Jean-Claude Trichet said the ECB would purchase €40bn of covered bonds and offer 12 and 13-month loans to banks in an effort to keep them flush with cash.
Jean-Claude Trichet said the ECB would purchase €40bn of covered bonds and offer 12 and 13-month loans to banks in an effort to keep them flush with cash.

Euro leaders set to shore up banking on continent



European leaders are preparing additional measures to help the continent's banks stay liquid as Greece edges closer to a sovereign default.

Jean-Claude Trichet, the outgoing president of the European Central Bank (ECB), yesterday said the regulator would purchase €40 billion (Dh195.4bn) of covered bonds and offer 12 and 13-month loans to banks in an effort to keep them flush with cash.

Shoring up banks' balance sheets and ensuring they have enough capital to withstand Europe's sovereign debt crisis has been a priority for months. The IMF has urged further recapitalisation of euro-zone banks following EU stress tests in July, but finance ministers have resisted the move until recently.

Mr Trichet announced the new measures for banks following the ECB's decision yesterday to leave benchmark interest rates at 1.5 per cent. That was expected, but calls have been intensifying for the ECB to reverse two rises in interest rates this year to spur Europe's economy as the debt crisis threatens to spread.

"The economic outlook remains subject to particularly high uncertainty and intensified downside risks," Mr Trichet warned during his speech yesterday, his last before he relinquishes his post to Mario Draghi, the Italian central bank governor, at the end of the month.

"A very thorough analysis of all incoming data and developments over the period ahead is warranted," he said.

Markets responded positively to the moves, with most European stock indexes up by more than 1 per cent in late-afternoon trading yesterday. The euro, however, dropped to a near 10-year low against the yen after the ECB rate decision.

Many analysts still expect the ECB to cut rates. One factor holding the ECB back, some say, is euro-zone inflation, which registered an annual rate of 3 per cent last month. Central banks typically move rates up to curb inflation; cutting them, conversely, can fuel rises in consumer prices.

"With inflation at 3 per cent, the bank might wait a couple of months before cutting rates," said Jennifer McKeown, a senior European economist at Capital Intelligence in London.

The Bank of England also increased the size of its bond-buying programme by £75bn (Dh423.65bn) yesterday to £275bn while keeping benchmark interest rates steady at 0.5 per cent.

Greece is in dire need of more aid from the IMF, EU and ECB - the so-called troika of international bodies that have lined up billions in aid. Auditors from the troika are now in Greece evaluating the country's deficit-reduction efforts, and a decision is expected soon on a critical aid instalment.

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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