When Wim Duisenberg announced a 50 basis point cut in the European Central Bank refinancing rate from 3% to 2.5% on April 8, he made every effort to pre-empt speculation about more such cuts for the foreseeable future. Throughout its first three months of operation, the ECB has had to endure endless pressure from European politicians and private-sector economists to cut interest rates. Having frustrated this critical audience by keeping rates stable in the face of sharply declining business confidence in the three largest economies in euroland Germany, Italy and France Duisenberg now surprised the markets with one swift, deep cut. And his message was: "This is it." Don't expect any more cuts in the near to medium term.
Duisenberg was quite explicit in passing the buck for re-energizing Europe and tackling its unemployment problems back to the continent's political leaders, pronouncing at the press conference on the day of the rate cut: "The solution to that problem has to be found in measures in the labour and in the goods markets and we do hope that taking the monetary policy stance we have done today will in the ensuing months increasingly focus the attention of policymakers and the public on the real causes of the unemployment problem, because it will demonstrably become clear that monetary policy is not the answer to solve those problems."
It is against this bleak but reform-friendly macroeconomic and political backdrop that European financial markets are reshaping themselves in ways that are intimately tied to the restructuring of Europe. The most notable development this year has been the appearance of hostile takeover bids: in theory, the ultimate expression of the primacy of shareholder value. The threat to management is clear: run your company efficiently, deliver value to shareholders, because if you don't someone else will bid for your company and kick you out. Telecom Italia has performed so poorly since privatization, has so obviously lacked any coherent direction, has invested so unwisely and been such a bad provider of its basic service, that it deserves to be taken over.
It seems extraordinary that the first takeover bid for a former telephone monopoly in Europe should be hostile, should come in Italy and should so completely depend on the blessing of the international financing markets for its go-ahead. Similarly, no-one would have predicted two months ago a hostile three-sided takeover contest in French banking. Unfortunately, it is debatable whether either Olivetti's or BNP's bids, or the Telecom Italia tie-up with Deutsche Telekom can truly be said to further the cause of shareholder value or to be predicated on maximizing business efficiency, cutting overcapacity and producing returns for shareholders. Both BNP's and Société Générale's plans are long on back-office integration, short on staff reductions and branch closures in France.
It's even harder to see what value Telecom Italia's proposed merger with Deutsche Telekom offers to shareholders. It brings little hope that either company will be transformed into a leaner, more efficient competitor.
Worse, it raises the prospect that politicians and civil servants will decide the fate of these deals, not markets. Olivetti's Roberto Colannino at least has some fairly red-blooded plans for Telecom Italia. The worry is corporate governance: if successful, will Colannino himself ultimately control a huge publicly quoted company with a tiny direct interest in its shares?
In this context, recent developments in the European corporate debt markets are highly significant. Corporate issuers account for nearly 30% of new euro bond deals this year, compared with 18% in 1998. More than half of these corporate deals have been jumbos of
e1 billion or more.
Whether this new corporate bond market can or should become a sustainable source of funding for leveraged takeovers a support for lean and hungry upstarts to take control of Europe's dozing corporate giants is an open question.
Bondholders require value almost as much as shareholders. Olivetti's €1.5 billion 10-year deal in January is one of the key deals of the year to date. Investors in it have had a rocky ride. It was launched at a spread to Bunds of 142bp, quickly tightened to 135bp, then moved in to as tight at 110bp, blew out to 130bp on announcement of the merger bid before returning to around 122bp in early April. At least investors that bought at new issue are still sitting on a profit.
For the moment, the drivers for reform in Europe appear to be progressing. But if political will fails, if takeovers are fudged in shareholder-unfriendly ways, if the economy worsens and credit spreads widen sharply: watch out. Much commentary in the run-up to the launch of the euro suggested that financial markets and corporate restructuring in Europe might mimic the American model.
But there is another model of which Europe should be fearful, one of over-regulation, political inertia, opaque financial markets and long-delayed corporate renewal. And Japan has found that even zero interest rates cannot overcome those kinds of structural problems.