Tag Archives: finance

Spatial and Local Factors in Understanding Financial Crises

By Benjamin Sacks

Picturesque Pforzheim, Germany belies local and regional financial woes. (c) 2014 Wikimedia Commons.

Picturesque Pforzheim, Germany belies local and regional financial woes. (Image credit: Parlacre (CC 0)

Geography, economics, and finance are intimately linked disciplines, a relationship that is sometimes misunderstood or ignored entirely by contemporary media. Port access, weather, spatial and network relations between various tiers of government, private sector businesses, and third-party (e.g. academic) institutions, even the positioning of financial headquarters – as recent threats from Standard Life and Lloyds to relocate from Edinburgh to London in the event of Scottish independence demonstrate – can all drastically affect financial markets, long-term monetary stability, and the ability of particular precincts or sectors to recover from such recessions as the 2008-2010 global financial crisis.

In the most recent suite of articles in Transactions of the Institute of British Geographers, Reijer P Hendrikse (University of Amsterdam) and James D Sidaway (National University of Singapore) undertook a focused study of Pforzheim, a German city of some 120,000 people in Baden-Württemberg, near the French provinces of Alsace and Lorraine. In ‘Financial wizardry and the Golden City’, Hendrikse and Sidaway critiqued the media’s focus on national-level bailouts, arguing that provincial- and city-level bailouts and financial negotiations were just as, if not more important to comprehending both the scale of the 2008-2010 crisis as well as possible solutions. Further, they recalled and adopted David Harvey’s 2011 argument criticising French and German media pundits and financial analysts alike who saw ‘the crisis in cultural or even nationalist terms’; as somehow a ‘distinctive Anglo-Saxon disease’ based in London and New York City.

The authors chose to examine Germany, in part, because of that country’s apparent economic stability in the face of difficult industrial and economic issues in neighbouring Eurozone states. Berlin famously directed the bailout of several EU member states: Greece, Portugal, and Spain. But a closer examination revealed a significantly more complex and debt-ridden landscape. Various German cities were ‘like Greek islands within Germany’, Die Tageszeitung reported, ‘having slowly but surely drowned in their debts over recent years’ (p. 195). Pforzheim, following a trend blazoned by other cities in the Rhine heartland, bought a large series of Deutsche Bank interest-rate swaps. This speculative maneuvre, popular in the world of hedge funds and day-trading currency exchanges, permits institutions (e.g. a city) to obtain a more cost-efficient fixed-rate interest arrangement enjoyed by another corporation. Ideally, both parties benefit from reduced interest-rate-associated costs. However, the risks are highly variable, and dependent on the financial stability of both parties. As A R Sorkin described, and Hendrikse and Sidaway reiterated, German cities were ‘gambling that [their] costs would be would be lower and taking on the risk that they could be many times higher’ (p. 196).

Theoretically, Pforzheim should have been a model city. After enduring a horrific bombing campaign near the end of the Second World War, Pforzheim’s economic base recovered, thanks to longstanding jewelry and watchmaking industries in the city. But Pforzheim’s geographical location limited its growth. The city shares Baden-Württemberg with Stuttgart, Heidelberg, and Mannheim, each major cities with significant economic and political clout. These cities traditionally attracted major corporations away from such smaller, more specialised urban centres as Pforzheim. Although the financial stresses of the late-2000s put pressure on all German cities, smaller, less economically vibrant communities suffered significantly worse. A Pforzheim administrator summarised the city’s awkward geostrategic situation: ‘We are a jewelry- and watchmaking city that has brought a relatively mono-structured economy’, more sensitive to economic shifts than larger, more diverse cities as Frankfurt-am-Main and Cologne (pp. 198-99). In a dangerous game of financial roulette, Pforzheim and other small German cities engaged in increasingly complicated and risky collaborations with German and EU financial institutions – unaware of these banks’ own instabilities. Pforzheim’s recession, the authors concluded, was demonstrative of how integrated German and continental European financial markets are to Anglo-Saxon banking paradigms, even as they continue to assert a supposedly distinct, fiscally conservative methodology and culture.

60-world2Robert Peston, ‘EU Law may force RBS and Lloyds to become English‘, BBC News, 5 March 2014.

60-world2Robert Peston, ‘Is Standard Life alone?‘, BBC News, 27 February 2014.

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Reijer P Hendrikse and James D Sidaway, ‘Financial wizardry and the Golden City: tracking the financial crisis through Pforzheim, Germany‘, Transactions of the Institute of British Geographers 39 (2014): 195-208.

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David Harvey, ‘Roepke lecture in economic geography – crises, geographical disruptions and the uneven development of political responses’, Economic Geography 87 (2011): 1-22.

books_iconA R Sorkin, ‘Towns in Europe learn about swaps the hard way’, The New York Times 16 April 2010.

Glocal Finance: bounded forms of global financial capitalism

By Fiona Ferbrache

Warehouses being built adjacent to airport runways may be used as 'freeports' to store valuable goods

Warehouses being built adjacent to airport runways may be used as ‘freeports’ to store valuable goods

Entrepôts, freeports, bonded warehouses… these terms refer to special economic zones in which regulations are relatively relaxed in comparison with those of surrounding jurisdictions.  Such spaces are often part of international trading networks and may be analysed to gain insight to financial relations across and within bounded spaces. 

Guernsey (Channel Islands) is one example of an historical entrepôt. During the 17th and 18th centuries, it developed a key role in Anglo-French trade in wine, spirits and tobacco. Not only was the island strategically located between France and England, but it was used by both countries, at different time, to reduce the costs of import/export. Today, Guernsey provides another example of a special economic zone through status as an offshore financial centre.  The attractions of such spaces (security, tax advantages (relative to mainland jurisdictions) and confidentiality) are also found in a growing number of  freeports.

Freeports refer to repositories at airports that are becoming increasingly popular places to store and trade valuable or luxury goods.  You can read about them in a recent article from The Economist (2013).  Goods may arrive by plane, be transported to freeport warehouse (literally alongside the runway), and then traded without incurring import or other taxation duties.  This occurs partly because goods in freeports can be considered ‘in transit’ – neither ‘here’ nor ‘there’ (another interesting link for geographers might be how this connects with ‘mobilities’). 

The Economist suggests that rising interest in freeports is entangled with global processes and regulations that have evolved since the start of the financial crisis.  It is here that I wish to make a link with a new TIBG paper by Hendrike and Sidaway (2013), and their exploration of how the global financial crisis was mediated in one very specific place: Pforzheim, southwest Germany. Pforzheim is  treated as a ‘glocal’ display of the crisis in which financial decisions were taken at the local level but complexly interlinked with broader processes and structures of financial capitalism. Through this study, Hendrike and Sidaway provide a symptomatic example of how the financial crisis was mediated through particular scales and polity. 

It is not the intention here to present these spaces as negative or deviant, but as localised or ‘bounded spaces’ in an interconnected world.  A commonality between entrepôts, freeports and Pforzheim, is the way in which global issues (such as the financial crisis or trade networks) are interpreted, negotiated and contested through bounded spaces; examination of which can inform out understanding or broader processes and structures.


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 Hendrikse, R.P. & Sidaway, J.D. 2013 Financial wizardry and the Golden City: tracking the financial crisis through Pforzheim, Germany. Transactions of the Institute of British Geographers. DOI: 10.1111/tran.12024

books_icon  Aalbers, M. (2009) Geographies of the financial crisis. Area. 41(1): 34-42

books_icon  Derudder, B., Hoyler, M. & Taylor, P. (2011) Goodbye Reykjavik: international banking centres and the global financial crisis. Area. 43(2): 173-182

60-world2 The Economist (2013) Freeports: Uber-warehouses for the ultra-rich.

60-world2  The New York Times (2012) Swiss Freeports are home for a growing treasury of art
 

“Goldman Sachs rules the world”, Islam-style?

by David Bassens

Goldman Sachs New World Headquarters (photo by Z4dude via Wikimedia Commons)

Last October, Goldman Sachs registered Islamic bonds – sukuk as these are called – for a total value of US$2 billion on the Irish Stock Exchange. Remembering the sobering BBC-statement late September by independent trader Alessio Rastani that “Goldman Sachs rules the world”, this paradoxical feat inevitably triggers the question of how it can be that a global investment bank renowned for its speculative behavior tries to attract ‘Shari’a-compliant’ capital that shuns interest, uncertainty, and speculation to finance its day-to-day business.

Our recent study, published in Area, which focused on office networks of transnational Islamic Finance (IF) firms and which produced empirical insights with regard to the heavy entanglement of IF and conventional financial circuits, makes the above far less counterintuitive. IF firms have indeed emerged as an answer to faith-based demands for Shari’a-compliant finance, when during the oil-boom of the 1970s Gulf bankers laid the basis for a domestic sector. However, next to full-fledged Islamic banks, ‘conventional’ banks with a strong historical presence in the Muslim World have developed ‘Islamic windows’ to cater to the growing demand for Shari’a-compliant products. This globalization of IF has produced a geography that is marked by the emergence of a number of financial centers in the Gulf (e.g., Abu Dhabi, Dubai, and Manama), where IF is gradually becoming a dominant finance form, but which are in turn heavily interconnected with ‘conventional’ financial centers that are striving to attract business in growing sukuk markets.

The recent engagement between IF and Wall Street investment bankers, then, allows us to conclude that these geographical entanglements imply that IF’s acclaimed ‘alterity’ is largely inflated. While the increased involvement of IF actors in ‘mainstream’ global financial circuits could potentially import a ‘new world’ of customs, values, demands, and ideologies into the realm of global finance, even in times of financial turmoil global finance is being persistently reproduced from Wall Street and The City through a formal, but not substantial adaptation of financial techniques to demands from ‘new’ places. Indeed, although much is done to present the bonds as Shari’a-compliant, a thorough investigation of the prospectus by Khnifer shows that Goldman Sachs has, put simply, issued conventional debt.

The motives for such formal adaptations are grounded in the current phase of capitalist crisis since it is mainly aimed at channeling surplus oil-liquidity through conventional financial centers, while still not actually adapting the ‘nature’ of global finance itself. This means that IF can also be understood as a manifestation of global finance as it reaches out and integrates ‘new and exciting’ emerging markets. In times when liquidity has become a scarce good, such engagements are likely to proliferate, but whether it will mean that Wall Street’s – or The City’s for that matter – investment banking community will start to limit its speculative behavior to conform to the Shari’a remains largely a rhetorical question.

The author: David Bassens is postdoctoral fellow of the Research Foundation – Flanders at Ghent University’s Geography Department. He was the winner of the 2010 Area prize for new researchers.

Bassens D, Derudder B and Witlox F 2010 Searching for the Mecca of finance: Islamic financial services and the world city network Area 42 35-46

BBC 2011 ‘Anyone can make money from a crash,’ says market trader 26 September

Khnifer M 2011 Disclosure of three likely flaws in Goldman Sachs’ milestone sukuk 9 December

Geography Compass Content Alert: Volume 5, Issue 11 (November 2011)

The latest issue of Geography Compass is available on Wiley Online Library.

Click past the break to view the full table of contents.

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Sell this: the geography of stock markets

In May 2010 the German government banned “naked short selling” of eurozone government bonds, their credit default swaps (CDS) and the shares of the country’s 10 biggest financial institutions. “Short selling” (selling shares borrowed for a fee from investors that actually own them) is a common investment strategy, in which the investor aims to sell the borrowed shares and then buy them back at a lower price, and then return them. “Naked short selling” is a variation in which the shares are not actually borrowed before being sold, with the seller relying on agreements to be able to buy the shares if necessary.

In response to the global financial crisis, government regulators in different countries have on several occasions banned naked short-selling of shares to limit speculation and possible market manipulation. Due to the interconnected nature of stock markets, particularly within Europe, this measure may not necessarily have the effects intended. For example the German naked short-selling ban in May 2010 could not affect eurozone debt traded in New York and London. As a result the German government has pushed for an EU-wide ban, although the move would be opposed by the City of London in particular.

A 2009 paper by Dariusz Wójcik surveys the literature on the relationship between stock markets and geography. Wójcik notes that in the nineteenth century stock markets were much more localised, with many cities having their own. With the adoption of the telegraph and telephone, markets became increasingly national, and since the 1970s they have become increasingly globalised, with multi-national enterprises often listed on exchanges in different countries. However despite growing globalisation and virtualisation, the importance of geography remains, with for example closer proximity to stock markets making firms more likely to raise capital in this way. One issue is that the media often treats stock prices as “neutral, benign barometers of the economy”; Wójcik warns that “stock markets do not equal transparency”. Whether it is trading through alternative systems out of reach of regulation, the risk of market manipulation by investors, or fraud or near-fraud by executives, there are many ways in which the prices of stocks (and of other financial instruments similarly traded) may be deceptive.

View the Wójcik (2009) article here Wójcik, Dariusz (2009), “Geography of Stock Markets”Geography Compass, Volume 3, Issue 4, Pages 1499-1514

Elena Moya, The Guardian: Europe bars Wall Street banks from government bond sales Dan Roberts, guardian.co.uk, 19 May 2010, “Germans are not posturing on short-selling: they’re deadly serious

Robin de la Motte

Mortgaged: geographies of the financial crisis

A 2009 paper by Manuel Aalbers surveys the geographies of the global financial crisis, the impacts of which continue to be felt. The crisis began with failures in the market for US residential mortgage-backed securities (RMBS), where so-called “subprime mortgages” issued to higher-risk borrowers were re-packaged and re-sold as groups of mortgages, with under-priced risk and over-estimated returns. Grouping the mortgages was supposed to average out the risk attached to individual mortgages, but Wall Street banks originating the securities had little incentive to take sufficient account of the economy-wide risks involved. In addition, much subprime lending took the form of predatory lending to vulnerable communities, with higher interest rates and fees, abusive terms and conditions, and failure to take account of the borrower’s ability to repay. As a result the economic downturn turned into a financial and foreclosure crisis hitting the poorest US communities hardest.

Outside the US, many RMBS were sold to institutional investors without sufficient explanation of the risks, and Aalbers gives the small Norwegian town of Narvik as an example, losing millions of dollars of investments which had been intended to support the construction of new municipal facilities. Much larger sums have been lost by other European institutional investors. There is relatively little Europe can do in the short term to counter these losses; one reaction has been to restrict access of US banks to the bond sales of European governments, so that these lose the relevant commission.

View the Aalbers (2009) article here Aalbers, Manuel (2009), “Geographies of the financial crisis“, Area, Volume 41, Issue 1, Pages 34-42

Elena Moya, The Guardian: Europe bars Wall Street banks from government bond sales Elena Moya, The Guardian, 8 March 2010, “Europe bars Wall Street banks from government bond sales

Robin de la Motte

Global networks of Islamic finance

By Jenny Lunn

The Islamic financial services (IFS) sector is booming. Worth an estimated US$639 billion in 2008, the sector has proved to be remarkably resilient in the recent global financial crisis. One of the most interesting aspects of the growth of IFS over recent years has been its widespread expansion beyond the Gulf countries. This is occurring in two main ways: first through the opening of banks (either the formation of new Islamic banks outside the Gulf, such as the Islamic Bank of Britain, or the establishment of foreign branches of Gulf banks); second, through product differentiation within existing conventional banks, such as HSBC’s subsidiary HSBC Amanah, which is headquartered in London and offers Islamic products.

The paper by Bassens, Derudder and Witlox in Area (March 2010) examines the Islamic financial services sector from a geographical perspective. They apply the ‘interlocking world city network’ model developed by Taylor (2001, 2004) to examine the worldwide distribution of IFS. This model measures connectivity and flows between cities and identifies primary and secondary hubs of activity. Bassens et al analysed the location strategies of 28 leading IFS firms in 64 cities and found that the ‘Mecca’ of global Islamic finance is Manama in Bahrain. Tehran and London were ranked second and third in terms of overall connectivity, followed by Dubai, Amman and Beirut.

Perhaps a different proxy for measuring connectivity and global significance in terms of Islamic finance would be the hosting of major summits and conferences. There are a range of events this year, for example in February Euromoney held its Ninth Annual Islamic Finance Summit in London; at the beginning of May the Islamic Financial Services Board (IFSB) is holding the Seventh Annual Summit in Manama; May also sees the 6th World Islamic Economic Forum in Kuala Lumpur, Malaysia, which expects 2,000 participants and the attendance of various Heads of State; whilst the 2nd Annual Islamic Finance Paris Summit is scheduled for September. These are just a very small selection of major events being held this year but mapping the location and frequency of events could be an alternative way of examining the hubs and networks of Islamic finance.

Read the paper by Bassens, Derudder and Witlox in Area

Read about the forthcoming 7th Islamic Financial Services Board Summit in Manama

Read about the forthcoming 6th World Islamic Economic Forum in Kuala Lumpur