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Financial crisis could hasten wealth shift from West to East

This article was posted on Aug 10, 2009 and is filed under Press Releases

The credit crisis may have forced Citigroup’s former chairman & CEO, Charles “Chuck” Prince, to step down from the top job at what was once
the world’s largest bank by market capitalisation, but he argues that the collective belief of the financial system was that the markets were still safe just before the subprime mortgage- fuelled credit crisis brought all big banks down on their knees.

In an exclusive interview with ET NOW’s correspondent, Prince says that the new regulatory structure for banks could be very different from the past and that the scale of consolidation in the US financial system will depend on how deep the current recession will be.

Would you, with any sort of certainty, say that the worst is behind us?
Well, if your question is ‘with certainty’, then the answer is no. I don’t think that in these times with what we have seen over the past couple of years, anyone can speak with certainty about anything. But if I had to just look at the US banking system, no one can, with any certainty, say that the worst is behind us.

There is talk about credit card defaults and even prime mortgage defaults in the US. Do you believe that’s going to be a big issue, going forward?
I think that in the US, we are in the middle of a consumer-led recession. And I think that there are historical precedences for that, so that it can be mapped out a little easier than the liquidity crisis we saw in capital markets starting in 2007. I think that defaults on credit card receivables and better mortgages will track unemployment. And so long as unemployment is going up, there will be a correlation there. I think that if unemployment begins to level off or get a little better, then, I think, you would see that reflected in the performance of credit card receivables and mortgage loans as well.

Do you foresee consolidation in the banking system in the US?
Well, there has already been significant consolidation in the US banking system. The number of major consolidations, over the past 24 months, I think, outdoes anything we have seen in decades. So, there has already been quite a large consolidation of major players. I think, your question really goes to what level of consolidation will apply to the mid-size companies and I think that will depend, in part, on how severe the consumer recession turns out to be.

In mid-2007, could any banker have actually said that this thing was going to blow up in their face?
Well, obviously that’s a complicated subject. I think that the one thing that I note is that a wide variety of market participants, people from rating agencies, to people who originated securitised products to investors in securitised products, a wide range of participants, not just one person, not just one firm, but almost on an industry-wide basis, believed that the markets were in safer places than they turned out to be. But at some point, that collective belief turned out to be wrong. The reason for such a broad collective belief that turned out to be so wrong will have to be examined very carefully.

Do you believe that the shift of wealth from the West to the East will happen a lot faster than we may have thought?
Well, it’s not appropriate for me to comment on Citigroup, but let me give you my own personal belief on this as a general matter. I think that before the financial crisis, there was a general shift in the relative importance of the developed countries in favour of the developing countries and you can describe that as wealth going from the West to the East.

I think that the general trend continues and I think that the financial crisis will have the effect of accelerating that a little bit. Now again, I use the word relative as growth. It’s not as if one will displace the other, or replace another, but I think, in terms of the relative importance, I would agree with the notion that wealth is going to flow from the West to the East.

I think, we have seen that the economies in China and India, and other places that are expanding rapidly, have had a very significant effect on global growth. I am thinking, for example, of the effect on commodities pricing, commodities markets, jut as one small indicator of that. So, I think, going forward, the growth of the world economy will be driven, to an important level, by China, India and others.

Would you say that global banks somewhere are a little disappointed with the pace of financial reforms they have seen come out of a market such as India?
I think that, obviously, foreign participants would love to have broader access to a growing, thriving and healthy economy like India. I think that the Reserve Bank of India (RBI) has been quite consistent and thoughtful about how it has approached that.
And one way of looking at it is that the Indian economy would be largely protected in a banking sense, largely protected from the difficulties of the financial crisis, and apart from banking, the economy has obviously been affected by the slowdown, but you haven’t seen a banking crisis in India as you have seen in other countries. And I think that no matter how frustrating it is, as you described, about how foreign banks may feel about access, the benefit as seen in the protection from the crisis is something that has to be given some credit for.

source: Economictimes

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