Malta loses Lm80 million in Argentina

It is generally estimated that Maltese investors have lost Lm80 million in Argentina. This is probably a conservative estimate, and there is a Maltese family which is rumoured to have lost Lm4 million.

Could this financial tragedy, which is equivalent to the capital of our largest banks, have been avoided? The answer is a definitive "yes", but it could not have been avoided easily.

Financial tragedies have been hitting the world stock exchanges routinely in the past few months, with a new outrage being exposed every week. It would be tedious to give a detailed roll-call of the disasters, which began with Enron and are now continuing with Tyco and WorldCom.

These disasters and Malta's loss in Argentina have a common root. They stem from a conflict of interest inherent in those financial organisations, which give analytical advice on the shares and bonds they are actually selling. That is, they act simultaneously as the adviser and the seller.

It has long been known that such an indecent cohabitation would lead to disaster for investors. This truth was ignored in America even more than in Malta, where we have had Globe Organisation and other stockbrokers giving their clients due warning before the default and the Malta Financial Services Centre seeking to exercise moral suasion against a repetition of the disaster.

The MFSC has acted correctly. Where Malta has erred is that it has carelessly copied the conflict of interest patterns inherent in financial dealing on the New York Stock Exchange. One can legitimately say that it can hardly be wiser than the United States.

If we have erred in the past along with New York moneymen, we should now seek to mend our ways along the lines which those great men are seeking to reform their wrongdoing. It is diabolical to persist in error when handling the life savings of poor people.

Financial suicide

The bitterness caused by the recent financial scandals in America is best seen in the words of the London Sunday Times: "Last week alone the chief executive of Tyco International, a company gripped by accounting scandals, was indicted for the tax evasion, and an executive of El Paso, the troubled energy firm, committed suicide.

"He was the second Houston-based energy executive to take his own life in six months. Last January Cliff Baxter, a former Enron manager, shot himself in his car."

The 1973-4 National Bank of Malta nationalisation has been known to have killed people, while the present loss of Maltese money in Argentina has by no means helped those with a heart condition. Not all Maltese have been profligate and thrown money into the maw of the freespending Argentinian monster.

The trouble is that the MFSC has no means of inspiring local financial journalism to make its views widespread. It is well known that the splendid 'Lex' column in the Financial Times is not written by ordinary financial journalists but is inspired by ministers of finance and central bankers. The MFSC can employ strategy used in Anglo-Saxon countries.

Wall Street's mea culpa

Wall Street is staging a massive mea culpa about its financial wrongdoing. This despite its great efforts in recent years to clean up its act with regard to insider dealing.

Frank Zarb, who wears the Maltese cross on his cuff-links, checked insider dealing in Wall Street but he did nothing to stop conflict of interest between analysts and brokers.

That task was beyond him, and perhaps beyond any leader of the American economy. It had long been known that Wall Street was walking on a razor's edge as regards the integrity of its brokerage firms.

Insufficient attention was being paid to the highly publicised dangers of off-balance sheet risks. These dangers were all analysed closely in the prestigious Institutional Investor magazine back in the mid-Eighties.

The stock market unfortunately displayed gargantuan greed, and refused to listen to independent financial advice. The great brokerage firms shamelessly invited analysts to help tout the shares, whatever their merits.

There is now an enormous reaction on Wall Street against such activity. Merrill Lynch has decided to pay its analysts according to the accuracy of their share movement predictions. It is going to be hard for an analyst to earn a living, but Malta must try to imitate this behaviour according to its circumstances.

The salesman selling a share should not be expected by the client to be the man analysing the future behaviour of that share. Brokerage houses in Malta must develop an analyst service, and put up 'Chinese walls' between their brokers and analysts.

This is hardly an adequate solution, but it seems for the time being to be the only viable one. Malta cannot create an independent analytical share and bond consultancy, which would be financially viable. No country in the world has yet been able to do it.

The Maltese public has yet to learn that the only way to avoid another Argentinian-type larceny is to have analysts who are able to point all the dangers of an economy to prospective investors. It is probably farcical to expect a brokerage house to give independent advice when it is earning its living mainly from selling Latin American bonds.

In the United Kingdom the only truly independent financial advice comes from The Sunday Times, closely followed by The Economist and the Financial Times. The reason why the Sunday Times Business supplement comes closest to being independent is because that newspaper is a trust and it is less tied to the interests of international money than The Economist and the Financial Times.

These two publications have a record of correct financial prediction, and the demise of the Internet boom was correctly predicted by them, as it was by Warren Buffet, the great American investment guru.

Nobody in the world however predicted how Bin Laden would be able to attack the heart of capitalism with the destruction of the Twin Towers of New York. Buffet suffered enormous insurance losses.

Independent Maltese financial advice does have a future but, as in the UK and the US, it depends not on the creation of independent analytical organisations but on the fostering of independent financial advice by a newspaper. Such a newspaper would be underpinned by diversified interests and not merely by those of high finance.

Wall Street investigation

Those who grew rich in the US on bad advice have been forced to forsake some if their ill-gotten gains. Has any broker in Malta given bad advice on Argentine bonds? There should be no careless accusations, but only those of the investigating committee, who are to be arrived at after due deliberation. The Spitzer investigative committee of Wall Street should be our example.

Malta lost much more money in Argentina than was lost in Wall Street in the recent scandals. Malta lost its money forever, while that lost by investors on Wall Street has remained in the US, although it is now in the hands of brokers and investment bankers.

The seriousness of the Wall Street investigations is shown by the statement of The Economist: "Mr Spitzer brought the recent case against Merrill Lynch, which focused on internal e-mails in which Merrill analysts - notably their former Internet guru, Henry Blodget - abused Internet firms as "crap" while simultaneously issuing research reports that urged investors to by their stock.

Now Mr Spitzer hopes to repeat his victory - Merrill paid $100 million to settle the case, though it did not admit any wrongdoing and was never changed with any specific offence."

Malta's money in Brazil

Our loss of Lm80 million in Argentina makes us think about our money in Brazil. Can Maltese investors in that country get a written analysis of its economy, and the probability or otherwise of its default from the brokers who sold them that country's debt? This analysis must be updated constantly.

Will Brazil be a re-enactment of the Argentina tragedy of Malta's money? This will not be the case if investors seek advice from an independent source, such as The Economist. Any broker in the world will have to consult The Economist or its Intelligence Unit if it wants to form an opinion about the future of that country's debt.

I must say, however, that there have been brokers who boasted that they never cared to consult The Economist; such was the extent of their blind greed. This made them ignore informed advice. The Economist has written about the probability or otherwise of Brazilian default. It stated:

"George Soros, a famous investor and currency speculator, offers Brazilians a stark choice in October's presidential election: vote for Josè Serra, the candidate of President Fernando Henrique Cardoso's centrist coalition, or expect an Argentine-style crash in which Brazil would be forced to default on its 685 billion reals ($245 billion) of public debt.

"Last weekend, Mr Soros told Folha, a Sao Paulo newspaper, that the election Luiz Inacio Lula da Silva of the left-wing Workers' Party, who heads opinion polls, would make investors so fearful of a possible default that they would stop financing Brazil, fulfilling their own prophecy. Only a victory for Mr Serra would banish such fears, he said."

In short, Brazil will probably be forced to default if the opposition wins October's presidential poll. So much for the nonsense still being touted out in Malta that a country unlike a company, cannot go bankrupt.

The Economist compares in detail the debt position of Brazil and Argentina. This is what Maltese investors in that country should be doing. The Economist stated: "The real worry is what happens to economic policy under the next government, which will face a heavy burden of debt expiring in it's first few months.

"If public debt of just over half of GDP proved unbearable for Argentina; will it also be for Brazil? There are several reasons to hope not. Argentina's debt was almost all in dollars, so default was a concomitant of the collapse of its currency's peg to the greenback.

"But only a quarter of Brazil's debt is dollar-linked and while Argentina borrowed mostly from fickle foreign investors, about three-quarters of Brazilian debt is held by more pliable domestic institutions. However, credit rating agencies do worry that Brazil's foreign debt is high compared to its export earnings."

Malta's money in Malta

I hope this article has helped to provide the right cultural background for the taking of appropriate investment decisions. Do the Argentinian and Brazilian debt stories teach us anything about Malta's public debt?

They definitely teach us that Malta's money is in a much safer position in this country than in Latin America. A national debt becomes dangerous when it is denominated in a foreign hard currency, and when the relation between it and the earnings from exports become disproportionate.

Malta's external loans are only Lm40 million, while its total exports have been averaging more than Lm750 million in the past five years. Malta is also a significant earner of hard currency from tourism.

The secret of investment is not to shun completely dangerous areas like Latin America, but to know how to get out of them at the right time.

This is a tall order for those investors who do not read an international financial publication on a regular basis. So long as Malta's popular financial education remains poor, its propensity to lose money will remain strong.

Mr Azzopardi Vella has advised Standard & Poor's and promoted the Malta Development Fund. E-mail: johnazzopardivella@hotmail.com.