Interest rates policy through the world

Interest rates are a tool used by central banks in order to regulate the economy. Their policy has an impact on growth and inflation. Thus high interest rates enable government to avoid inflation, whereas low interest rates are used to enhance growth and avoid recession.

Different Central Banks do not all have same goal and policy. Let us have a quick look at the different institutions through the world.

· China
China has an impressive growth nowadays. Some specialists even claim this growth is too high; it might be only the result of speculation wave. If this theory is true, there might be terrible consequences for Chinese economy. In fact speculation could suddenly change. Speculative bubbles are quite unpredictable. A bad result announced by Chinese institutions could radically change the movement of the wave.
In order to diminish the euphoria, the central bank of China has decided to increase its interest rates. Thus Chinese are less willing to borrow money. However it appears that this rates policy in not able to control this euphoria. It will be interesting in the following years to see what happens to China. Will China become the strongest economy in the world? Or is China going to collapse?

· US
The Federal Reserve (Fed) aims to enhance growth and avoid inflation. However its main priority is the growth. During the reign of Alan Greenspan, the Fed slashed the interest rates to a very low level to avoid recession and thus to boost the economy. Consequently US economy developed quite rapidly this period.
Nevertheless more and more economists claim that this policy is the origin of the current crisis. Low interest rates encouraged people to borrow money to purchase home; homeownership was supposed to enhance security and stability. But the rise in mortgage foreclosures, fuelled by subprime lending, seriously threatened and undermined American efforts of stability and revitalization.
Bernanke, the new chairman of the Fed, decided to change regulation laws and to slash interest rates in order to improve the market mood after the credit crunch.

· European Union
The European Central Bank (ECB) focuses on avoiding inflation. It does not really care of the growth. This policy is maybe the result of previous huge inflation, which occurred between the world wars. European countries are quite afraid of inflation.
The governor of ECB is currently JC Trichet.

· Japan
On the other hand, the bank of Japan was obliged these previous years to fight against deflation. Thus they slashed interest rates to a very law level in order to boost the economy and encourage people to borrow money. Consequently the level of interest rates was 0% for a long while.

No real alternatives to oil energy for the moment

Most of analysis show the evidence of a nearly end of oil reserves. Oil barrels are more and more expensive. In the same time, researchers have highlighted the danger of oil regarding the planet health. Consequently, governments are looking for new ressources and praising green energy. However, it appears that there are no real alternatives to oil energy for the moment. Let us have a look at the different energies, which tried to take the place of oil.



For a long while nuclear energy have been considered as the ideal substitute of oil energy. This ressource is indeed particularly strong. Neverthless, some scandals and accidents, like chernobil, have destroyed its image. Nuclear energy is now criticized by a lot of people; it is considered as a harmful and hazardous energy. Many associations and groups have demonstrated and have been militant against it.




Electricity and eolian energy have the advantage to offer a very “clean” and safe energy. However their strengh is not important enough; these ressources are not able to satisfy the world demand as a whole. Thus they can contribute to the energy supply; but definitely not threaten the oil hegemony.





Ethanol might be the most serious threat to oil hegemony. This ressource is indeed becoming more and more important in energy sector. Many companies have invested in ethanol, by claiming it stands for the future energy. Furthermore american(Georges W Bush) and brazilian (Lula) governments have spoken highly of this energy and established a parternship in order to boost ethanol production. Neverthless there is no consensus about this alternative. In fact ethanol consuption and production cause pollution and thus can not be considered as clean and green energy! In Brazil, ethanol factories have caused substancial inconveniances for employees and inhabitants. Furthermore ethanol industry's revenue stands for less than one percent of Brazil's GDP. There is no ethanol revolution.
In this environment, Gordon Brown is likely to reconsider green energy target. In fact, several members of the government claim that the previous target regarding alternative green energy will not be reached. This evolution seems to be more complicated that expected due to impressive cost and "practical difficulties" involved.

The crucial role of information

Nowadays world is organized around the concept of financial markets, which are a mechanism that allows people to easily trade. The appearance and development of these markets have given a crucial role to information.

In fact information has become a key tool in the current system. It enables people to get a knowledge of the market and thus to trade efficiently.
Most of time knowledge is not equal; some agents may have more information or maybe different information than the others. These problems of asymmetric and non perfect information may destroy the effectiveness of the market. Such inconveniances have been the origine of substantial researches in economics, like the market of lemons theory. Moreover this year, American economists received the Nobel price regarding their contribution to the establishment of a more efficient market.

Firms and investors are willing to pay huge amounts to get the best information possible. Thus they make a kind of intangible investment, as information is supposed to generate profits in the future. Inormation has become a quite valuable asset.

Another crucial point is the information flows speed. Time is important; those who get information first have a great advantage over the others. Sometimes a difference of only a few seconds can create a gap of millions pounds. As a result, companies need efficient system to spread and find information.

Do authorities have to rescue banks in trouble?

Since the announcement of Northern Rock' crisis, the bank of England has already lend huge and impressive amounts to help this bank to survive. Was is a good idea for financial authorities to intervene in such a situation?

In short-run, a helpful policy enables financial authorities to avoid a crisis by rescuing banks in trouble. It helps bank's customers, who might have lost all their savings and also helps bank's employees, who may lose their job and thus increase unemployment rate.
Furthermore this policy avoids a domino effect, which could have drastic consequences on the financial community as a whole. Central banks may also intervene for personal reasons...pride and honor instead of rational and realistic judgment!

Fortunately authorities refuse to rescue banks sometimes. For example it happened in the UK, when Barings collapsed. Barings Bank was the oldest merchant banking company in London until its collapse in 1995 after one of the bank's trader lost $1.4 billion in speculation.

Let us move on to the reasons not to help. If a company has a harmful management, why should authorities help it? By rescuing such banks, authorities may appear weak and thus may encourage careless management.
Moreover by lending money to banks in trouble, central banks risk losing even more money in the future. Here is a big dilemma...a helpful policy may avoid the crisis in the short-run, whereas it might create a bigger one in the future. Financial authorities have to be credible. Thus banks would be aware of risks and that is crucial!

Stock options : why do they scare people?

Louis Gallois has announced officially his desire to eliminate Stock options within his company EADS due to the insider trading scandal. Some top executives and corporate shareholders, Lagardere and DaymlerChrystler, indeed sold substantial amounts of shares just before announcing the company problems, by using illegally their insider knowledge.

Stock options have been created originally in order to motivate managers to work efficiently. Their earnings were indexed to the company's shares value. Theoretically this tool was supposed to help all the stakeholders. Shareholders would eliminate the agency problem, which claims managers may not work for the benefit of shareholders. And Managers would have the possibility to increase their earnings.

However the real and effective impact of stock options is different. Managers use their insider knowledge for their own goals. They focus on short-run to maximise shares value and thus their earnings. Then just before bad news announcement, they sell illegally the shares. It is illegal because it privileges an investor over another and establish asymmetric information. Thus stock market confidence goes down. This problem is not new. Previous financial scandals such as Enron emphasized it.

Finally EADS scandal may release the end of stock options existence. The desire to destroy stock options is not the goal of only Mr Gallois. New French government intend also to establish new rules to prohibit them and act to curb so-called “golden handshakes”

Subprime loan : a tool which contributed to the current crisis

Financial community is getting more and more anxious about the current crisis. In fact another prestigious bank, Merryl Lynch, has announced very bad results. This quarter, they lost $5 billion because of subprime loans. Many other banks have similar problems: Northern Rock, BNP Paribas, Morgan Stanley, Barclays, UBS…

Subprime loans are a very dangerous tool. They were provided most of time to “bad” customers, whose credit rating was under medium average. In fact these borrowers who did not qualify for loans from mainstream lenders. This phenomenon was widespread in the US, where about six million people who have no money have borrowed about 100% of the value of a house, right at the top of housing market which has since fallen sharply. These are the subprime borrowers. With subprime loans, customers pay only the loan's interests for a long while and then have to pay suddenly all the borrowed money. This is very risky... Furthermore these loans depended on the interest rates. As central banks raised their interest rates, it became harder and harder for customers to pay back their loans. A slowdown in the US housing market coupled with rising US interest rates have also hit the subprime system.

A lot of people have been unable to pay their debts. Thus banks lost huge amounts because of this risky tool. All the financial community is suffering from this incident. Banks are afraid and refuse to lend money each other. Thus Central Banks are now obliged to lend huge amounts to banks.

Plavix patent: the end of Sanofi-Aventis nightmare?

A Canadian Federal Court has rejected Apotex's challenge to Sanofi-Aventis' Plavix patent. Even if the fight is not finished, Sanofi-Aventis may feel reassured. In fact the result of this battle will be crucial for the French group.

Plavix is one of the most important medicines, which belong to Sanofi-Aventis. It enables them to earn a lot of money. We call it a “blockbuster”. All pharmaceutical companies need some blockbusters to finance their huge investments in research and investments. Plavix is the highest-selling antiplatelet agent and its main competitor is aspirin.

Apotex, a pharmaceutical company which produces more than 260 generic pharmaceuticals in approximately 4000 dosages, has challenged Sanofi over a Plavix patent, which expires in 2011. In fact Apotex claim that the 2011 patent is invalid because the molecular structure of Plavix is already described in another patent expiring in 2003.

This case has not finished yet, as it is still ongoing in US. Nevertheless the result in Canada is a great victory for Sanofi-Aventis, who was afraid to be obliged to share its blockbuster revenues…

Investor relations : a key tool

Because of globalization and the development of financial markets, companies have become obliged to focus on a new work : investor relations. Nowadays communication is very important...communication is key to success! It's a link between a company and investor community. That's why investor relations have a strategic importance. Thus companies have to devote time to this activity which enable to earn a good reputation.

• What are the criteria of good investor relations?
The key aim is to appear “transparent” by providing the maximum of informations. Thus investor community can feel reassured and confidant. Therefore annual reports have to be available as well as company' s strategy, structure and management. The company has to find the appropriate balance between technical and easy information. In fact this information must be useful for financial analysts but also for all the shareholders.
Finally another important criteria is the interactivity. Investors community is indeed keen to contact the company to request some information. Thus it would be advisable for company to elaborate some e-communication and blog.

• Do investor relations provide a real knowledge ?
For investors, information provided by the company is useful. Nevertheless it is not sufficient to create a knowledge. It is advisable for investors community to use it only like a data or an information and then create their own analysis. In fact companies try to influence and attract investors by giving a good image of their situation. Companies try to emphasize their advantages and hide their weakness. Consequently only the financial statements, which are neutral, are useful.
Thanks to balance sheet and income statement investors can determine financial ratios (liquidity, leverage, profitability, efficiency...) and compare the company to the whole industry. Thus investors can create their own knowledge of the company.

• The importance of financial informations : the case of LVMH and Morgan Stanley.

Financial informations are crucial for investor community. Without this tool, it would be impossible to examine companies. Thus this information must be precise and proved. Otherwise it could lure people...

For example in 2004 Morgan Stanley gave false information about the group LVMH. Consequently LVMH shares decreased sharply. Then Morgan Stanley was ordered to pay at least 30 million euros ($38.5 million) in damages to LVMH after a Paris court found the investment bank guilty of "talking down" the world's largest luxury goods maker in analyst research notes.

This example emphasizes the crucial importance of financial communication and the impact it may have on investor community.

Alan Greenspan : is the myth declining?

Although the former chairman of the Fed has managed to become the genius of finance and the most important person in the world, it appears now that some specialists are criticizing his previous policy.

Greenspan was chairman of the Fed from 1987 to 2006...almost twenty years! During these years, he managed to build a wonderful reputation. He maintained the interest rates at a low level for a long while in order to boost the economy and avoid a recession. Thanks to this policy, Greenspan enabled USA to reach very high level of growth.

Some analysts criticize him regarding his policy. They claim current financial problems of USA are due to previous mistakes of Greenspan. According to them, Greenspan shouldn't have slashed interest rates to such a low level to avoid housing bubble.

On the other hand, Greenspan claims nothing can avoid a bubble.”Bubbles are unavoidable”. Fed policy is not the origin of this crisis...the bubble was a world phenomenon! By trying to avoid
housing bubble, Fed might have created a recession.

Bernanke, the new chairman of the Fed, has decided to defend Greenspan policy by claiming he would have done exactly the same.

To know more about the story, look at the video in this link : http://video.google.co.uk/videoplay?docid=-7230818744817509491&q=greenspan&total=527&start=0&num=10&so=0&type=search&plindex=4