Tags: Mobius | Derivatives | Global | Markets

Mark Mobius: Derivatives Still Threaten Global Markets

Friday, 23 Dec 2011 09:48 AM

Derivatives, made famous during the U.S. housing collapse when credit default swaps pummeled the U.S. financial system, still threaten the global financial system, says Mark Mobius, executive chairman of Templeton Emerging Markets Group.

While dependency on derivatives aren't posing any immediate crisis on the global financial system, they do merit watching.

"There is a big risk that faces the entire financial system, and that has to do with derivatives," Mobius tells CNBC.
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"We believe in derivatives, we use derivatives, but the fact remains that they remain a very, very big risk to the system because they're so used — $600 trillion — 10 times more than the total GDP of the world."

mark_mobius200.jpg
Mark Mobius
(Templeton file photo)
Derivatives allow for hedging of financial decisions and often supply liquidity to markets.

Central banks around the world, meanwhile, have taken steps to flood their economies with liquidity through various measures, from traditional interest-rate cuts to more extraordinary measures like the Federal Reserve's quantitative easing, where the monetary authority buys government debt and other assets directly from banks in order to pump money into the economy.

"The positive thing, and kind of ironically, is the tremendous flow of money because governments around the world are now trying to prevent another recession, another depression and therefore have been pumping money continuously into the market so the liquidity is there," Mobius says.

Still, keep an eye on derivatives.

"Of course banks are not lending but that will change. I think as we go forward, they will begin to lend and the economies will move again. However overhanging the entire system is this threat that we have to be aware of."

Mobius adds he remains positive that Europe will work its way out of the debt crisis.

The crisis began with default scares in periphery EU countries like Greece but has spread to bigger economies like those in Italy and Spain, and today is even threatening the credit ratings of healthier nations like France.

For two years now, European policymakers have take steps to contain the crisis, but it always seems to return, often worse than it was in the beginning.

The European Central Bank recently made huge sums of loans available to banks with the aim of easing a crisis-related credit crunch, which is all part of Europe's navigation from unchartered waters to familiar territories.

"I have always said this is going to take time. The process that the Europeans have to go through is earth-shaking in their mind. It's a big, big change in the mentality," Mobius says.

"There's the big debate going on whether governments should keep on spending, whether people should go back to work if they are retired. All of these are life-changing decisions that have to be made. It takes time for the Europeans to come to some conclusions, which I think they will sometime next year."

China, Mobius says, will avoid that hard-landing that many economists fear, many of whom often point to an overbuilt housing sector that popped up during a recent boom as reason to fear.

"A lot of people have been talking about a soft or a hard landing, and I'm saying they are not going to land, they are going to keep on flying simply because there is an incredible amount of momentum in the Chinese economy," Mobius says.

"There's a lot to be done in terms of infrastructure, of course housing at the high end was overdone but at the low end there's tremendous demand."
Derivatives proponents, meanwhile, are fighting to keep their financial tools — and industry — live.

The International Swaps and Derivatives Association, a trade group representing hundreds of banks and other companies, spent $674,000 in the third quarter lobbying the federal government and Congress to keep new financial oversight rules as derivative-friendly as possible, the Associated Press reports.

That figure doubles the $346,000 the group spent in the third quarter of 2010 and tops the $505,000 spent in the second quarter of this year.

The Dodd-Frank financial reform law was born in wake of the market meltdown and financial battery take took place in 2008 that many blame in part to heavy derivative usage.

The co-author of that bill, Barney Frank, a Massachusetts Democrat, recently retired from the House of Representatives but said the law will survive without him despite criticism that it is too rigid and hampers recovery.

"Once (Dodd-Frank) is fully implemented — I think it will be in another year — it is much harder for people to get rid of, because I think it will be popular," Frank said recently, according to Reuters.

"The easiest chance you get to strangle something is in the early stages."

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Derivatives, made famous during the U.S. housing collapse when credit default swaps pummeled the U.S. financial system, still threaten the global financial system, says Mark Mobius, executive chairman of Templeton Emerging Markets Group. While dependency on derivatives...
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2011-48-23
Friday, 23 Dec 2011 09:48 AM
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