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The pressure is on

Our attention this week is drawn to an article in weekly news magazine Le Point. More specifically, a column by economist Nicolas Baverez titled “Negative interest rates: warning – danger ahead!” Indeed, for more than five years now, negative interest rates have become increasingly widespread across Japan and subsequently Europe. Countries like Germany are now borrowing at -0.2%, and some recent bond issues by France and Sweden have also been undertaken at negative interest rates. Nicolas Baverez offers his analysis: “In total, some $10,000 billion of sovereign debt is affected by this economic aberration, under which investors are paying to lend and borrowers are being paid to borrow.” The situation is particularly aberrant in that these negative interest rates automatically create a machine that generates new speculative bubbles, especially in real estate, finance, equities and bonds. Nicolas Baverez concludes thusly: “Faced with the unresolvable dilemma of avoiding a further recession while preventing the formation of speculative bubbles facilitated by excess liquidity and free money, central banks – under pressure from political authorities threatening to undermine their independence – have ruled in favour of supporting the economy. Even if this means adding fuel to already overheating economies and sacrificing their ability to build up room for manoeuvre in the event of fresh shocks – the probability and intensity of which is increased by easy money.” In Germany, the future of an iconic bank is fuelling debate, as reported by daily newspaper Le Figaro. Deutsche Bank has recently announced a €7.4 billion restructuring plan and drawn a line under equity markets. This plan has been considered a last-ditch effort for Germany’s leading bank, now forced to take drastic action. Le Figaro details this extremely rigorous plan: “Deutsche Bank is to axe 18,000 jobs worldwide between now and 2022, equating to one fifth of its workforce (currently 91,500). This is unprecedented in the history of the bank, founded in 1870. Within three years, the number of employees will have fallen to around 74,000, according to a press release issued by the bank. The group has explained that it wants to cut costs by €17 billion between now and 2022, to enable it to return to profitability. On Sunday, Germany’s Verdi Labour Union announced its support for the plan.” The prime target of this radical plan is the Corporate and Investment Bank (CIB), which encompasses capital market activities, large corporates, and mergers and acquisitions. CIB has been deemed to be the bank’s weak link, generating mediocre profitability. Deutsche Bank is thus to scale back operations in this prestigious business, which currently accounts for around half of its revenue. In so doing, it will be drawing a line under just about all its equity market activities (trading, equity sales, etc.). Le Figaro points out that “Deutsche Bank expects to post a net loss of €2.8 billion in the second quarter as a result of restructuring costs”. In other words, the huge reorganisation of Deutsche Bank – unprecedented in the banking sector since 2011, when HSBC axed 30,000 jobs – is going to cost dearly from this year. Le Figaro goes on to explain that “Deutsche Bank is also going to set up a ‘bad bank’ to house €74 billion of risk assets it no longer wants. Its role will be to sell or hold to maturity highly unprofitable assets.” It is clear that the banking sector continues to change – or, in other words, that it is seeking a new development model. Furthermore, French markets have become somewhat feverish this July: morale among economic decision-makers is declining, in spite of sometimes good news on corporate investment. Interest rates squeezed, banks under huge pressure to reinvent themselves, an economic horizon sometimes shrouded in mist… Summer is a good time to try to find some bright spots again – hopefully without overheating. Christian Moguérou

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