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FORBES Blogs on Competition in Emerging Economies, and Outward Investment

June 17, 2015


Unfortunately, I have not been able to blog as frequently as I would like to due to various work obligations. I have not yet given up that one day I may revive the good tradition. In the meantime, you may want to check out a few blogs that I have written for the FORBES website:




A Lesson from Essen: How NOT to manage your finances internationally

January 19, 2015

The recent turbulences in currency markets, and the Swiss Franc markets in particular, remind us of some very basic lessons about international finance. Sadly, many smart advisers offer complex products that seem to lower our costs, or increase our interest earning. Yet they don't. Local governments in German and Austria learned this the painful way.

In the early 2000s, interest rates in Swiss francs were almost two percentage points lower than for euros. So, treasures of several German cities had the smart idea of issuing bonds in francs. For a while they smiled while paying lower interest rates than neighbouring towns.

Yet, then the financial crisis hit, and the euro weakened relative to the franc, the exchange rate dropped from 1.60 FR/€ in 2005 until the Swiss National Bank stabilized the rate in 2011 euro to 1.20 FR/€. Analyzing the situation in September 2014, city treasures acknowledged their loss – which so far was only on the books. The big bill would come when the bonds were due –a 1 million franc bond raised about €625,000 (=1/1.60) in 2005, yet on due day the repayment would be €833,000 if the exchange rate remained at 1.20 FR/€. If you add that up to outstanding bonds of 450 million francs as in the case of Essen, that adds to a lot of money. The 1 or 2 percentage points saved every year in interest covered only a small part of those losses.

However, things turned a lot worse. After months of speculation and increasing capital inflows to Switzerland, in January 2015 the Swiss National Bank stopped its currency market interventions. The Swiss franc again became free floating, and jumped to a new price of 1.02 FR/€. The city of Essen alone lost about €70 million that day, together municipalities in North Rhine Westphalia may have lost as much as €900 million. Meanwhile, the Austrian capital city of Vienna saw its debt soar by about €300 million.

Why did the promising financing opportunity turn saw badly wrong? The city treasurers appear to have ignored some basic rules of international finance:

  • Rule 1: If it looks too good to be true, it is probably not true! Specifically, there are likely to be risks hidden that are not immediately obvious to the lay person.

  • Rule 2: Match  the currencies of your revenues and costs! Specifically, if your expected revenues are mostly in euro (as is the case for local councils), you should also raise fund in euros!

Sources: (1) M. Kohlstadt, 2014, Revier-Städte verzocken Millionen mit Schweizer Krediten, Westdeutsche Allgemeine Zeitung, September 15; (2) M. Schymiczek, 2015, Kursbeben in der Schweiz verschärft Finanzkrise in Essen, Westdeutsche Allgemeine Zeitung, January 16; (3) T. Döring, 2015, Deutsche Kommunen in der Franken-Falle, Handelsblatt, January 16; (4) Wirtschaftsblatt, 2015, Franken-Kredite in Österreich, January 16.


Chinese Crowds, Stampede in Shanghai

January 1, 2015.


Three years ago, on New Years eve, I was on the Bund and experienced the atmosphere of Shanghai getting read for the New Year light display. In view of the sad news that we woke up to this morning, I want to share a few impressions to put this in to context.


I was near the place where the stampede happened last night, but I left the area around 10 pm because I did not feel comfortable with the density of people in the central part of the Bund (i.e. the historical riverfront of Shanghai). The crowds seemed to be well managed in the sense that there was a strong police presence; they blocked off many roads and even the nearest metro station (Nanjing East Road) was closed. In this way, they allowed people walk only in certain directions - and only those willing to walk long distances would even make it to the Bund. People were generally also well behaved in the sense that there wasn't much shuffling and pushing, and not much alcohol, compared to similar events in London or Berlin. Yet still, in some areas, one could only move where the crowds pushed.


Generally speaking, the Chinese authorities are good at managing large crowds. Individualistic Europeans or Americans are often irritated by constraints on where they may or may not go. Or, as journalists, they attribute the presence of policemen to some political motives. The truth is that China has a lot of people. There are 24 million people living in Shanghai, and they are joined by tourists from all over China during the holidays. And, the place to be, the place with the best views, is the Bund. If so many people rush into one place, crowd management becomes a real challenge - a freak incident or a panic can cause people to rush in some direction, one person trips and then a disaster happens. For all their experience in crowd management, yesterday the Shanghai authorities failed. Expect a few resignations in the next days, replaced by the new leadership's loyal supporters. 


Everyone knows that China is a big country, but unless you see it with your own eyes, it is hard to appreciate what that really implies.





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Note: C-numbers link to chapters in: M.W. Peng & K.E. Meyer, 2011 International Business, London: Cengage.




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