A conference was recently organised by HSBC Malta to present HSBC’s views on the European economy and to highlight some effective techniques for managing market risks.
Drawing on expertise from within the HSBC Group, two leading experts – Karen Ward, Senior Global Economist, formerly with the Bank of England, and Graham Newton, HSBC’s Head of Business Development – were invited to Malta to contribute to the debate.
Chris Bond, HSBC’s Head of Global Banking and Markets, welcomed the audience of commercial customers and explained that, as a leading international bank, HSBC Malta is ideally placed to help customers identify and manage their market risks against a background of market volatility and economic uncertainty.
Giving a broad overview on the global economic outlook, Karen Ward pointed out how the banking crisis has spread into a sovereign crisis. The measures being taken in terms of the bailout package have lessened the risks of contagion, although the fiscal challenge remains and the austerity packages will restrain growth in the peripheral economies. She elaborated on how Germany should benefit from a rebound in global trade, albeit this would not be enough to carry the entire region, expecting large divergences between countries, with interest rates staying low to compensate for the fiscal withdrawal.
Karen Ward also touched upon solutions that could enable countries to rise out of their debt problems, although she reckons there are limited options within a monetary union. She believes that, apart from the austerity measures being adopted at this point, the euro may need to remain at current exchange rate levels in order to restore the competitiveness within the Eurozone. “In fact, the weaker euro is already helping exports to grow, in particular Germany, although this needs to feed into higher consumption that should generate further growth,” she said. In her final comments, she said the Maltese recession in 2009 was mild in comparison to the rest of the Eurozone. She is also confident that Malta is expected to continue outperforming the Eurozone average in 2010.
With regard to the need to manage interest rate risk, Mr Newton said a hedging strategy should be able to protect the borrower against adverse movements in interest rates, provide benefit should rates remain low, be compatible with future financing plans, is cost effective, simple, efficient and transparent. Putting it simply, one can either do nothing by remaining floating, fix the rate by entering into an interest rate swap, or hedge through an interest rate cap, he said.
Mr Newton said his preferred hedging option was to use interest rate caps which protect the borrower against a rise in rates, giving the benefit that if rates stay low, then the borrower can benefit from paying a lower interest rate. Finally, he mentioned a combination of strategies that one can apply to protect against interest rate risk by adopting the various options available. “We live in uncertain times and still cannot predict the future, in which case, interest rate risk is a dangerous game to play. With the right instrument, one can retain the flexibility to manage risk in an uncertain world,” he said.
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