Trading systems

CATASTROPHE BONDS

Leaning easily against their sandbagged position, the machine-gunners look decidedly bored and even a little sleepy in the glaring midday sun. Watching the quiet approach road to Karachi's main international airport is, apparently, not the kind of duty that sets pulses racing. The local newspapers may be exercised by the story that a section of the airport is being handed over to American forces as a staging post for Afghanistan - and by the notion that US troops might be hunting for Osama bin Laden inside Pakistan - but Karachi's citizens apparently couldn't care less. The mopping up of Al-Qaeda leaders has become a subject of wry humour rather than passionate outrage. When the Americans called their operation Enduring Freedom did they mean that Osama bin Laden and Mullah Omar were going to enjoy enduring freedom? So runs one popular joke.

Russia

Last year was marvellous for the debt markets. Despite all the setbacks, such as the collapses of Enron, Argentina and others, frequent interest rate cuts and huge corporate financing programmes kept the banks in clover. This year doing deals will be much tougher. Corporates have less borrowing to do and interest rates may rise. Banks will have to fight harder than ever for market share to keep revenues up.

A rash of European high-yield defaults has pointed up the skills of specialist law firms practised in pursuing the interests of bondholders.

MEXICO

INDIA

Did Kenneth Lay's call of doom to Paul O'Neill contain a germ of truth? The Enron chairman claimed in an October telephone conversation with the US Treasury secretary that the collapse of Enron could lead to a systemic decline in the US financial system. It was easy to deride it at the time as the desperate ravings of a man scrambling to save the company he and fellow executives had crashed into the ground. For a while the Enron saga unfolded as an extraordinary but somehow remote and isolated event, rather like the collapse of Argentina. Financial markets took the biggest ever bankruptcy in America calmly. Neither credit nor equity markets sold off. But now, three months on, it seems Lay had a point.

For financial institutions from Europe, the US and Japan, China is the last great frontier. Though the country's membership of the World Trade Organization, which came into effect last month, will bring major changes across the economic board, the revolution is likely to be most radical in banking, share markets, insurance and allied services.

The world’s elite AAA-rated bond issuers will need to be fast on their feet to get the best deals in 2002. Interest rates are on the way up and investors look set to focus on yield rather than quality. Charles Olivier reports on borrowing strategies.

Investing in credit need not be rocket science. But it definitely requires something more than a dartboard approach. At a time when funds are pouring into Europe's fast-growing credit markets - and when returns are high but so are volatility and the frequency of credit shocks - investors are finding that success in the credit arena boils down to three things: diversification, specialization and, above all, intensive and constant research.

Not so long ago touted as a major growth area, the market for bonds issued by European regions and municipalities has proved to be a steady rather than spectacular performer, with old stagers such as the German Länder dominant and newcomers rare. Devolution of power from the centre has not been as fast as expected and despite central governments’ desire to offload debt burdens there are doubts about the viability of sub-sovereign bond finance when it is more costly than central government borrowing.

The fastest-growing part of the credit markets is not bonds, loans or commercial paper. It is a curious hybrid of credit derivatives and securitization. The market in synthetic CDOs is growing at an explosive rate and making investment banks plenty of money in the process. But just as the fight for leadership is getting most intense, the most lucrative days of this market may be behind it.

The Turkish banking system is well on the way into restructuring and consolidation that optimists argue will make for a lucrative investment story. State banks are rationalizing – and taking a smaller share of the market – and the way in which private banks will be recapitalized by the treasury will mean that the weakest – half of them – won’t survive unless they merge.

In the January edition of Euromoney in the article headed: "Banks downsize, centralize and head for China" we incorrectly stated that Merrill Lynch had pulled out of Indonesia.

So Sandy Weill has a successor at last. Or does he? The chairman and CEO of Citigroup has announced that Bob Willumstad is being promoted to president.

The world is in recession. But it won't be by the end of the year. It will be the US economy that will show the way out of the mire. And it will be the US consumer that will hold the centre in the battle against recession.

US MARKETS

GREECE

Europe's high-yield debt market is on its knees. Investors have had two years of heavy losses and new issuance has ground to a halt. But bankers predict rapid growth in a related area: the issuance of high-yield CDOs (collateralized debt obligations).

At a gala dinner in Karachi in January Euromoney finally managed to present the finance minister of the year award for 2001 to Pakistan's Shaukat Aziz.

Governor, China Development Bank

Will Argentina spread ideological contagion across the whole of Latin America, prompting a revolt against free markets? Or does it show the failure of the political elite?

Global: Deals of the year 2001: The landmark deals of 2001

AUTO DEALS

INDEX-LINKED PRODUCTS

Germany’s big four private-sector banks have enormous assets but dismal profitability, return on equity and market share and weak cost control. Put well into the shade in retail business by the local savings banks and state banks, which have peculiar funding advantages, they are ill-equipped to meet the challenge of the coming European financial market without frontiers. They are scrabbling around for survival strategies but few of them impress. Jennifer Morris reports on a banking system on its knees

INDONESIA

David Bowie was a big hit when he debuted in the securities market. His $55 million bond issue securitized by future royalties on his back catalogue of records was an innovative transaction, appeared to herald a slew of similar deals, and made a star out of banker David Pullman.