The mother of all rallies

My Bloomberg screen tells me that Asian markets have fallen for a fifth day but that the HSBC share price jumps. This now stands at a five-year low and has all the credentials for a tiger leap. The mother of all rallies is in the making, and it is quite obvious which bank is most likely to lead it.

It is no secret that even in the UK most deposits are pouring into HSBC. In spite of all this, if one were to apply rigorous economic analysis to HSBC, it could still be possibly defaulting on the side of a degree of risk. Its leverage ratio (the relationship between debt and capital) is 19. Irwin Seltzer points out in his 'Letter from America' in London's The Sunday Times that 12 should be the right ratio.

HSBC is not playing a high risk game which can bear comparison with Barclays'. The latter bank has liabilities of around £1,300 billion. Its leverage ratio is 60, which, for practical purposes, is equivalent to the GDP of the UK. The degree of leverage which banks like Deutsche, Barclays and Fortis have been taking is absolutely indefensible. The average Wall Street securities firm was leveraged 27 to one, and this provoked disaster.

It should be pointed out that the worst dangers of the possibility of a financial meltdown have been avoided - but only just. Fighting a financial recession is helped by the contemplation of the strategy which went into the making of great military victories. Military strategy is built on marches and counter-marches. In this dramatic crisis the great world financial leaders seem to have a steady hand on the field marshall's baton.

It is now acknowledged that Jean Claude Trichet made a serious mistake last July in raising interest rates.

The economists of the G7 countries have persuaded their ministers to make a stunning U-turn on the recent bank recapitalisation plan. It was a Keynesian one relying more on direct intervention, thus on interest rate policy.

This manouevre, which deserves to be paralleled to a Napoleonic infantry thrust on an Austerlitz battlefield, has probably saved the world economy. It certainly came some precious days, if not weeks too late, but it came soon enough to stave off a certain world financial meltdown.

This dramatic policy U-turn which must have grievously hurt some great money men's ego is the strongest reason why we should hope that the beginning of the mother of all economic rallies is just round the corner.

The G7 group has now proven leadership as it demonstrates that there is a solution to the present crisis - the magnitude of which can be judged by its impact on the Barclays share price, which fell 50 per cent within a month of the Lehman deal.

The Barclays deal looks like a steal on paper: For $1.5 billion, it acquired 32 storeys in the Lehman Manhattan offices, two New Jersey data centres, and a role as a major player in Wall Street. A banker with a Rothschild ego like Marcus Agius has moved fast, and very probably stole a successful march on world banking developments by his Lehman move. He has been covered in his work by the newly acquired self-confidence rubbed down by the G7.

Barclays' shares, which have fallen in two years from over 700p to less than 200p, can be expected to rally but not immediately. There are still some cards to be played.

The US can afford some Obama largesse. Its bank bailouts are only five per cent of GDP, by no means the highly worrying 30 per cent of the UK. The national debt ratio of the US at 60 per cent. This is laughable when compared to the 105 per cent of Italy.

Great money-making opportunities are in the offing. What is by no means certain is how fast the rally will be. Politicians will try to slow it down. Profligate world bankers and their political masters need a lesson. A rally can be expected to move forward at about 15 per cent a year.

Readers would note that in these last six weeks, Barclays has undergone considerable transformation. It is now not the Barclays most Maltese know. It has become high risk with a possibility of high gain.

Mr Azzopardi Vella, currently economic consultant with DBR Investments Ltd, has promoted the Malta Development Fund and advised S&P.

johnazzopardivella@hotmail.com