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Published on April 10, 2008

The biggest lesson from the US sub-prime fiasco is that investors should stay away from what they do not understand, says Christos Papadopoulos, Standard Chartered Bank's managing director and global head of the bank's financial institutions.

During a three-day visit last month, Papadopoulos expressed continuing confidence in Thailand's economic future, saying global investors could not afford to ignore what the country offered.

In an exclusive interview, he spoke about the global economic outlook following the US sub-prime crisis and gave his views on the Thai market. The following is an excerpt.

What is your view on the sub-prime crisis? It seems bankers still have their fingers crossed as to whether there will be more assets to be written down.

There are two unique aspects to the sub-prime crisis. The first is that historically, crises begin when the corporate segment, or the real economy, strikes a problem, and then banks get the problem. But this time, it started in the financial sector.

Second, unintended consequences were set up, because the SEC (US Securities and Exchange Commission), the IFRS (International Financial Reporting Standards) and accounting

standards require banks and financial institutions to adopt market values.

The consequences have affected all classes of assets, because the current market value has dropped below the intrinsic value of those assets. We're now in a downward spiral.

A distressed institution has to sell distressed assets at a distressed price.

That price sets a new benchmark, and everyone has to adopt the

new benchmark as the new market price.

The concern is the downward spiral is accelerating rather than slowing down.

But once the crisis is over - and it will be over - financial institutions that have been raising capital to support their balance sheets will write back their assets as fast as they wrote them down.

So what's the outlook for the crisis?

My personal view is we're in the final chapter. There will be some more difficulty for some major banks in their first-quarter results, or in April. There will be further market stress, and the Fed (US Federal Reserve) may need to buy assets outright, and this would set the floor on prices of assets, in order to make the market stop the frenzy of relentless writing-down. Once that happens, there'll be an impact on the real economy in the US.

The US slowdown will be longer than the conventional V shape.

In your view, how long before things return to normal?

I think within the second half of this year, we will see more normalcy in the financial market, but we will start to see stress in the corporate sector globally. Big corporations that have highly leveraged private-equity transactions will be in trouble.

These companies have invested in non-core business that they don't understand. For example, they're in manufacturing, but they've shifted their money to invest in property. While the economy was growing, nothing happened; they could get away with this kind of thing. But once the US economy slows down, these highly leveraged companies will be impacted. Everyone thinks property prices will go up all the time.

But good news for Thailand: the property market here is quite stable - unlike what happened in Singapore, Hong Kong and Dubai. This is because Thailand had capital controls and a change of government.

Within nine months, property prices in Singapore have risen by

50 per cent, and this is unsustainable.

My view is that part of it is over, but there will be a hangover.

What is the main lesson we can learn from the sub-prime crisis?

The biggest lesson is investors must not enter into transactions they don't understand. These were complex structured products that investors, funds, insurance firms and financial institutions bought and didn't truly understand. From now on, investors will be a lot more careful. They will avoid the structured products and get back to "plain vanilla" solutions. Investment banks must rethink their module to originate distribution.

Another big lesson is, ultimately, liquidity is king. You may

think you have a strong balance sheet.

But liquidity is based on market confidence; without it, no bank in the world can survive - not

even Northern Rock or Bear Stearns.

You gave an interview to 'Arabian Business' magazine two years ago in which you said a military coup in Thailand was far less devastating for the local economy than, for example, the government in Zimbabwe. What was your view about Thailand then and what about now?

Once the coup happened, looking from our long-term perspective, it wasn't an event that distracted our long-term strategy. Not only was our commitment continued, but also after the coup we were able to communicate with clients

globally with our views about Thailand.

My view is we're very positive about Thailand. Like every developing country, there may be bumps along the way. And now, my view doesn't change.

What are your views on the Thai economy and the capital controls that have been removed?

The baht is stronger, and this impacts on the economy. But it does reflect the strength of the

economy, from exports. People are worrying about the baht's appreciation, but ultimately it reflects the robust nature of Thailand's economy.

I wouldn't be surprised if the baht becomes even stronger.

The capital controls were only a hiccup that came during the regime. But investors realise what opportunities Thailand is offering.

They will move back to Thailand. I don't believe there has been any damage. Investors who take a long-term view will realise there was a bump along the way.

Global investors cannot ignore Thailand.

Jiwamol Kanoksilp

The Nation