Tag Archives: France

Cyprus, Slovenia and France: A mess and the potential for the EFSF-blowup

Cyprus is still a mess. Let’s seen what happens over the weekend and at the latest on Monday, when ECB emergency loans could be cut off.

Naked Capitalism makes mention of the dire straits of Slovenia and France. France has been kind of almost on the radar for a long time, at least in the connection of its banking system being burdened by the problems of Spain, Portugal and Greece. Slovenia has been more invisible, but Edward Hugh already anticipated this early Summer 2012.

The big problem in European terms is nonetheless France, in connection with the European Financial Stability Fund. Yanis Varoufakis alluded to the structural (toxic) problem of the EFSF in 2011, which is essentially that it relies on the strong countries to leverage the money in the EFSF. If France wobbles, then the whole structure starts to collapse:

But what makes EFSF bonds even worse is that the structure of these eurobonds is heavily dependent on the underlying risk. Lest we forget the lessons of 2008, financial disasters strike when bankers and authorities neglect the effect of their instruments and trades on the solvency of the underlying assets in question. It is in this sense that EFSF’s eurobonds are, clearly, part of the euro crisis rather than a solution to it. To see this, consider the destructive dynamic inbuilt within the EFSF bonds: Suppose Portugal exits the markets, as it is bound to, and runs to the EFSF for loans. The EFSF will have to issue new debts, on behalf of the remaining eurozone countries. This means that, with Portugal out of that group, a greater burden will be shared by the N-1 countries remaining as pillars of the EFSF. This means that the markets will immediately focus on the new ‘marginal’ country: the one that is currently borrowing at the highest interest rates within the EFSF in order to loan the money to Portugal. Immediately, it’s own spreads vis a vis the German bond rates will rise until that country (Spain in all probability) is also pushed out of the markets. Then there will be N-2 countries left to borrow of EFSF’s behalf and the markets will focus on the newer ‘marginal’ country. And so on, until the band of nations within the EFSF is so small that they cannot bear the burden of total debt on their shoulders (even if they wish to). At that point, led by Germany, these remaining. solvent, states they will leave the euro.

I can’t say how much the OMT-program can prevent this dynamic but the stalling of France is a really bad sign in this regard.

All’s not well in the Eurozone: case the Netherlands

Today Naked Capitalism features a bit by Delusional Economics on the current state of the Eurozone, or to be precise, the widening gap between Germany and the rest of the Eurozone. It is a pity that Finland is not included in Markit’s PMI measurements, because that could be interesting. The piece focuses mostly on France, as it is arguably the most dramatic case at the moment, but the Netherlands also gets a mention:

The other ‘core’ country that I have expressed concern over in the last few months is the Netherlands. On Tuesday Fitch adjusted the country’s outlook to negative (full text here):

Rating agency Fitch cut its outlook on the Netherlands’ AAA credit rating to negative on Tuesday, citing worries about falling house prices, the banking system and the high state debt burden.

The other major rating agencies, Moody’s and Standard & Poor’s, have already put their Netherlands’ ratings on a negative outlook. The country is one of just four in the 17-nation euro zone to have kept a full set of top ratings.

“The leveraged Dutch economy has suffered a number of shocks,” Fitch said in a statement.

It pointed to a sharp fall in house prices which it said was worse than it had previously expected. Fitch recently revised its projected peak-to-trough decline to 25 percent from 18 percent, and said this will continue to depress household spending.

I referred to the article Delusional Economics mentions and recently I have written a few short bits on the nationalization of SNS Reaal and the state of the housing market and indebtedness. It is worth the time to read the reasoning by Fitch on the negative outlook, as it says something which seems a bit of an understatement. Fitch states that the following will influence a decision to consider a downgrade:
– Prolonged economic stagnation and rising unemployment
Although the Dutch labour market is quite flexible and at the moment unemployment is not very high, the issue of economic stagnation is a real threat, given how dependent the Dutch economy is on the economic well-being of other countries. But on the other hand, as this article argues (in Dutch), at the local level there are all kinds of activities to build a sustainable economy. But given that the (until recently) growth of the German economy has not benefited the Dutch economy, it would be good to keep an eye on this little big country.

VoxEU.org: ‘Eurozone crisis: It ain’t over yet’

This link relates to at least this, this and this post. Things are not at all well in the Eurozone. It is sad that the leading Finnish daily, Helsingin Sanomat, pretends (in its editorial!) that the worst is over.

UPDATE: The first link above is mentioned in the column of Ambrose Evans-Pritchard, which nominally reflects on David Cameron’s Europe-speech.

Why private equity take-overs should be seen as a nail in the coffin of healthy companies

What is private equity and how does it work? Moreover, why should anybody working at a firm that is taken over by an private equity firm worry?

In the economic blogs, there have been many good articles about the private equity industry, especially in relation to Mitt Romney, who somehow claims to be a job creator because he was in a private equity firm.

To quote from a good introductory article by James Kwak of The Baseline Scenario:

A private equity firm is just a rebranded version of what were called LBO (leveraged buyout shops) in the 1980s, before they got a bad name. The classic transaction is to take over a company by contributing a small amount of equity and borrowing a lot of money.

As he states later in the same article,

The discussion of the power of leverage above should have reminded you of something: the credit bubble and financial crisis. Leverage means higher expected returns, but it also means higher risk, transaction costs, and the potential for looting. […]

When it’s easy to make money just by piling on debt and paying yourself hefty “dividends” and “fees,” why go to the bother of actually making a company better? In that case, it’s simply a case of shareholders (private equity funds) taking money from creditors, with employees left as collateral damage.

In another article on the links between private equity and ‘job creation’, James Kwak has this to say:

Private equity firms, in general, are buying shares on the secondary market (this is what “taking a company private” is all about), not contributing new capital. They are not increasing the amount of cash available for investment by companies. In fact, since they make money by paying themselves special dividends, they are reducing the amount of cash available for investment. In some circumstances this may be the best thing for shareholders, but it certainly has nothing to do with job creation—especially since we know that the dividends paid back to those private equity funds are only going to be used to buy more mature companies. The goal of a private equity firm is to make its companies more profitable: sometimes that means new products and new jobs, but it can just as easily mean the opposite (eliminating unprofitable product lines and fewer jobs).

Furthermore, the great Jared Bernstein states the obvious about the relation (and risk!) between the leveraged buyouts and the health of companies:

As I stressed here, because interest on their borrowing is tax deductable, debt financing and PE are locked in a symbiotic relationship that distorts incentives and leads to levels of indebtedness that can cripple otherwise stable companies.

(Obviously, for Europe this might be different, because the interest on debts might be less tax deductible than in the US, see Naked Capitalism’s piece on that here).
So, simply put, a private equity deal is a situation where a PE firm buys another company with a little own capital and loads of borrowed money. Their business is ‘buying and selling companies, all done with the goal of earning big returns for themselves and their investors.’ It does not necessarily have anything to do with making the bought company more competitive or upgrade its operations. The only goal is profit, profit – for the PE firm and the investors.
For the paper and board industry this is a nail in the coffin. There are many profitable paper and board mills in Europe (still) but the developments of the markets are such that profit margins will shrink (except for pulp, which is still in high demand in Eastern Europe and China. But for private equity firms these paper companies are interesting investment objects, since they usually have a fairly good cash flow and their capital intensity means that the value of the companies by itself is good, which means the PE firm can borrow a lot of money against the company. But as the NewPage fiasco has shown, if there is no understanding of the industry, then in the end the PE firm will somehow walk away from the debt, while having made a lot of money nonetheless.
So when Newark announced that it would divest its European operations to Phi Industrial Acquisitions, I naturally saw this as a very negative development, especially since according to Newark those mills are in a good condition and ready for the future – this indicates that there might actually not be so many options for improving the profit margin.
And yes, theoretically speaking, in a perfect world, private equity investment would be probably good for firms. But since they apparently need huge tax breaks, I have doubts about their usefulness.

France, Finland and the ‘repertoire of contention’

Another thought regarding this news.

The article mentions that the protest movement of the workers of the paper mills has been ‘tough and diverse’. They organized blockades, an occupation of the mill, demonstrations locally and in Paris and ‘other stunts’. And yes, they also resorted to ‘light vandalism.’

In the study of social movements, to which we can also add labour unions and their protests, Charles Tilly talks about ‘repertoires of contention.’ Simply put, this means the diverse ways of expressing discontent with issues, whether they relate to local politics or work.

In interviews with various officials and shop stewards in the Finnish Paper Workers’ Union, the view has emerged that quite generally speaking, shop stewards see strikes in the paper industry as futile. This has apparently two major reasons: the first is that employers can relatively easily transfer production abroad in case of a strike threat, and second, employers are very quick to label any industrial action as illegal (whether it actually is or not). The latter issue is obviously aimed at removing any credibility and public support from the union’s action and surely also changes the focus from the company actions to the labour union actions. In any case, already since 1995, according to statistics from METLA (the Finnish Forest Research Institute) strike levels in the pulp and paper industry have been very low, rarely even as much as ten strikes a year (with the exception of 2005, which is a different story).

All in all, given that the labour union can’t be very happy about the constant decline of employment in its sector, may have lost a previously useful instrument of ‘contention’ – the strike. Why does employee resistance work in France and not in Finland?

One reason might be the right to strike. According to Warneck (2007) in a very useful overview of European strike rules, different countries have dramatically different rules for what is acceptable industrial action. In this comparison (p. 8) it is clear that Finland actually has – in a legal sense – a more admissive set of rules concerning strikes than France. It is interesting to note that one of the forms of collective action mentioned in the news article, road blockade, is illegal by French law. Also occupation is an illegal means of collective action.

In France, the right to strike is an individual right, and there is not an actual definition of a strike in French law, which allows for many varieties (e.g. demonstrations in Paris even though the paper mill is elsewhere). In Finland, by contrast, the right to strike is only implicitly acknowledged through the right to association, which means only a strike organized by a labour union can be legal, if the conditions are met (e.g. not breaking the peace clause etc.) Other than that, many forms of collective action are allowed by law.

So, it seams that the French union at least highly creatively interpreted the law. In theory, Finnish employees and their labour union branches should have better possibilities to resist e.g. closure of a paper mill. Also M-Real in France could have transferred production elsewhere. The crucial difference might nonetheless be that in France the decision to close was heavily criticized by the French minister of regional policy and a former Prime minister. In the Finnish context, no (former) political heavyweights have criticized the decisions of the Finnish paper companies to close mills around the country – even though Stora Enso is partly owned by the Finnish state.

Does the Finnish Paper Workers’ Union need more instruments of collective action, international solidarity (e.g. from the Swedish Paper Union) or more allies in the Finnish state? How can it be, that French employees which are so much less organized than their Finnish counterparts, achieve the results that would have been desirable in Myllykoski, Summa and Voikkaa?