A conference was recently held by HSBC Malta to present HSBC’s views on the European economy and highlight some effective techniques for managing market risks.

Drawing on expertise from within the HSBC Group, two leading experts – Karen Ward, Senior Global Economist, formerly with the Bank of England, and Graham Newton, HSBC’s Head of Business Development – were invited to Malta to contribute to the debate.

Chris Bond, HSBC’s Head of Global Banking and Markets, welcomed the audience of commercial customers and explained that, as a leading international bank, HSBC Malta is ideally placed to help customers identify and manage their market risks against a background of market volatility and economic uncertainty.

Giving a broad overview on the global economic outlook, Karen Ward pointed out how the banking crisis has spread into a sovereign crisis. The measures being taken in terms of the bailout package have lessened the risks of contagion, although the fiscal challenge remains and the austerity packages will restrain growth in the peripheral economies. She elaborated on how Germany should benefit from a rebound in global trade, although this would not be enough to carry the entire region, expecting large divergences between countries, with interest rates staying low to compensate for the fiscal withdrawal.

Ms Ward also touched on solutions that could enable countries to rise out of their debt problems, although she reckons there are limited options within a monetary union. She believes that, apart from the austerity measures being adopted at this point, the euro may need to remain at current exchange rate levels in order to restore the competitiveness within the eurozone. “In fact, the weaker euro is already helping exports to grow, in particular in Germany, although this needs to feed into higher consumption that should generate further growth,” she said.

In her final comments, Ms Ward said the Maltese recession in 2009 was mild in comparison to the rest of the eurozone. She is also confident that Malta will continue outperforming the eurozone average in 2010.

With regard to the need to manage interest rate risk, Mr Newton said a hedging strategy should be able to protect the borrower against adverse movements in interest rates, provide benefit should rates remain low, be compatible with future financing plans and be cost effective, simple, efficient and transparent. Putting it simply, one can either do nothing by remaining floating, fix the rate by entering into an interest rate swap or hedge through an interest rate cap, he said.

Mr Newton said his preferred hedging option was to use interest rate caps that protect the borrower against a rise in rates, giving the benefit that, if rates stay low, then the borrower can benefit from paying a lower interest rate.

Finally, he mentioned a combination of strategies that can be applied to protect against interest rate risk by adopting the various options available. “We live in uncertain times and still cannot predict the future, in which case, interest rate risk is a dangerous game to play. With the right instrument, one can retain the flexibility to manage risk in an uncertain world,” he said.

Answering questions from the floor, Head of Commercial Banking Richard Cottell said HSBC is in an optimal position to provide sound corporate risk advisory services for the benefit of customers, ensuring at the same time that risks are contained.