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William Rhodes: A cautionary tale

Sep 1, 2013

Having emerged from the global financial crisis relatively unscathed, Latin America must remember that hubris never pays, says veteran banker William Rhodes

By Taimur Ahmad

In September 2006, William Rhodes warned of a looming crisis. To the then senior vice-chairman at Citigroup, all the tell tale signs were there – and he was worried.

This was not the first approaching crisis the veteran banker had recognized. Having sat at the heart of international finance for over three decades, Rhodes had been involved in every major debt crisis around the world since the 1970s; reading the signs of an impending bust was something of a second nature to him.

But this time was different – and the consequences, he felt, potentially cataclysmic.

For Rhodes was talking about a downturn in the US housing market, which he believed risked turning into a full-blown crash that could savage the US economy – and wreak untold havoc on the global economy. "What kind of slowdown will we get and how deep will it be?" he said in an interview at the time with Emerging Markets, a sister publication to LatinFinance.

By February of the following year, the first major US subprime mortgage loss would emerge in a domestic credit crunch that 18 months later would snowball into the worst global financial crisis since the Great Depression.

Seven years on, Rhodes has retired from Citigroup, following a 53-year career with the bank. But he remains no less attuned to the risks in today’s global marketplace.

The one lesson he can impart from his career? "No country escapes the risk of sovereign crisis," he tells LatinFinance. "Any country that does not take the proper steps vis-à-vis the economy is always liable to run into problems."

That lesson, he says, is as profound for Europe today as for any emerging market. "Any time you take something for granted, it’s dangerous. Take the eurozone. Back in 2010, whenever anyone tried to point out the problems in their southern periphery the response was: we’re developed countries, not developing countries."

Four eurozone sovereigns have been bailed out since the region’s debt crisis began in late 2009.

For Latin America – having emerged from the global financial crisis relatively unscathed – the lesson, says Rhodes, is that hubris never pays. This is especially true today in the face of an ever more challenging external environment.

"Latin Americans have got to understand that just because they didn’t fall into some of the pitfalls of the Europeans and US in the Great Recession, it doesn’t mean it’s not going to be a challenging world."

Rhodes says the main challenges to the region are a slowdown in global growth and an associated drop in world trade. "It will be a more challenging world because global growth is under pressure and will be for the next couple of years. Trade has also stumbled badly," he says. "That’s the challenge for Latin America."

Turn, turn, turn

For Rhodes, the cycle has once again turned, and having done well during the global recession, "the emerging markets today are facing a period of difficult growth. The next couple of years are not going to be easy."

Chief among his worries is the impact of a slowing Chinese economy, which Rhodes says has long been a tailwind for Latin growth. "There’s no doubt that double-digit growth in China is gone, we’re not going to see that again. The question is where is it going to level off?"

While China’s authorities expect a 7.5% growth rate in 2013, a growing number of analysts reckon that its rate of expansion will drop significantly over the long-term as the country’s growth model changes. "Over the longer-run they’re going to have a tough time to keep to 7%," says Rhodes.

The implications for commodities trade will be significant, he says. "There’s no doubt that there will not be the volume of commodities imports by China as there was with double-digit growth," he says. "That has had and will continue to have an impact on Latin America."

He also points to the much-publicized risks of tighter money, as developed world interest rates ultimately rise. "Eventually interest rates are going to rise and it’s going to have its implications – across the board. Just like when QE was introduced and it had an impact on emerging market currencies, we will see the reverse, that’s inevitable. It’s just inevitable that there will be some effect on Latin America."

Yet the combined effects of these two challenges need not be disastrous for the region, Rhodes insists. "Latin America can’t sit back and say 'we are emerging from this and we don’t have any problems’," he says. "They should take the opportunity from crises elsewhere and move ahead with structural reforms and deregulation and to build institutions. This will be key." LF



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