Now it's time to forget credit crunch

I start with two rather surprising – perhaps even alarming – facts.

First, it's time to forget the credit crunch. We should instead be focusing on the liquidity love-in. Second, and, come to think of it, really quite worryingly, this is not necessarily good news for investors – certainly not for investors based in what we Westerners refer to as the Middle and Far East.

So first things first: the rally in the credit markets. Having endured a see-no-evil, hear-no-evil, do-absolutely-nothing period of market supervision from the US Fed and the Bank of England, a very great deal has been done very late in the day.

The most headline-grabbing of these actions was the takeover of US bank Bear Stearns at the end of March. The Fed didn't actually put its name on the deal, but it effectively sponsored the takeover.

Cue a rally in the credit markets. Spreads on US and European corporate bonds have eased considerably just recently. Followers of the European iTRAXX crossover index, a compilation of five-year credit-default swaps for high-yield corporate bonds, have seen a steady easing of the spreads, which reflects easier spreads on underlying cash bonds.

Confused? Don't be. All it really means is that the players in Europe and the US are willing to trade and assume risk again. So the cost of insuring against default on a loan – and fear of people not paying up on sub-prime securities was the root cause of all the mayhem, let's not forget – has got a lot cheaper. Even cautious observers are suggesting that the financial crisis might be over.

But, as I reflect on a recent trip to Singapore, there's an argument to be made that this isn't good news at all. Singapore, to a modern British observer, is a delightfully old-fashioned place in many ways. Hyper-modern on the outside with its sexy cityscapes, the beating heart of this tiny nation state is Protestant work ethic with an Asian twist. And their old-fashioned values are in the process of effecting a major cultural shift in geo-political power.

Why? Because Singaporeans reflect the culture of many Asians in that they save up. Saving up may not be glamorous or fashionable – for years, savings-to-income ratios in the UK and the US have been negligible in comparison to those of Japan and the tiger economies of Asia. But glamour and fashion don't come into it on rainy days – and certainly not when the weather turned into the monsoon season, as it did in the credit markets.

The credit crunch proved that capital was king. Investing with Other People's Money was witty and fashionable among Western investors – at least until Other People thought better of lending it. At which point, the West looked for other sources of investment to stop the whole system grinding to a halt.

Enter the sovereign wealth funds of the Middle and Far East, which have been greeted with open arms of welcome – so far – in the West. Sovereign funds have splurged more than $100bn (Dh36.7bn), by my reckoning, on western assets. The Government of Singapore Investment Corp (GSIC) and Temasek Holdings, a state-related investment vehicle, between them have pumped in just under $7bn into Citigroup, 11bn Swiss Francs into UBS, and $4.4bn into Merrill Lynch.

In difficult times, such investment is welcomed. The West gives thanks for the prudence of its Asian friends. But I predict it's all going to get nasty quite soon. Memories are incredibly short in financial markets – it's a very good bet, for example, that there'll be another overconfident bout of cheap credit provision within the next few years.

Given that investment is so much a matter of sentiment, it's also a racing certainty that today's rescuers will be tomorrow's vultures. Once the relief has worn off, people in the UK and especially the US are going to have to come to terms with the fact that Asia owns a huge chunk of the developed economies. It's an acknowledged truth that the rescued resent their rescuers. It's not a good idea, for example, for Brits or Americans, when in France, to discourse at length about the Second World War.

The triumph of the sovereign funds with their judicious expenditure of capital at a difficult time is not yet fully appreciated. Their investment in fund management groups and investment banks is effectively a play in the companies and the markets in which the financial operators invest. For many years, if you want a geared play in a market, often with a dividend yield above the market average, it's been good to buy a financial stock. Well, that leverage is already working hugely in favour of the sovereign funds with the full war chests. The markets hit the western banks very hard, so picking up the stock cheaply was a brilliant way of gaining indirect ownership of the assets the banks own.

But as the markets turn, so the amnesia and the ingratitude will set in. It will be a test of the West's respect for the rule of law, because the East owns more of the developed economies than ever before. And Wall Street, in particular, is going to find that very difficult to swallow.

There must be a moral in this somewhere for Dubai International Capital (DIC). DIC wants to do a deal that is not one of the world's biggest – yet is undoubtedly one of the most high-profile. The attempt to acquire Liverpool Football Club of England's Premier League for around $400m, is a huge story.

For the moment, the fans of Liverpool are sharply divided between two warring American co-investors who have fallen out over the proposed transactions. Most fans, but not all, seem to want the club to be sold to DIC.

But what does unite them is a xenophobic dislike for the Americans, whom they claim, don't understand the game. The investment, if it ever gets made, may well be lucrative for DIC. But one thing is for sure: the fans will be no more grateful to DIC for the capital injection that the bulge bracket bankers will be to their own investors.

-- Martin Baker is a journalist, author and commentator on international business affairs

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