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Annual Meeting - December 1, 2011

“Banker to the World” Bill Rhodes Delivers Keynote Speech at EMTA 2011 Annual Meeting

“Banker to the World” Bill Rhodes delivered the keynote speech at EMTA’s Annual Meeting in New York on December 1, 2011. In his remarks, Rhodes reflected on his decades of experience in international financial crisis management, drawing parallels between the current Greek financial crisis and earlier crises in an array of countries. Rhodes reviewed the most important lessons, and shared some of his opinions on what policies Greece should follow to overcome its predicament.

Rhodes serves as president and CEO of William R. Rhodes Global Advisors, LLC and is also Professor-at-Large at Brown University. His book, “Banker to the World: Leadership Lessons From the Front Lines of Global Finance”, was recently published to critical acclaim. Rhodes has distinguished himself as one of the leading bankers in the world during his more than 50 years at Citi, where he is now a Senior Advisor.

Sr. Rhodes began his formal remarks by noting that he had often heard people say that the experiences of EM countries would not apply to Greece and Europe, with its mature economies. He then refuted this argument through concrete examples.

The first lesson Rhodes offered was that each country and situation is unique. The factors that led to the current financial crisis in Greece differ from those of past crises, and even those of Ireland, Portugal, Spain and Italy. The common thread through all of these, however, is the element of contagion. Rhodes repeatedly emphasized the importance of acting quickly in a crisis, in order to limit contagion. In the case of Greece, policymakers did not take action quickly enough, he argued. Many had assumed that the Eurozone would not be subject to contagion, but that was clearly not the case.

Another key lesson, according to Rhodes, was the importance of strong leadership. Leaders must be able to convince their people that austerity measures are truly in their interest, and that they will eventually result in growth. He offered early 1990s Brazil, Turkey in 2001, and South Korea in 1997-98 as examples where leaders successfully communicated austerity needs to their populations with positive results: he reminisced about seeing Korean women waiting to melt down their gold jewelry, to prevent Korea from going into default, offering a case where such a need for a common goal had proven effective.

The importance of involving the private sector from the outset is another lesson, since it is the private sector which must ultimately bring countries back to the market. Rhodes again drew a comparison to Greece, where the private sector was not called in early enough.

Rhodes noted that, in the past, the IMF was the major actor in international financial crises, while the Eurozone situation was more complicated because one must also take the ECB and the EU into consideration. He argued that the IMF should play a greater role in the current crisis because it has the stability, experience and credibility; and he raised the idea of a trust fund, through the IMF, for some EM countries.

In closing, Rhodes said that, as the fear of a collapse of Greece had become widespread, policymakers would take the actions needed for the country to pull out of its crisis. He stressed that they should develop a fiscal structure and fiscal discipline, and that such action can no longer be delayed. He did not believe this will result in a worldwide recession, although many market participants were concerned about this.

A Q&A session followed the presentation. Rhodes answered questions on a variety of topics, including controversy about the role of the ECB, the IMF trust fund idea, the lack of international accounting standards, stress tests and the liquidity statement by the major central banks.

Investor Discuss Eurozone Prognosis

David Lubin of Citi moderated a panel of investor speakers at the event. Tulio Vera (Bladex Asset Management), Jim Barrineau (ICE Canyon), Dave Rolley (Loomis Sayles) and Hari Hariharan (NWI Management) offered their perspectives on the Eurozone crisis and its effects on EM.

The panel kicked off with a discussion of whether the Eurozone crisis would result in a “lost decade” for Europe. Hariharan argued that a common Eurobond solution would not work, and panelists agreed that the ten days following the panel would be crucial for determining how bad the crisis could get. Rolley pointed out that, at one point, the “lost decade” was presented as the worst case scenario, but it had since become more of a base case. Without ECB help, a depression (and not a recession) would be possible for Europe.

Lubin compared the crisis to Latin America in the 1980s, but Vera saw more similarities with 1990s Japan. Barrineau suggested the best prism to use was a Rogoff framework: “Heavily indebted countries, post financial crises, grow much slower than one would expect for 5-10 years….this happened to the US and it will happen in Europe,” he commented. He believed that the implications for EM were unambiguously negative, and warned that some Eurozone members might leave the common currency within two years. Lubin polled the audience on this point, and a show of hands revealed that most EMTA members in attendance agreed.

The role of the IMF was also debated. Rolley commented that the IMF did not have enough resources to solve the Eurozone crisis, and changing IMF rules to give more power to China and Brazil was not realistic. Barrineau did not believe it was appropriate policy to increase the financial resources of the IMF in order to bail out a wealthy Europe if it meant doing it on the backs of people from far-poorer regions. He offered that the IMF could be used to get around ECB restrictions. Vera picked up on the theme of the shift in geopolitics, with EM wanting more representation in multinational institutions as they became a larger piece of the global economy.

Lubin then asked the panelists their thoughts on inflation, and whether an inflationary period would be on the horizon. Vera thought a deflationary environment would occur during the next 12 months, but over the next five years it was less clear. Barrineau forecast moderate disinflation over the next 12 months, and inflation over the next five years.

In terms of future predications, Hariharan and Rolley were positive on Mexico, while Hariharan expressed uncertainty about the CNH currency. Barrineau disagreed on Mexico, and offered Venezuela as a potential outperformer. Vera viewed the main themes of 2012 as Euro weakness and Europe’s vulnerability.

Sell Side Panel Discusses 2012 Economic Outlook

Joyce Chang of JPMorgan led a panel on the Economic Outlook for the Emerging Markets in 2012 following Rhodes’ keynote address. Alberto Ades (Bank of America Merrill Lynch), Piero Ghezzi (Barclays Capital), Kasper Bartholdy (Credit Suisse), Drausio Giacomelli (Deutsche Bank) and Paulo Leme (Goldman Sachs) discussed varying degrees of pessimistic expectations for 2012, focusing largely on the Eurozone.

Chang opened by commenting that 2011 was ending with the most vulnerable global financial outlook since the 2008 crisis. On the other hand, she noted that, despite the tumultuous year, EM debt had outperformed many other asset classes. Chang invited her panelists to describe their 2012 outlooks.

Ades laid out three scenarios, but believed that the most likely cases were the “bad” (some improvement in second half of 2012, with 3.5% global growth) and the “ugly” (economic growth not gaining any traction in second half). He expected the Eurozone would end the year with 0.6% growth after a period of contraction, with US growth at 1.9% in 2012.

Ghezzi commented that, although the market was still negative on Europe, he suspected that the situation might be reaching a turning point, and that further fiscal integration could occur over the next 18-24 months. He acknowledged, however, that a break-up of the Eurozone and sovereign defaults could not be ruled out. Some sort of quasi-Eurobond issuance would make sense, according to Ghezzi.

While there was more of an understanding of what needed to be done on Europe, Chang reasoned, she remained concerned that little would be accomplished at the December 9 EU summit which followed the EMTA Meeting, an opinion shared by other panelists. Bartholdy agreed that Europe would move towards fiscal integration, and adopted a slightly more optimistic note on the US than other participants.

Giacomelli voiced relative optimism that the Eurozone crisis would be resolved, and highlighted the key role of fiscal integration. Leme expected the road ahead to be rocky, and warned investors to be prepared for additional complications. He stressed the importance of structural reforms in the Eurozone, while acknowledging that, ultimately, he expected it to survive.

Regarding Greece, Ghezzi argued that no action would take place until there was a sufficient shield created around Italy and Spain. The tragedy of Greece, he stressed, was that the country’s 5% permanent deficit meant that even a 100% debt reduction would not theoretically work. Defaults in Portugal and Ireland remained possibilities, Ghezzi warned.

The panel also covered the degree of policy flexibility in EM countries. Ades said that under the “bad” scenario there would be some room for countries to cut interest rates and to do some fiscal easing, with Latin America having the most room. If the “ugly” scenario became a reality, however, this would not work: “With the exception of some of the countries with very high interest rates, interest rates are relatively low already, so I don’t see a lot of room for cuts,” he commented.

Leme reviewed the Brazilian economy, and discussed how it had slowed more dramatically than the other LatAm countries. Brazil’s goals were contradictory: they wanted big growth, but without a lot of inflation, according to Leme. Leme expected further easing in a “bad” scenario. Giacomelli recommended that that President Dilma Rousseff be bolder in terms of promoting Brazilian growth, although he noted that she had outperformed market expectations.

The importance of China in the global economy was emphasized by speakers, and panelists did not expect China to ease credit as much as it had done in 2008-2009. The Chinese economic slowdown was debated, with speakers concurring that a soft landing was the most likely scenario.

The panel concluded with speakers revealing their top trade recommendations for 2012. Ades favored a basket of Asian currencies against EMEA currencies, as well as short-dated Korean bonds and MXN. Ghezzi pointed out that, because of new financial reforms, liquidity was important to consider when buying an asset. He favored Mexico, Brazil and Malaysia and the BRL and RUB.

Chang noted that President Chavez’ health could seriously affect JPMorgan’s views on Venezuela, and believed that EM sovereigns would outperform EM corporates in 2012. Bartholdy agreed on Venezuela, and reiterated a bearish near-term view on Europe, Giacomelli recommended a cautious approach in general, and seconded a recommendation on the RUB. Leme also recommend Brazil and Mexico and noted that, despite volatility, the case for EM long-term remained strong.