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SectionsJanuary 2 2008

Timely wisdom from an enduring master

Bill Rhodes, chairman of Citibank and winner of The Banker’s Lifetime Achievement Award talks to Stephen Timewell about his 50-year career, offering insights on the Latin American debt crises of the 1980s through the end of communism and expansion eastwards, to the present day rise of protectionism.
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The lessons of history are seldom learned and bankers, in particular, often seem able to forget or ignore the laws of gravity and the past. While the current subprime crisis may have new dynamics the old principles of banking remain the same and new generations just have to relearn them, often the hard way. One banker, however, has built his reputation by helping to solve financial crises across the globe over many decades. From the Latin American debt crisis in the early 1980s to the Asian crisis in the 1990s to today’s subprime crisis and emergence of China, he has been a pillar of strength for the banking industry as well as his own bank.

There is only one Bill Rhodes, senior vice-chairman of Citigroup and chairman and chief executive of Citibank, who has recently completed 50 years of service for his bank and was recently awarded The Banker’s inaugural Lifetime Achievement Award.

At 72 he is remarkable not just because of his huge energy and enthusiasm but because of the vast experience and history he brings to the unique position of being the world’s best-known banking diplomat. Countries and banks still queue up at his door seeking advice and wisdom on a range of issues from debt restructurings to strategic deals and sovereign wealth funds. Above all, he has a rare quality, he genuinely knows everybody and they trust him and they trust his advice.

In March 2007 in the Financial Times he noted: “What is clear to me is that in the next year a material correction in the markets will occur. This clearly is the time to exercise greater prudence in lending and investing and to resist any temptation to relax standards.” He believes today that many new players have forgotten at their cost some of the lessons learned in the 1997 Asian crisis which was followed by the Russian crisis of 1998 and led to the Long-Term Capital Management (LTCM) event and bail-out.

He has worked through these and many other important banking events over the past five decades and as first vice-chairman of the prestigious Washington-based think tank, the Institute of International Finance (IIF), he continues to play a key role in the evolution of global banking.

In 1991 he was responsible for Citi opening up in central and eastern Europe. “This was a time of financial problems for the bank; I had just been made vice-chairman, and I convinced John [Reed] and the board to open up branches in Poland and the Czech Republic [then Czechoslovakia] in November 1991. Here I must give the board and John a lot of credit because instead of cutting and running, as most banks in the US and UK were doing at that time, we were entering a major expansion programme.”

In addition to the offices in Poland and the Czech Republic, Citi followed in 1993 by opening in Russia, both in Moscow and St Petersburg, and subsequently in Romania, Slovakia and Bulgaria and acquiring Bank Handlowy in Poland.” I was especially proud of my role in our expansion in central Europe and Citi having the largest US presence in the region.”

Mr Rhodes also played a key role in Citi’s expansion in China, helping to negotiate and get approval for the bank’s purchase of a stake in Shanghai Pudong Development Bank and last year’s stake in Guangdong Development Bank. “I spend a lot of time in China and worked actively to get licences for our last four branches there including Tianjin, Chengdu, Hangzou and Dalian.”

Protectionist fears

For Mr Rhodes, the most important bilateral relationship in the world today is the one between the US and China, and while he is deeply concerned about the rise of protectionist sentiment on both sides he is working actively on improving co-operation. In July 2005 his extensive diplomatic skills were in use as an intermediary between the Chinese and the US Treasury when China came off its fixed exchange rate to the dollar, taking some of the antagonism out of the exchange rate issue. He was also actively involved in China’s entry into the Inter American Development Bank, again acting as an intermediary.

He says: “The Chinese government needs to further increase consumption and rely less on exports, they have to tackle areas such as the environment and put in place a viable social safety net. All these are key to the stability of China and the government will also have to eventually move to a more flexible exchange rate, probably the sooner the better.”

Chinese expansion

Looking at China’s banking sector there is a new international strategy: China Merchants Bank was recently approved to enter the US; ICBC has just acquired banks in Macau and Indonesia and a 20% stake in South Africa’s Standard Bank Group and is also expected to enter the US in the near future; and Bank of China is keen to open more branches internationally including in the US. “More Chinese banks will come to Africa and Latin America with the tremendous expansion of Chinese interests. Where you see investment and trade flows the banks will follow, it will happen. That’s the way it’s always been with the US and the UK, it’s a natural trend.”

Mr Rhodes adds: “China’s banking system is in a very different situation from what it was even five years ago, it suits it to open up more. But the government also needs to lift the foreign ownership limits beyond the current 25% and open up the securities and brokerage houses, especially if Chinese banks want to expand overseas and avoid the reciprocity issue. They need to open up for their own good.”

But nonetheless he is cautious about the very high growth rates achieved recently and is well aware that China cannot afford to have an overheated economy. Chinese wisdom dictates, he explains, that at least 7% growth is needed to maintain economic momentum and to absorb the migration of people from the western provinces and create new jobs, 8% to 10% is fine but cause for some concern, while growth in excess of 10% means overheating and strong measures are needed to moderate it. Mr Rhodes believes that stronger action will be taken now that the 17th Party Congress in October has occurred.

What actions China takes in the coming period remain to be seen but Mr Rhodes notes: “China’s economy is too large, complex and dynamic to prosper in the long run unless the financial system is more open and transparent.”

Mr Rhodes emphasises that unlike the 1997 Asian crisis, China cannot stand back; it is now a fully integrated part of the global economy and must play its part. But he is also concerned about the rising protectionist sentiment across the world which verges on nationalism. He believes protectionism is a concern not only in the US and China but also in Europe and Russia and is a growing problem. He believes this is a problem because international trade has fuelled the so-called global Goldilocks economy – not too hot, not too cold.

“We need to be careful not only about the Doha trade round but also about the future of both bilateral and regional relationships and the growing scepticism about sovereign wealth funds [SWFs]. SWFs are another issue tending to push the protectionist/nationalist agenda.” He adds: “It is very important to not let these concerns derail the tremendous expansion we have had in trade, which is one of the most important challenges and opportunities of this century.”

Looking back to 1982 and the Latin American debt crisis, when many of the large US banks were technically bankrupt but certainly did not admit it, Mr Rhodes explains how dramatically the world has changed. “Lending to what was then called the developing world was dominated by the public sector and the multilaterals plus the syndicated loans from private banks. Unlike today there were no bond markets to speak of in the developing world, it was basically straight lending over Libor co-ordinated out of London.” In the 1980s there were many financial crises and the debt crisis spread from Latin America and the Philippines to Africa, Poland and beyond.

Historical turning point

Mr Rhodes notes a key turning point in the international capital markets came when US Treasury secretary Nicholas Brady put an end to the restructuring and rolling over of loans by securitising debt and formulating the Brady Plan in 1989, in effect, returning to the bond markets of the 1920s. The Brady Plan changed the lending environment and created a more widely dispersed debt structure. Mr Rhodes was again in the thick of it, both advising in the formulation of the Brady Plan as well as leading the debt restructuring of all of the major Latin American countries.

Also in the late 1980s he worked with Jean Claude Trichet, then head of the Paris Club, to facilitate the lifting of Brazil’s moratorium on foreign bank debt. This eventually led to a Brady Plan negotiation of all of Brazil’s foreign sovereign debt in 1993. Based on the completion of this arrangement, then Finance Minister and later president Fernando Henrique Cardoso introduced the Real Plan, which stabilised Brazil’s economy and substantially reduced the country’s very high inflation rate. The success of the Brady Plan was also a turning point which set the tone for the huge flow of private sector funds to the emerging markets that today account for over 90% of all flows.

Looking to the future, Mr Rhodes believes the global economy is more global and interdependent than ever before. But much as they may think it, New York and London as financial centres are no longer completely dominant. Other regional centres, he believes, such as Hong Kong, Singapore, Dubai and Bahrain, among others, and national centres including Shanghai and Mumbai are asserting themselves, as are the new financial players such as hedge funds, private equity and SWFs. The financial world is changing rapidly but Mr Rhodes is still in the vanguard.

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