws and regulations.  Don’t bring money in under not-legal ways – just under practical way – it’s very risky, you might lose it all.  We had a lot of cases where money like this is just lost and you cannot claim it back, because there’s no legal way you brought it in so there’s no legal way to get it back.  So first of all make sure that what you do is make it correct and be in compliance with laws and regulations.  Secondly, I would say that before you make the investment, you know, you write down in your business plan, in your articles or wherever, you write down an exit strategy, a liquidation strategy.   However, you write it down and you get a approval for that as well when you bring out the money you’ve got that approval in the beginning already when you’ve just brought it in.

RSA:  From SAFE? Is that who you’re talking about when you say ‘the authorities’?

RH:  Well they’re different.  It wouldn’t be in this case, it wouldn’t be the SAFE, that is involved, you know, this case, would be the MOFCOM, the AIC, because this is related to the company setup.  However these are the authorities that also make a lot of problems when you liquidate.

RSA:   And MOFCOM is?

RH:  Ministry of Commerce

RSA:  And SAFE is the?

RH:  The State Administration of Foreign Exchange.

RSA:  In a pre-approval to exit.  Practically, does that work?

RH:  Yes. In our, we, being here since 20 years, in our experience it’s worked.  It’s not perfect, nothing is perfect, right?  But it’s smoothened the exit, it’s smoothened the outflow of money.  I think the third thing, is that you have to, you have to look at the policy of the Chinese government.  The Chinese government is writing every year five years down the five year plan.  This is like a business plan of the government that lines down the strategies for the next five years.  So read that business plan and make your strategy accordingly.

RSA:  Tell me about the man on the street, the view from within China..

RH:  For me to understand China I like to talk to the man on the street.  Now that could be the taxi driver or it could be the man collecting the rubbish I don’t mind, you know, just chatting with them or the cleaning lady you know or whoever is there.  They’re never concerned about unemployment.  But there are issues like for example they want to buy new Apple products, you know everyone is having iPhones and iPads.. or cars.  It’s funny for me that one of the major problems in Beijing when I’m talking to people, is that they cannot buy a car in Beijing.  It’s not because they don’t have the money for buying the car, it’s because of the licence plate.  The licence plate in Beijing is restricted; you have to go through a lottery kind of thing to win the licence plate, and you have to wait maybe a year or so to get the licence plate, so somehow, they all have money.

RSA:  What does it mean?

RH:  What I believe is the Chinese consumer base is still underestimated.  So there’s a lot of, Chinese people like to spend money now.  Maybe the generations have saved for them, we also have the one child policy that six adults putting money into one kid, you know.  Then we have the real estate market that went up a lot.  So if you had a look at real estate somewhere in the downtown area you might be suddenly very very rich, you know, and this is the reason that a lot of younger people can afford a lot of very expensive products, like, for example, cars or Apple products or other products – lifestyle products. Gucci, Bulova, you know, you name it.

RSA:  The view from within China of outside of China.

RH:  We’re talking I think on two levels. If you look at the official, like the public level that you’re reading in the newspapers, that you can see on the TV then I think China is trying to look very carefully where, what is happening in Europe and America these days.  On a more like, again from the people on the street if you talk with them, they have pretty much the feeling that – well I heard – that China is a bit, saving the world, right? You know, they have money, they can go into different European countries, into America, and help these a bit struggling economies to, yeah, to be more sustainable in the future.  I’m German so they always say to me, talk to me about Germany, they say Germany’s doing quite well but Europe is suffering but we’re Chinese, we help you.

So, last weekend I went skiing, with a lot of Chinese I went to a skiing competition.

RSA:  Where?

RH:  Close to Beijing.  In Wanlong, right?  So it was a competition and we are all racing and..

RSA:  You mean you competed?

RH:  I competed as well, yeah.

RSA:  Oh.  And did you win?

RH:  Unfortunately not, no.

RSA:  So what does that say when a German can’t win a skiing competition in China!?

OK that’s it and all for today.  Send us all your comments, we read them all.  Like us on Facebook, follow us on Twitter, link up to our LinkedIn group.  I’m Scott Arnell from GenevaRoadShow.TV and remember if it’s on the internet, if it’s on the internet, if it’s on the internet, it’s gotta be true.

Maybe EURO-Determination Is Stronger Than We Think

It’s hard to find any encouraging signs pointing to a resolution of the Euro crisis in the news these days.  That’s why one thing stood out the other night in a reportage by Michael Portillo: everyone he interviewed in Greece or Germany chose to continue with the Euro and rejected the idea of a return to their former national currencies.  And this reportage coming from one of the staunchest Euro-sceptics.

In the BBC’s ‘This World: Michael Portillo’s Great Euro Crisis’ which first aired on 9 May 2012, from the soup kitchens of Athens to former finance ministers to Porsche factory workers, the former UK Conservative Party politician and Cabinet Minister offers interviewees Drachma and/or Deutschmarks in place of their Euro – but to no avail in either Greece OR Germany.

Whilst this was a comprehensive hour-long presentation of the origins and current state of the Euro crisis, we’ve assembled a brief montage of just the bottom-line responses of the various individuals interviewed to Portillo’s repeated question and their reasoning.  In view of the recent election results and reporting on the current political environment in Europe seems to lean towards nationalism and anti-Euro rhetoric, the stated commitment of the ‘man in the street’ to the future of the Euro, both in Greece and in Germany, shows a determination not often reported today.  In fact the only negative response was from a banker who supports the Euro, but only without Greece!  With the enormity of the problems at hand, determination and willingness to do a tough slog by the man in the street in the Eurozone will be the only way out of this mess.  Maybe there’s more of this out there than we think.

You can watch the entire hour long show here on BBC iPlayer for about a week, but only if you’re in the UK.  If you’re not, well… at least you’ve seen these clips here… CLICK ON THE REQUEST CONTACT BUTTON to subscribe to our mailing list and we’ll let you know whenever we’ve posted a new video.


A CIVETS primer: Can they be the next BRIC?

A batch of six countries, Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa – now referred to as the ‘CIVETS’ – are being promoted by some as a block that will experience the same kind of dynamic growth during the next 10 years as experienced by the BRIC countries in the last decade. This is a brief CIVETS primer with basic pro and con commentary on the substance of the CIVETS concept by the Colombian Ambassador Mauricio Rodriguez and Wolfango Piccoli, a risk consultant at the Eurasia Group both interviewed by Jeremy Paxman of BBC’s Newsnight program filmed in April 2012.

HOW TO INVEST IN CANCER

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How To Invest In Cancer

NEXTECH INVEST – The first private equity fund advisor investing exclusively in oncology companies

In this episode, veteran road warrior Scott Arnell takes you out on the road to Nextech Invest biotech investors in Zurich to meet Alfred Scheidegger and his team of experienced biopharma executives who have a double-digit IRR track record in the Nextech II oncology fund, the world’s first private equity healthcare investment fund focused solely on investing equity in late-stage biotech cancer treatment development companies that are acquired by major pharmaceutical companies.

In this segment, Alfred explains how to successfully invest in cancer with an investment strategy that targets the underlying pharma market structure: 1) huge and growing (ageing) cancer therapeutics market demand, 2) inelastic price sensitivity for innovative cancer treatments, and 3) exit via trade sales to major pharma who must acquire R&D companies to fill their drug pipeline regardless of economic downturns or market volatility.   They invest in companies with management that has proven success in cancer drug development and patented technologies that are structured for acquisition by a major pharmaceutical company within three years.

Nextech Invest’s competitive advantage is their scientific advisory board comprised of six world renown oncology experts in cancer science, drug development and market intelligence who have an intimate knowledge of the competitive landscape in oncology, clinical-stage companies and cancer products.  They are all exclusive to Nextech Invest in private equity investment advising and provide a unique assessment of the commercial potential of oncology products, cancer treatments and companies developing oncology therapies.

The Nextech III biotech investment fund builds on the Nextech II oncology focused investment platform and was launched in April 2010.  To achieve investor transparency, the Nextech III oncology private equity fund is an onshore, closed-end Swiss Limited Partnership registered in Switzerland with FINMA.

Meet the rest of the team and find out why Alfred take 50 kicks to the stomach in Japan in our follow-on segment “Who is Alfred Scheidegger?”

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THE CANCER INVESTORS

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THE CANCER INVESTORS

WHO IS DR. ALFRED SCHEIDEGGER? Meet the Nextech Invest Private Equity Investment Team

Meet the only Swiss investment fund manager with a black belt achieved at an exclusive karate club in Japan! Find out how he did it and meet the rest of the Nextech Oncology private equity fund investment  team.   This bonus segment post picks up from where the previous Nextech Invest overview episode, “HOW TO INVEST IN CANCER” left off.  Scott Arnell takes you behind the scenes at the Nextech Invest headquarters in Zurich to delve into the backgrounds of CEO Alfred Scheidegger and his team of experienced biotech private equity investors who launched the world’s first private equity healthcare investment fund focused solely on late-stage biotech R&D cancer treatment company investments achieving exits through trade sales to major pharma within three years.

In this segment, you will meet Alfred Scheidegger on a more personal level as he describes his formative education, doctoral studies in Japan, why he speaks fluent Japanese and his early days in the pharmaceutical industry in Basel, Switzerland that put him on the path to launching Nextech Invest in 1998 from which he launched three healthcare biotech investment funds.  You will also get an impromptu tour of the Nextech Invest headquarters office and meet the key members of the investment team: Myoung-Ok Kwon, Managing Partner; Rudolf Gygax, Managing Partner; Mátyás Végh, Managing Partner; Roland Ruckstuhl, Chief Financial Officer; and Camille Therre, Associate.

You will be able to get a good feel for team Alfred has assembled, their extensive vertical experience in the cancer product and oncology drug development investment space and ability to achieve investment exits via trade sales to major pharmaceutical companies.  You will also find out first hand why Alfred took 50 kicks to the stomach in Japan and if you hang on long enough, you’ll see Scott Arnell taken down by Camille Therre’s martial arts expertise.

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