GeorGeThe

streetReviewInside...A failed Economic Recovery - Stephen S. RoachInterviewing - Tricks they don’t want you to know!Grouponomics - Liam AuerEurope at a Glance - Lewis Bourne and Oliver HartwichWhere to Now for Tiger Airways? - Stephen Bartholomeusz

Features

A Failed Economic Recovery

Will Wounded Tiger Beat a Retreat?

Actions Speak Louder Than Words: The Right

Body Language for an Interview

A Glance at the Widening Gap

BetweenEuropean Nations

Has the EU’s Stress Test Failed?

Grouponomics

The Chinese Shadow Banking Crisis

Fostor’s Suitors Confront a Dollar Too High

CONTACT or CONTRIBUTE to the GEORGE STREET REVIEW?Oliver Kidd - oliver.kidd@student.bond.edu.au

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All articles (where necessary) are republished with full permission.

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FROM THE CHAIR

Welcome back to The George Street Review. After a hiatus of nearly a semester, we are back and bigger and better than ever. In this edition we are featuring articles from Stephen Roach (Chairman of Morgan Stanley and economist from Yale University) on the global recovery, myself on how Groupon actually makes money, market updates and more.

Bond Investment Group is committed to delivering you the opportunities, experiences, knowledge and resources needed to give yourself an edge over your fellow peers when applying for jobs. For a number of years, we have provided sessions that cover the basic concepts of finance, which has recently evolved into the BIG Edge series. After the trial introduction this year, the committee has taken the program back to the drawing board and is improving it for 2012. Get excited.

Our inaugural BIG Investment Banking Competition was held this semester as part of that concerted effort to provide you with those experiences that will help your technical skills and improve your chances of landing a career in finance. With seven teams entering the competition, the standard of entries was fierce indeed. Even fiercer was the judging panel consisting of Ms. Phillippa Wright (Faculty of Business tutor with corporate

finance experience), Dr. Tim Kiessling (Faculty of Business professor with experience in M&A strategy) and Mr Paul Robertson (an EMBA student with impressive experience in the business world). Congratulations to the winning teams, who put forth excellent pitches – your wins were well deserved.

It is that time of year again – the time for you to start thinking about internship applications. Indeed, Melbourne internships have already closed and Sydney internships close on 5 August. The process can be a long and arduous one, with lots of necessary preparation. Our last Advanced Edge Seminar: Investment Banking Internships Preparation covered what you need to know from a technical and process perspective, but if you missed that please get in contact with us and we might be able to give some more assistance.

Lucky for Bondies is that internship applications also signal another fun period: exams. Remember – grades are critical to getting past those initial screening processes at the banks. Once you make your way past that, then your extra-curricular experience comes into play. So, with that said, best of luck with your exams and study hard. Before I sign off, let me just plug our next ‘big’ event: Titans of Industry Forum. This is your chance to listen to, and network with,

the biggest in Australian business. Mark Thursday, 6 October (Week 4 next semester) in your diaries, because that is when Mr David Crawford (Chairman, Lend Lease, Foster’s Group and more), Mr Alan Oster (Chief Economist, National Australia Bank), Mr Saul Eslake (Program Director, Grattan Institute) and Mr Ivan St Clair (former National Head of Treasury Advisory, Ernst & Young) will be weighing in on Australian business and the economy.

Remember to always think BIG.

LIAM AUERChair | Bond Investment Group

FROM THE CHAIR

The George Street Review is Back!

03Winter 2011

Feature

Global recovery A FAILED

05Winter 2011

in my view – it will remain below its trend-line potential for over eight years in a row, through 2015.

This protracted “global output gap” underscores the absence of a cushion in today’s world economy, as well as its heightened sensitivity to shocks. And there have certainly been numerous such blows in recent months – from Europe’s sovereign-debt crisis and Japan’s natural disasters to sharply higher oil prices and another setback in the US housing recovery.

While none of these shocks appears to have been severe enough to have derailed the current global recovery, the combined effect is worrisome, especially in a still-weakened post-crisis world.

Most pundits dismiss the possibility of a double-dip recession. Labeling the current slowdown a temporary “soft patch,” they pin their optimism on the inevitable rebound that follows any shock. For example, a boost is expected from Japan’s reconstruction and supply-chain

Stephen S. Roach

NEW HAVEN – The global economy is in the midst of its second growth scare in less than two years. Get used to it. In a post-crisis world, these are the footprints of a failed recovery.

The reason is simple. The typical business cycle has a natural cushioning mechanism that wards off unexpected blows. The deeper the downturn, the more powerful the snapback, and the greater the cumulative forces of self-sustaining revival. Vigorous V-shaped rebounds have a built-in resilience that allows them to shrug off shocks relatively easily.

But a post-crisis recovery is a very different animal. As Carmen Reinhart and Kenneth Rogoff have shown in their book This Time is Different, over the long sweep of history, post-crisis recoveries in output and employment tend to be decidedly subpar.

Such weak recoveries, by definition, lack the cushion of V-shaped rebounds. Consequently, external shocks quickly expose their vulnerability. If the shocks are sharp enough – and if they hit a weakened global economy that is approaching its “stall speed” of around 3% annual growth – the relapse could turn into the dreaded double-dip recession.

That is the risk today. There can be no mistaking the decidedly subpar character of the current global recovery. Superficially, the numbers look strong: world GDP rebounded by 5.1% in 2010, and is expected to rise another 4.3% in 2011, according to the International Monetary Fund. But because these gains follow the massive contraction that occurred during the Great Recession of 2008-2009, they are a far cry from the trajectory of a classic V-shaped recovery.

Indeed, if the IMF’s latest forecast proves correct, global GDP at the end of 2012 will still be about 2.2 percentage points below the level that would have been reached had the world remained on its longer-term 3.7% annual-growth path. Even if the global economy holds at a 4.3% cruise speed – a big “if,”

resumption. Another assist may come from America’s recent move to tap its strategic petroleum reserves in an effort to push oil prices lower.

But in the aftermath of the worst crisis and recession of modern times – when shocks can push an already weakened global economy to its tipping point a lot faster than would be the case under a stronger growth scenario – the escape velocity of self-sustaining recovery is much harder to achieve. The soft patch may be closer to a quagmire.

This conclusion should not be lost on high-flying emerging-market economies, especially in Asia – currently the world’s fastest-growing region and the leader of what many now call a two-speed world. Yet with exports still close to a record 45% of pan-regional GDP, Asia can hardly afford to take external shocks lightly – especially if they hit an already weakened baseline growth trajectory in the post-crisis developed world. The recent slowdown in Chinese industrial activity underscores this very risk.

Policymakers are ill prepared to cope with a steady stream of growth scares. They continue to favor strategies that are better

suited to combating crisis than to promoting post-crisis healing.

That is certainly true of the United States. While the US Federal Reserve Board’s first round of quantitative easing was effective in ending a wrenching crisis, the second round has done little to sustain meaningful recovery in the labor market and the real economy. America’s zombie consumers need to repair their damaged balance sheets, and US workers need to align new skills with new jobs. Open-ended liquidity injections accomplish neither. European authorities are caught up in a similar mindset. Mistaking a solvency problem for a liquidity

shortfall, Europe has become hooked on the drip feed of bailouts. However, this works only if countries like Greece grow their way out of a debt trap or abrogate their deeply entrenched social contracts. The odds on either are exceedingly poor.

The likelihood of recurring growth scares for the next several years implies little hope for new and creative approaches to post-crisis monetary and fiscal policies. Driven by short-term electoral horizons,

policymakers r e p e a t e d l y seek a quick fix – another bailout or one more

liquidity injection. Yet, in the aftermath of a balance-sheet recession in the US, and in the midst of a debt trap in Europe, that approach is doomed to failure.

Liquidity injections and bailouts serve only one purpose – to buy time. Yet time is not the answer for economies desperately in need of the structural repairs of fiscal consolidation, private-sector deleveraging, labor-market reforms, or improved competitiveness. Nor does time cushion anemic post-crisis recoveries from the inevitable next shock.

It’s hard to know when the next shock will hit, or what form it will take; otherwise, it wouldn’t be a shock. But, as night follows day, such a disruption is inevitable. With policymakers reluctant to focus on the imperatives of structural healing, the result will be yet another growth scare – or worse. A failed recovery underscores the risks of an increasingly treacherous endgame in today’s post-crisis world.

Stephen S. Roach, a member of the faculty at Yale University, is Non-Executive Chairman of Morgan Stanley Asia and the author of The Next Asia.

It’s hard to know when the next shock will hit, or what form it will take; otherwise, it wouldn’t be a shock.

Stephen Bartholomeusz

Singapore Airlines has always pre-sented itself as an arm’s-length, pas-sive investor in Tiger Airways. It would appear that is no longer the case.

The grounding of Tiger’s Austral-ian fleet until at least the end of this month has ignited a flurry of activ-ity within the boardroom of its Sin-gapore parent, culminating in the departure of its Australian chief ex-ecutive, Crawford Rix, and the ap-pointment of the parent company’s chief executive, Tony Davis, as the local CEO – presumably on the ba-sis that he was re-sponsible for the turmoil and therefore it is up to him to fix it.

Since the crisis in its Australian operation erupted on July 1, when the Civil Avia-tion Authority in-structed Tiger to suspend services because of safety concerns, there have been chang-es within the Sin-gapore boardroom.

On July 3, in what was the first omi-nous signal for Davis, the board ap-pointed Chin Yau Seng, a Singapore Airlines executive and former CEO of its SilkAir short haul subsidiary, as an executive director to ‘’work with’’ Davis. Yesterday he became acting CEO. The board also appoint-ed J.Y. Pillay, a former chairman of Singapore Airlines, as non-execu-tive chairman, displacing Gerard Ee.

Pillay is also a very senior member of ’Singapore Inc’: he’s a member of Singapore’s Securities Industry Council, chairman of the Council of Presidential Advisers and a former managing director of Singapore’s Monetary Authority and its Invest-ment Corporation.

Singapore Airlines, which holds just under 33 per cent of Tiger’s capital, and the Singapore government’s in-vestment arm, Temasek Holdings, which controls about 7.5 per cent, would have been embarrassed and aggrieved at the mess Tiger has got itself into in Australia. It appears they have been spurred into taking aggressive action to wrest control of the boardroom and the situation.

Apart from the financial and brand damage Tiger has experienced, Ti-ger’s inexplicable decision to defy the public warnings of Australian Competition and Consumer Com-

mission chair Graeme Samuel and continue to take bookings, until it finally backed down under duress on Tuesday, would have caused con-sternation in Singapore, where defi-ance of government authorities isn’t usual.

Even with Singapore Airlines appar-ently taking a more assertive role, it isn’t clear how the loss-making Aus-tralian operation – which is now los-ing an estimated $1.6 million a week

as a result of the groundings – can be rehabilitated.

Even if it can satisfy CASA and get its planes back into the air, the brand damage – and the Tiger brand wasn’t particularly valued even before the groundings – has been enormous be-cause of the visibility of the safety issues, as well as the massive disrup-tion experienced by its customers.

Qantas, through its Jetstar brand, and Virgin Australia could also be expected to seek to put a lot of pres-sure on Tiger if it is allowed to re-sume services, in the knowledge that an already loss-making business will be even more vulnerable in its dam-aged state. Tiger is likely to need a lot of time and capital if it is to re-establish itself and become a viable competitor in this market.

Tiger’s Asian operations are profit-able and growing and it may make

more sense for the reshaped board and senior management to abandon the Aus-tralian market and re-deploy the ten planes in the local fleet else-where.

Despite its protesta-tions, the presence of Singapore Airlines on Tiger’s register as its biggest shareholder has always created speculation that it saw Tiger’s entry into the

Australian industry as a way of both creating the group’s long sought-af-ter access to the Australian domestic market and creating some pressure on its rival, Qantas.

The recently-struck alliance with Virgin Australia, from Singapore’s perspective, serves a similar purpose and may tilt the balance of the de-cision-making over Tiger’s future in Australia towards a withdrawal.

Will Wounded Tiger Beat a Retreat?

07Winter 2011

Actions Speak Louder Than Words: The right body language in an interview.

Nitesh Chawda

Being successful in an interview goes beyond simply what you say. Often interviewers are trained and have had enough experience to pick the ‘right person for the right job’. But what does it take to be the ‘right person’? Well, almost every action you do in the interview will either draw you closer or further from your dream of becoming the next big shot investment banker, or fund manager, or whatever you may wish to become. However, one component that will truly playing a predominant role on your outcome is your body language. It is crucial that when the jitters are trying to get the best of you, you maintain the best body lan-guage to prove that you are indeed the ‘right person for the job’.

Maintain the correct gaze and proper eye contact

When in an interview keep your gaze constantly sweeping, fixating your eyes from time to time on different interviewers. This is likely to evoke engagement and comfort. Keep in mind, that when under pres-sure, although tempting, avoid looking down as this indicates sadness, or away as it indicates embarrassment or even guilt. Ensure to set a formal and serious atmosphere by making use of the “business gaze”. This is done easily by focusing your eyes in between

the interviewers eyebrows and eyes.

Be congruent with your verbal communication and facial expressions

Research has shown that non-verbal signals carry about 5 fold the impact of verbal communication. Thus, when asked to draw on your weaknesses or a difficult experience you have encountered ensure you convey legitimacy by supporting what you say with how you really feel. Any incongruent communication will im-mediately signal suspicion of dishonestly lowering your credibility.

Keep your hands away from your face

As Dr Paul Ekman, leading psychiatrist says, “The best way to conceal strong emotions is with a mask. Cov-ering the face or part of it with one’s hand...can’t be done without giving [a] lie away”. Thus to avoid looking dishonest, avoid covering your mouth, even rubbing your eye unnecessarily and even scratching away at your neck.

Avoid crossing your arms

Crossing your arms may indicate a negative and defensive mindset. It is the he minds way of subconsciously creating a barrier between yourself and inter-viewer. Avoid less obvious crossing of the arms, such as fidgeting with a cuffing or watch, or even holding an object for too long in front of your body.

Finally, keep in mind what the famous Mae West one said, that to succeed in an interview, you must be able to be ‘good at two languages, English and body’.

Feature

A Glance at the Widening Gap Between European NationsLewis Bourne

Every now and then fears concerning the European Sovereign Debt Crisis seem to surface in the media and investors become pessimistic concerning the outlook for the global economy.

The European region expanded by 0.8 per cent in the first three months of 2011, surprising some analysts given that Portugal has recently returned to recession and Greece still has a great deal of debt. The European Commission have forecast that quarter-on-quarter growth within the euro zone will slow to 0.3 per cent

in the second quarter of 2011 and then stabilise at 0.4 per cent for the next two quarters. There exists what could be figuratively described as a chasm between European nations. Both the German and French economies are continuing to show sustained growth; data reveals that the German economy grew by a staggering 1.5 per cent in the first quarter of 2011 and French economy grew by 1.0 per cent in the first quarter of 2011.

The relatively high levels of growth in the French and German economies is attributable to the overall growth experienced within the European region given that France and Germany account for nearly half of the European region’s gross domestic product.In contrast, the Portuguese economy contracted 0.7 per cent in the first quarter of 2011, with the government conceding that its economy will continue to shrink both this year and the next. The European Commission

is forecasting that the Portuguese economy will contract 2.2 per cent in 2011 and 1.8 per cent in 2012. Surprisingly, Greece actually achieved quarterly growth of 0.8 per cent in the first quarter of 2011, however this is the first time that Greece has achieved quarterly growth since late 2009. The European Commission expects that the Greek economy will shrink 3.5 per cent in 2011 if their policies remain unchanged.

Both the Spanish and the Italian economies have showed weak growth in the most recent quarter, with the Italian economy growing just 0.1 per cent in the first quarter of 2011 and the Spanish economy growing 0.3 per cent. This small but positive growth illustrates that both of these countries may be able to avoid being sucked into the European debt crisis.The International Monetary Fund has articulated the view that the European Sovereign Debt Crisis is a prevalent concern and it is urging the European Central Bank to hold off on raising interest rates in the next few months.

The International Monetary Fund fears that the European Debt Crisis could spread to core European nations and even emerging European nations. Some analysts are proposing however that the European Central Bank will raise interest rates as soon as July, despite the contagion risk, given that inflation within the European region is currently at its highest level since the financial crisis.

09Winter 2011

Oliver Marc Hartwich

As the whole world worried about a potential Greek collapse, another Eu-ropean country experienced two actu-al bank failures. And no, they did not happen in Portugal, Spain or Italy. In fact, the failures didn’t even occur in the eurozone. The country in question is Denmark.

Remember last year when the Euro-pean Union’s banking stress test came to the comforting conclusion that, by and large, there were no reasons to be concerned about Europe’s financial system? Whether the methodology be-hind the Committee of European Bank-ing Supervisors report in July 2010 was correct or overly lenient for the banks was controversial even then.

However, it was often overlooked that the CEBS report only dealt with 91 fi-nancial institutions, rep-resenting roughly two thirds of the EU’s bank-ing sector. This means that many smaller banks were excluded from it. In Denmark, for ex-ample, only the three biggest banks (Danske Bank, Jyske Bank and Sydbank) were tested. The two Danish banks that failed this year, Amagerbanken – which collapsed in February – and Fjordbank Mors – which failed just two weeks ago – were not among them.

This begs the question of whether the much celebrated stress test last year amounted to more than just an exercise in calming the markets. And if it was

no more than this, what other risks have been overlooked?

For example, there is the disputed defi-nition of the capital basis of Germany’s Landesbanken, which recently caused tensions between the European Bank Authority and some German state-owned banks.

Last year’s stress test also did not in-clude a scenario in which a member of the eurozone defaults on its debt. That may have appeared unthinkable back then but in light of recent developments it now almost looks like a certainty.

And then, of course, there is the pos-sibility that the euro itself may not survive the sovereign debt crisis. How-ever, the implications of this scenario might be so severe that they are hard to model. For a start, a Greek exit from the euro could derail all Greek banks, not just ATEbank, which did not pass the test last year.

The problems in Denmark’s banking system are still results of the global fi-nancial crisis. As in most other coun-tries, the Danish government had initially guaranteed all deposits in na-tional financial institutions. This guar-antee expired in September last year, and ever since then Copenhagen has been pursuing a much tougher policy

against the country’s financial sector. This means that depositors and other unsecured creditors of distressed banks are no longer fully protected. Bank-ruptcy and loss of investment is now a real possibility in Denmark’s financial

sector.

This is what happened to Amager-banken, a small bank with a customer base of just over 100,000. After heavy write-downs on some of its investment, the bank’s equity had fallen to just 2.4 billion Danish kroners (approximately $440 million). It was at this stage that the bank had to be closed and taken over by the Danish Financial Stability Com-pany (Finansiel Stabilitet), the govern-ment’s financial rescue authority. Only €100,000 (approximately $135,000) per customer were protected, while any remaining investments with Amager-banken were subject to a substantial haircut of 41.2 per cent. The healthy parts of the bank have since been trans-ferred to its competitor BankNordik.

A similar procedure is now await-ing the customers of Fjordbank Mors. With 73,000 customers it is smaller than Amagerbanken, and again only €100,000 per client is protected. For more than 99 per cent of Fjordbank savers, that is enough to fully compen-sate them. However, there is no similar protection for shareholders, who are likely to lose their investment. Bond-holders are only safe if they had pur-chased bonds issued before the expiry of the Danish government’s guarantees. Holders of unsecured claims can expect a haircut of 26 per cent, the Danish Fi-

nancial Stability Company announced.

There are fears the crisis will spread to more finan-cial institutions because the difficulties experi-enced by Amagerbanken and Fjordbank are not unique. Other Danish banks are equally exposed to non-performing loans, particularly in Denmark’s property and construction industry. But this is not the only problem in the Danish banking sector right now.

Last month, there was a very public spat between rating agency Moody’s Investors Service and Danske Bank’s mortgage subsidiary, Realkredit Dan-mark. Moody’s had demanded addi-tional capital of €6.2 billion to maintain

Has the EU’s Stress Test Failed?

Realkredit’s AAA rating. Realkredit hit back at Moody’s, claiming the rating agency did not understand the Dan-ish mortgage market and announced it would no longer have its products rated by Moody’s. Whether it’s Realkredit or Moody’s that is right in this case hardly matters, but the dispute underlines sus-picions that Denmark’s financial sys-tem is perhaps not quite as safe as was hoped.

There are real worries now that Den-mark might head for a repeat of the ini-tial stages of the financial crisis, when several of its banks had to seek protec-tion under the umbrella of the Danish Financial Stability Company. The rea-son then was the bursting of a bubble in Danish residential property. At the time, the collapse of Roskilde bank was shouldered by the entire Danish bank-ing system. In the wake of Roskilde, other Danish banks had to be saved as well.

Last year, when the results of the EU stress test were announced, Denmark’s financial regulators were jubilant. “The Danish Financial Supervisory Author-ity and Danmarks Nationalbank wel-

come the EU stress test and find the results for the European banking sec-tor overall positive”, they declared in a joint press release. “The results do not change the perception of financial sta-bility in Denmark, and hence no new initiatives are called for.”

As it turns out now, such celebrations were premature. By just focusing on the three biggest banks, it was forgot-ten that more risks could hide under the surface. Besides, even the stress test’s own pessimistic assumptions have turned out to err on the side of opti-mism.

For Denmark, the EU stress test as-sumed a 1.6 per cent correction in resi-dential property for 2011 in its adverse scenario. But Danish real estate is cur-rently so soft that an even stronger cor-rection for this year is still possible. Re-ality may be worse than the simulation of the stress test. Needless to say, part of the costs of depositors’ protection for the now bankrupt regional banks has to be borne by Denmark’s bigger banks. But no provision for these extra costs had been made in the stress test.

In hindsight, last year’s stress test only confirmed what everybody already knew at the time: The nationalised Ger-man zombie bank HypoRealEstate, a Greek bank and five Spanish cajas did not pass the 6 per cent capital adequacy ratio of Tier 1. But beyond that, the test pretended that everything else was fine. As Denmark now demonstrates, this says more about the design of the stress test than about the real health of Europe’s financial system.

Denmark is a small country, so prob-lems in its financial sector should not cause wider disruptions in Europe’s fi-nancial system. Or at least, one would hope not. Nevertheless, it is worrying that the EU’s banking stress test failed to spot the conditions which led to the country’s current problems.

As long the risks of a eurozone mem-ber’s default and the collapse of the euro remain excluded from future stress tests, doubts remain about the useful-ness of the analysis. And as the Danish example shows, you cannot solve prob-lems by ignoring them.

011Winter 2011

Liam Auer

Having heard of Google’s failed USD 6 billion bid for Groupon and its upcom-ing USD 750 million IPO that values it at an astonishing USD 25 billion, I thought I had better sign up to their Australian service and see what the hype was all about. More importantly, I wanted to see where the money was.

Does Groupon represent a revival of the late 1990s tech bubble, or it this a different sort of company that actu-ally has a sustainable business model beyond the “price-per-clicks” metrics that were all the rage in those halcyon days? Just as a quick note: I will be looking at the US numbers and figures for Groupon, as they are much readily available and are likely to represent a

more mature stage of the business than its Australian operations.

At its core, Groupon is a discount coupon service that utilises email and social networking to extend its reach. Companies sign up for Groupon and typically agree to give away 50% of the revenue generated from each cou-pon sale to Groupon.

Why would merchants do this? They are giving away a huge chunk of their revenue that, as is the case with many restaurateurs, they cannot afford to give away. Well, a coupon from Groupon only becomes activated once a mini-mum number of people sign up for it. This guarantees the merchant that their marketing efforts, essentially what a coupon is, will be noticed. Traditional, newspaper-based coupons never had this sort of guarantee, which makes Groupon more valuable for merchants

than the old system.

Another benefit for merchants that Groupon offers is flexibility. Grou-pon tailors its service around specific sectors or business. Continuing on from my hospitality example before, the biggest benefit for restaurants is Groupon’s ability to target locals. Res-taurants want to target locals, as they represent the best source of return busi-ness. As we all know, repeat customers are orders of magnitude cheaper to at-tract than new customers. So, Groupon offers a tantalising incentive for restau-rants in this space.

So essentially Groupon is a marketing channel for local businesses. Even if you as a consumer do not take up their offer, you are still essentially seeing a

local business be-ing advertised at its core market from a respect-able outlet. Addi-tionally, Groupon also serves as a prod for consum-ers. For example, a new restaurant a few blocks down

the road might have opened up and you have been meaning to try it out for a while. A Groupon for this restaurant comes along and voila! It nudges you from your neutral position (“I’ve been meaning to try this out”) to proactively go and seek out this restaurant (“I’m eating there tonight”).

For consumers, a Groupon represents a commitment because of its short ex-piration date. You have to go now, oth-erwise the Groupon you just paid for will be wasted. Again, this nudges you from your default position of “I’ll do it later” to “I have to go now”.

Even better, and particularly for res-taurants, Groupons also serve as a tool to get business, and hence cash flow, through the door during off-peak times. Even better, it is a tool for up selling. The restaurant might start off in a losing position with you paying

$20 for $40 worth of food with your Groupon, but you add a bottle of wine, a few beers and maybe a dessert and all of a sudden the restaurant is profit-ing off you again.

With that said, I believe that Groupon will only work for certain types of businesses. Restaurants are a perfect example of this; retailers, where the goods are fungible or commoditised, not so much. This is because, unlike a restaurant, there is a very small loyalty component to your local retail outlet, particularly if you can get the same goods online for cheaper. All Grou-pon will do for this sort of businesses is bring in once-off customers who are unlikely to come back again. There are also all sorts of anecdotal horror stories out there indicating that Groupon is not for everyone – including restaurants.

As I have underscored, the strength of Groupon rests with its social net-working capabilities to specifically target local neighbourhoods on behalf of business. Yet, there are other media outlets that do this better than Grou-pon, but their management has yet to catch onto this: metropolitan newspa-pers. Take a look at the Sydney Morn-ing Herald and The Age. Both papers are major metropolitan newspapers. Both papers have significant, and well-received, food and lifestyle sections. More importantly, both papers would have the addresses, and linked email addresses, of hundreds of thousands of middle-to-upper class subscribers – the perfect target market for local restau-rants. They should be monitoring their viewers reading habits and generating this data to extend a Groupon-esque service to their subscribers, thus en-hancing the value of a subscription to the paper (and generating a new, high-growth revenue stream to boot). Even better, they already have the credit card details of subscribers, making for a seamless payment system for every-one.

I guess those expensive, easy-to-cir-cumvent paywalls and iPad apps are generating much more revenue and growth than Groupon. Just ask Mr Murdoch.

GROUPONOMICS

013Winter 2011

Karen Maley

Could China be heading for a crisis in its shadow banking system? That’s the real risk highlighted by the Internation-al Monetary Fund in its latest review of the Chinese economy.

The IMF report notes that China’s cen-tral bank, the People’s Bank of China, uses both interest rates and reserve re-quirements (the amount of money that the banks are required to hold on deposit with the central bank) to slow the growth of credit in the system. In addition, the bank imposes direct administrative lim-its on how much the banks can lend.

But this approach, it notes, only limits the supply of bank credit. It has little impact on either the cost of credit or the demand for new loans. What’s more, banks have a strong incentive to find ways to keep lending, because they earn a guaranteed margin on their loans.

As a result, the IMF report says, there’s been a surge in the amount of borrow-ing, and lending, that’s being conducted outside the banking system. According to the IMF, “there has been a significant rise in off-balance sheet provision of loans (e.g. through trust funds, leasing, bankers’ acceptances, inter-corporate lending, and other means) and a grow-ing intermediation of credit through non-banks and fixed income markets.”

In addition, the report notes that “over the past several months, there have been large loan inflows from offshore entities recorded in the balance of payments (as Chinese companies go abroad to offset credit restrictions at home).“

This growth of the non-bank financial

sector is now clearly reducing the effec-tiveness of Chinese monetary policy at a time when the country is battling rising inflationary pressures. China’s consum-er price inflation index in June surged by 6.4 per cent from a year earlier, its fast-est rate in three years.

At the same time, China’s determina-tion to stop its exchange rate from ap-preciating means that its central bank is struggling to mop up the flood of liquid-ity flowing into the country. In the three months to June, China accumulated a further $153 billion of foreign exchange reserves, bringing its total reserves to $3.2 trillion. To prevent China’s ex-change rate from rising, China’s central bank prints new yuan and buys all the foreign exchange that comes streaming into the country.

However, this adds to China’s money

supply, further stoking inflationary pres-sures. In order to remove this increased liquidity, the central bank either has to sell bills or order banks to set aside an even higher chunk of their deposits as required reserves.

Last month, China lifted the reserve ra-tio requirement by a further half a per-centage point to a record 21.5 per cent for the country’s biggest banks. But banks only earn an interest rate of 1 per cent on the deposits they’re forced to hold with the central bank, and so the reserve requirement acts as a hefty tax on the banking system.

This creates a further incentive for sav-ers and borrowers to find ways to trans-act business outside the formal bank-ing system. Savers are attracted to this

‘shadow’ banking system because they can earn higher interest rates on their deposits than the puny returns offered by the banks. At the same time, pri-vate companies, starved of funds by the banks, can raise much-needed cash in the non-bank arena, although often at a significantly higher cost.

But this rampant growth in China’s shadow banking system poses grave risks for the Chinese – and global – economies. The IMF report urges the Chinese government to start deregulat-ing its financial markets, by allowing the exchange rate to rise and allowing the market to determine both deposit and lending rates. Instead of imposing limits on bank lending, the IMF says the Chinese central bank should allow cred-it to be allocated by price-based means.

The IMF report warns that continuing

to delay financial liberalisation “could mean that the financial system, instead, evolves in an uncoordinated and disor-derly fashion, outpacing supervisory capabilities and revealing regulatory gaps.”

It says there is now a high risk that “developments proceed on a timetable driven not by careful, pre-emptive and concerted policy planning but rather by the pace of market disintermediation and innovation. “

But with China’s financial system now much more complex, the IMF warns that “an ad-hoc or poorly configured approach would be especially risky, for both China and the global economy.”

Is China Set for a Shadow Banking Crisis?

Stephen Bartholomeusz

With SABMiller stalking Foster’s and some smoke swirling around its sibling, Treasury Wine Es-tates, there’s an interesting ques-tion raised by the implications of the record strength of the Austral-ian dollar for any bids.

In theory, an Australian dollar

above $US1.07 shouldn’t be an obstacle to a foreign bid for ei-ther entity, given that the bids would be funded presumably in Australian dollars and, if success-ful, would generate largely Aus-tralian dollar income streams, particularly in any acquisition of Foster’s.

Any bidder would, however, in-evitably have to factor a future fall in the value of the Australian dollar into their scenario plan-ning.

While that would, if the bid were funded with Australian dollars, see the value of the assets and earnings acquired fall on transla-tion into the bidder’s functional currency (in the London-listed SABMiller’s case that is the US dollar) there would be a corre-sponding reduction in the levels of debt and interest costs report-

ed.

Thus the exposure would pre-sumably be limited to the equity component of the acquisition, which could itself be hedged if deemed necessary.

In the case of Foster’s, where the earnings and cash flows have been extremely resilient, cur-rency would appear to be a minor issue. That might not necessarily be the case with Treasury, which operates in a far more volatile sector and has multi-currency ex-posures.

That’s because while the acqui-sition cost is certain and can be hedged, either naturally by bor-rowing in Australian dollars or through financial transactions, the future income streams from the acquisition are not.

Foster’s Suitors Confront a Dollar Too High

015Winter 2011

With virtually no debt – and therefore no natural hedge against its large US dollar ex-posures – Treasury might ap-pear quite vulnerable to any predator that looks at it through a US dollar lens.

A significant improvement in Treasury’s underlying per-formance in recent times has been masked, for its Australian shareholders, by the impact of the dollar on its offshore earn-ings – both from its wineries offshore and its exports of Aus-tralian wine.

For a foreign predator plan-ning to acquire it with US dol-lar-denominated debt that could, however, create an opportunity to acquire the group cheaply.

The most natural buyers for Treasury are private equity firms, despite the speculation, since de-nied, that China’s Bright Foods group was contemplating an of-fer. Foster’s rejected an approach from private equity ahead of the demerger.

For private equity, which knows that it will be a seller of anything it acquires in a timeframe that opens about three years after the acquisition and closes probably around seven years at most, the risk of a major devaluation of the Australian dollar would, along with the vagaries of the agricul-tural cycle and the sensitivity of demand for wine to the economic settings, have to be factored into any planning for a bid.

A significant devaluation wouldn’t, from a US buyer’s perspective, impact the value or reported earnings from Treas-

ury’s offshore businesses but would have a marked impact on the earnings and value of its Aus-tralian operations. That could be a deterrent to strategic activity around Treasury.

SABMiller may not be unduly concerned about currency issues, given that it wouldn’t acquire Foster’s in order to flip it a few years later, but it would be wor-ried about the lack of traction its $4.90 a share approach has gained with Foster’s and the market.

It had appeared that the strategy was to use the approach to force Foster’s to engage and negotiate its price for surrender but Foster’s has refused to engage and simply got on with its business as if the approach had never occurred.

Meanwhile, the market has pushed Foster’s price up to around $5.15 which, given that it would probably take at least six months for any takeover to be completed and acceptances paid for, signals a market expectation of an offer around $5.50 a share, if not higher. Foster’s own view

of its value, comparing it with the multiples paid for other beverage transactions in this market and elsewhere, is probably closer to $6 a share than $5.

Given the relative paucity of syn-ergies, the reality that the Aus-tralian beer market is at best low-growth and the potential that an acquisition of Foster’s might see it lose some of its very lucrative licences to distribute other brew-ers’ products in this market, that might prove too rich for SAB-Miller, which would know that if it comes back with a higher num-ber that would only be the start-ing point for any serious negotia-tion with Foster’s.

In effect, as a consequence of Foster’s tactic of ignoring the ini-tial approach, SABMiller would know that to acquire its target (and assuming no other bidder emerges) it would have to be prepared to bid against itself not once, but at least twice.

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