If finance is now “faceless”, the sentencing of its excesses is nevertheless slightly more visible every day!
In France, this genuine “répression financière ” causing pain to bankers and pleasure to campaigning politicians is not worth discussing in more detail given the extent of messages heard over the punishing, supervising and re-organisation of the banking industry. While neither accusing nor defending, we would simply recognise that although banks have had their bad moments (subprimes, “exotic” loans and outlandish bonuses), the current fall-out they are enduring is not directly attributable to them and they cannot be blamed for the particularly costly European sovereign debt crisis.
This last point is worth investigating. How and why can major European banks continue to unfailingly lend money at ridiculously low rates to these states that are constantly blaming them?
Our UK neighbours, who have a little bit more experience in the subject, have found the term “financial repression” to qualify this strange situation where investors play a game with a very haphazard future remuneration.
The English term was discovered by US economists Edward Shaw and Ronald Mc Kinnon and describes a policy by which a state aims to turn its debt rate into a negative real interest rate. If this type of policy is successfully implemented, it enables the state to refinance at an abnormally low rate, resulting in a gradual impoverishment for holders of the said debt. The difficulty of course lies in convincing investors to buy and to hold onto this debt with an almost ridiculous yield… Two stimuli can therefore convince investors: the fear of owning a different asset, or regulatory obligations restricting them to own government bonds.
Any resemblance with an existing situation… is no hazard: clearly, “financial repression” is currently present throughout the western world and explains why investors are rushing to lend money to the US for five years at a yield of just 0.7%.
Purists could discuss at length whether this “financial repression” is deliberate or not. If it is, the state is twisting the arms of investors via regulatory restrictions (Basel III, Solvency II at present or bond loans previously). If it is not, investments are spontaneous and investors are clearly renouncing any other type of investment due primarily to the fear of risk.
Whether in French or in English, “répression financière” or “financial repression” have not the same meaning but have a similar result. The financial world is lastingly under pressure and is now living with low prospective returns on the capital that it can or must invest without taking risks.
Today, the only question we would like to answer is how to escape this double-sided repression and remunerate the capital you entrust to us. Economic literature is rich, but to remain simple, there are two ways: yields and growth stocks, a virtuous horizon that is the privilege of companies. These companies can also refuse to get involved with banks and states. Indeed, they have sinned less than the former and managed themselves better than the latter!
Trusting in companies is a good theme for 2012!
Didier LE MENESTREL
With Marc CRAQUELIN