Balance of financial power is 'headed to the East'

"This time it's different" was a frequent refrain from market bulls when sceptics warned that unusually strong growth during the first seven years of this decade couldn't last forever.

But the phrase is even more appropriate when applied to the aftermath, suggests a report from the international accounting firm PricewaterhouseCoopers.

"Unlike in the wake of earlier crises in the postwar period, the world economy and its financial markets will not resume their former pattern," PWC says in a recently released look at the fallout from the credit crisis, named after the 2004 climate-change disaster movie, The Day After Tomorrow.

"The balance of economic and political power will shift towards the East as part of a trend towards a less US-centric world economy."

Good financial systems are built on trust, but as PWC notes, Western financial centres have displayed little of this over the last two years. If they are unable to rebuild that trust quickly, "It will undermine their aspirations to maintain their pre-eminent position in the financial system".

The report points out that emerging-market nations are mindful of their increased power and are demanding a greater say in how the world's financial system works.

"The importance of sovereign wealth funds, Chinese banks and Gulf Co-operation Council-based private equity and real estate investors will continue to grow."

These types of players, PWC believes, will end up owning much of the West's financial institutions.

Western Governments - through an unprecedented string of bailouts, equity injections and a growing tide of outright nationalisations - have, and will continue to, become the owners of much of the financial system.

They will, over time, look to sell out, and it is highly likely that these largely Asian entities will be the only potential buyers with sufficient capital.

"There will be political resistance to these investments, but economics will prevail," says PWC.

China, for example, will invest where it needs to, to build its economy, observes PWC. That process is well underway with a series of recent bids for Australian mining companies.

While the Australian banking sector's "Four Pillars" policy may be a hurdle for prospective overseas buyers seeking a strategic or controlling stake, ANZ Banking Group chief executive Mike Smith has suggested that a Chinese tilt at one of the majors is more a question of when not if.

Meanwhile, PWC also focuses on the likely implications flowing from Governments' new ownership of the banking sector, which without direct relevance to the situation so far, still has some resonance here.

After massive bailouts and other forms of Government support to banks, "society expects, understandably, that the banks will adjust their behaviour to reflect the wider public interest and not, necessarily, shareholder interests".Even those that manage to negotiate the crisis without requiring government aid will not be immune to this pressure.

In a point that has some relevance to New Zealand, where the Inland Revenue Department is currently seeking to recover $1.7 billion plus interest from the banks as a result of contested tax minimisation mechanisms, PWC says: "Governments will increasingly expect financial institutions not engage in 'unacceptable' tax planning".

Another key point of tension already emerging in New Zealand is "de-leveraging".

"Governments want the banks to keep lending to mitigate the effects of the recession, while the banks need to shrink their balance sheets and restore profitability," says PWC.

Finally, "nouveau classic" is the label PWC have come up with to describe the type of post credit-crunch business banks will either choose or be forced to focus on.

This shouldn't be too much of a problem in Australasia where, as we are often reminded, the fact that the banks here have hardly strayed far from the "classic" banking model is why they have come through the crisis relatively unscathed so far.