Who trades Bank Guarantees and is there a market for them? - Part 3 of the series on trading Bank Guarantees

A couple of years ago I published  Part 1 and Part 2  of the series on trading Bank Guarantees to help make this highly complex and fraud ridden area of corporate finance clearer and as a warning to non-professionals contemplating getting into this highly risky business. In Part 1 I explained the structure of a Bank Guarantee and in Part 2 I explained the aspects of a Bank Guarantee a security that can be traded. In this Part 3, I will explain the mechanism and the intermediaries who trade in Bank Securities. Again, a strong note of caution - this area of corporate finance is unregulated by any regulator and attracts hordes of fraudulent intermediaries looking to make a quick penny by duping gullible investors.



Essentially, Bank Guarantees are traded by merchants involved in large volume international trade. For example, lets assume a food distributor in Europe "EuroMetro" purchases and imports canned sea food from a seafood processing factory in Asia "AsiaSeaFoods". If EuroMetro runs into cash flow difficulties due to the current economic crisis and can't pay AsiaSeaFoods, then a bank guarantee arranged by EuroMetro would pay an agreed-upon sum to AsiaSeaFoods. Similarly, if AsiaSeaFoods was unable to provide the goods, the bank would then pay EuroMetro the agreed-upon sum. In this instance, the bank guarantee acts as a safety measure for the counter party in the transaction. As explained in Part 2, either AsiaSeaFoods or EuroMetro could discount their counter party Bank Guarantee to a trading house, a non banking financial company or wire house through intermediaries.



The legitimate intermediaries (and there are a very few legitimate intermediaries) have created an unregulated international market of sorts in the trading of these Bank Guarantees. Unfortunately, the vast majority of intermediaries are fraudulent and have set up elaborate jargon ridden scams under varying names such as "Secret trading programs" etc. with the sole intention of defrauding potential investors. For the uninitiated, the best piece of advice I can give is to stay as far away as possible from any intermediary who claims to be "representing" buyers or sellers of Bank Guarantees.

Geopolitical stress points to upcoming war events - what should expats do?

From the nuclear missile laden saber rattling from North Korea to the French Embassy bombing in Libya today to an Iran linked terror plot in Canada to potential conflict between China and Japan (see video) or between China and Vietnam or between China and India, not to mention everyday bad news from Syria, Pakistan and Afghanistan, geopolitical stress seems to be climbing to new heights globally. A great article in Salon.com today summarizes the basis of all this geopolitical stress as being resource shortage driven. According to the article, "although the global supply of most basic commodities has grown enormously since the end of World War II, analysts see the persistence of resource-related conflict in areas where materials remain scarce or there is anxiety about the future reliability of supplies".

The question for expats and other investors is how should they hedge themselves against such an event. It is highly recommended that expats should have exposure in their portfolio to resource based funds such as water resources funds, food commodities, oil and gas, forestry as well as precious metals. These are exactly the resources that shoot up when geopolitical conflicts escalate.

Inflation is the growth killer - and the RBI stifles it further through monetary policy

Last month, the Governor of the RBI, delivered a lecture at the London School of Economics on India's macroeconomic challenges in which he more or less admitted that RBI's monetary policy was largely to blame for declining growth in India. A large portion of the lecture focused on the huge inflation problem in India which as measured by the wholesale price index(WPI) was 9.6% in 2010/11, 8.9% in 2011/12 and 7.5% 2012/13. According to the RBI the major driver from the supply side has been food inflation, arising from rising incomes, especially in rural areas, which is leading to a shift in dietary habits from cereals to protein foods, the monsoon related spike in prices of food items such as vegetables and global commodity prices, especially the price of crude oil. The price of crude especially affects Indian inflation very badly since India imports 80% of its oil demand.



This commodity inflation is further compounded by the depreciation of the rupee and lack of demand adjustment due to the Indian governments subsidized pricing regime of petroleum products. But the worst growth killer of all has been RBI's response in the form of monetary policy as the Governor himself admits in his speech.

Austerity in divided Britain makes the South richer and the North poorer

The Economist magazine gave a breakdown recently of the political divide between the north and the south in Britain. With the unfortunate passing away of Margaret Thatcher, this divide has resurfaced largely due to the harsh underlying economic connotations (see video). An independent study, carried out for the Resolution Foundation last year by the Institute for Fiscal Studies and the Institute for Employment Research, has highlighted this deep divide of a nation increasingly polarised between a poorer half whose incomes are set to fall (largely in the north) and a top half whose living standards will continue to rise (largely in the south). Entitled Who Gains from Growth? (full report available here), the study makes clear that future prosperity for the bottom half of earners depends on a policy revolution on several fronts: increasing the number of women in work, boosting training and skills, and raising wages for the lowest paid. Without this, the report finds, a typical low-income family will see its net income fall in real terms by 15% by 2020 – down from £10,600 (at 2009 prices) to just £9,000 at the end of the decade (again at 2009 prices). A typical household close to middle income could expect to see an income of £22,100 in 2020 – a 3% fall from £22,900 in 2009. Overall, by 2020 families who depend on benefits could expect to see an annual decline in income of 1.7%. Meanwhile, the top 50% of households can expect their living standards to grow by 0.2% a year to 2020; and faster for the most affluent. A typical middle income for a working-age couple is roughly £30,000 before tax, rising to £42,000 for a couple with two children. Austerity seems to benefit the wealthy south while making the impoverished north poorer. Question is - how long can this continue without casing significant social consequences?