Year: 2011

UBS said it expects to win back more money from clients in 2011 and has laid the foundations for a rebound in its investment bank as chief Oswald Gruebel turns around a bank almost felled by the crisis.

UBS said it had seen improvement across all its businesses in the fourth quarter – with total net new money of 7.1 billion Swiss francs – although inflows were “very small” at its core wealth management unit after 1 billion in the third quarter.

“We are optimistic that overall positive net new money inflows will continue in the first quarter. For the full year, we believe that net new money will strengthen noticeably,” UBS said in a statement.

Clients rattled by massive writedowns on toxic assets and a tax dispute with the United States had pulled nearly 400 billion francs from Switzerland’s biggest bank in recent years.

“The results are a relief after the poor results of US brokers and those from Deutsche Bank and even Julius Baer,” said Helvea analyst Peter Thorne. “It is a relief to hear their optimism for 2011.”

Gruebel’s overhaul of the investment bank started to pay off in the fourth quarter as equities and fixed income, commodities and currencies revenues improved, though bigger losses on the bank’s own credit, as well as losses on student loans, kept net profit to just 75 million Swiss francs ($78.35m) after a surprise loss for the previous three months.

UBS described the investment bank results as “unsatisfactory in relation to our ambitions” but expects some improvement in the business’s trading results in the first quarter, though this depended largely on market conditions.

UBS was forced to cut risky but potentially very profitable proprietary trading in favour of client flow business after it took huge losses in the financial crisis pushing it to take a bailout from the Swiss government in 2008.

“While we made substantial progress in 2010, we are fully aware that we have to continue to improve our results,” Gruebel said in a statement.

Bank secrecy pressure hurts
While the bank won client cash in the Asia Pacific region – traditionally an area of strength for UBS – and among the ultra wealthy and Swiss customers, it continued to bleed a small amount of assets both onshore and offshore in Europe, where neighbouring countries have attacked Swiss bank secrecy.

Wealth management revenues rose two percent in the fourth quarter, though the unprecedented strength of the Swiss franc partly offset increased client activity, UBS said.

UBS said it made total litigation provisions of 230 million francs in the quarter, mainly in its wealth management Americas business, which pushed up operating expenses.

While this led to a pretax loss for the Americas business, which was hit hard by a tax dispute that ended with UBS being forced to hand client data to US authorities, it attracted 3.4 billion francs of new money after a small net outflow the previous quarter.

UBS, which is still held in suspicion by the Swiss public after booking the biggest loss in the country’s history in 2008, said it would pay out 10 percent less in bonuses for 2010, cutting the bonus pool to 4.3 billion francs.

It also said 1.550 billion francs of the bonus pool would be be deferred to future years.

Plane maker Boeing received unfair subsidies from the US government, a World Trade Organisation report said recently, according to Boeing’s European rival Airbus.

The two companies disagreed over the extent of the subsidies outlined in the report, which was delivered to the US government and the EU Commission but not released publicly.

Airbus said the report showed Boeing had received at least $5bn in illegal subsidies and was only able to launch its 787 Dreamliner with such support. Boeing denied the assertions.

The US and EU, both trading superpowers, have been fighting cases against each other in the WTO for more than six years over each other’s subsidies for large passenger aircraft.

Boeing’s stock, a Dow component, showed little reaction to the WTO report. Shares were up just eight cents at $69.31.

“I don’t think there’s clarity as to what this really means. It seems to be a lot of noise,” said Alex Hamilton, managing director of EarlyBirdCapital, a boutique investment bank.the dispute as Airbus and Boeing battle for the $1.7trn market.

The report is still confidential, but even Boeing acknowledges that the WTO has backed some of the EU claims. However, the two sides disagreed strongly over the amount of condemned Boeing subsidies and how they compared with those given to Airbus.

The findings came as a US Air Force decision was expected within weeks on whether to award Boeing or Airbus parent EADS a contract worth $25bn to $50bn for refueling tankers. But EarlyBird’s Hamilton said the WTO report was likely to have little impact on the US government decision.

Both plane makers have supporters in the US Congress, as Boeing would build and finish the tanker in Washington state and Kansas while Airbus would assemble it in Alabama.

Senator Richard Shelby of Alabama said that the WTO report “unquestionably states that Boeing received significant government subsidies prohibited by the WTO.”

“Today’s decision should end Boeing supporters’ attempt to derail the tanker competition by arguing that the trade dispute is one-sided,” Shelby said in a statement.

On the other side, Senator Pat Roberts of Kansas said: “Attempts to skew this ruling in the EU’s favour are an exercise in distraction. Once this ruling is made public in the near future, the sunshine will refute much of the claims by the EU and truly indicate where the market-distorting benefits flowed.”

With no end to the litigation in sight, both sides have periodically called for a negotiated end to the dispute, as EU Trade Commissioner Karel De Gucht did in September when an interim version of the report was issued.

His spokesman said the report confirmed those initial findings, in comments suggesting Brussels was not keen to raise the stakes, or wanted to play down a previous WTO ruling that condemned its own support for Airbus.

“This solid report sheds further light on the negative consequences for the EU industry of these US subsidies and provides a timely element of balance in this long-running dispute,” spokesman John Clancy said in a statement.

One EU diplomat said a political solution was preferable.

“Given the state of the global airline industry today, a political agreement is important for both sides of the Atlantic,” the diplomat said.

The ruling, like the interim report, was handed only to the parties. It will not be published for several weeks while being translated into French and Spanish.

US Trade Representative Ron Kirk’s office said it could not provide detailed comment now as the report was confidential.

“Despite that the EU has publicly commented on the report, at this time we will simply say that the United States is confident that the WTO will confirm the US view that European subsidies to Airbus dwarf any subsidies that the US provided to Boeing,” spokeswoman Nefeterius McPherson said.

Massive subsidies
Airbus said the report would show Boeing had received billions of dollars in illegal subsidies, depriving Airbus of $45bn in sales, an indication of what the EU could seek in sanctions if the case moved to retaliation.

But Boeing disputed Airbus’s figures and said the ruling would not require any change in policy or practice as far as Boeing was concerned.

WTO experts found last year that Airbus received illegal export subsidies from European governments and both sides have appealed against that ruling.

Appeals involving prohibited export subsidies are supposed to be dealt with in 60 days under WTO rules, but this case is so complicated that the WTO’s appellate body has said it will not come to a conclusion until some time this year.

Boeing says the research and development grants it received pale into insignificance beside the support for Airbus.

In the Airbus case, WTO judges found the company had been able to launch a series of passenger aircraft only thanks to the government support and called for an end to export subsidies.

Both sides have an interest in clarifying the rules for how governments can facilitate the development of new aircraft in a fair manner.

It could take until much later this year for the appeals process in both cases to run its course, but the two governments, aware that Brazil, Canada, China, India, Japan and Russia have en eye on the market, are eventually likely to negotiate a settlement.

As Berlin presses its eurozone partners to introduce tough German-style deficit rules, first cracks are emerging in the country’s own commitment to the “debt brake” law it holds up as a model for others.

Chancellor Angela Merkel is pushing other European countries to enshrine binding rules based on the German legislation in their constitutions as part of a new anti-crisis package meant to overcome the currency bloc’s debt crisis.

The German law forces the federal and state governments to virtually eliminate their structural budget deficits over the next five to 10 years. Already eurozone members such as France and Spain have expressed interest in pursuing similar steps.

The appeal is simple: national deficit limits that reinforced the EU’s discredited Stability and Growth Pact would show markets that leaders are serious about getting their finances in order and reduce the risk of future crises.

But economists who have studied the effectiveness of fiscal rules in shaping policy are sceptical about whether Germany’s debt-brake law can be successfully exported to other members of the currency bloc with no tradition of fiscal discipline.

Some worry that such a drive could even increase the risk of member states pursuing the kind of creative accounting that helped get the bloc into its current mess.

“I am far from sure that these rules would work,” said Alberto Alesina, an economist at Harvard University. “A government can put rules in place but experience shows that if they want to find a way around them and pursue a different policy, they will.”

Debt denial drama
Exhibit A is Germany itself.

Late last year, the Bundesbank and the government’s “wise men” panel of economic advisers, criticised Merkel’s coalition for violating the spirit of its own debt-brake law after Berlin refused to adjust its consolidation plans to take into account better-than-expected 2010 tax revenues.

Had it done so, its scope for new borrowing in the coming years would have been sharply reduced because 2010 is used as the base year for its goal of cutting the structural deficit to 0.35 percent of GDP by 2016.

Signs of backsliding are also evident in Germany’s most populous state, North Rhine-Westphalia, where a regional court is threatening to block plans by the minority government of Social Democrats (SPD) and Greens to sharply increase borrowing – in part to cover losses at regional Landesbank WestLB.

Under the state government’s plan, net new borrowing would surge to €7.8bn this year, compared to €4.1bn in 2009. That would cast doubt on NRW’s ability to meet its commmitments under the debt-brake law, which gives Germany’s regions until 2020 to slash their deficits to near zero.

“If the state government sticks to its stance I don’t think NRW will be able to achieve the limits set out in the law,” said Juergen von Hagen, an economics professor at Bonn University. “Then other German states will say, if the big guys don’t have to play by the rules why should we?”

Von Hagen believes a similar debt denial drama could play out in Europe if other countries follow Germany’s lead and introduce tough new fiscal rules in their national legislation.

He points to the example of the US, where many states have rules in place to limit public debt but have found ways around them by inventing new financial instruments that are not defined as debt.

“One of the dangers of rules like this is they create a lot of opacity in public finances. You run the risk of creating Enrons all over the place,” he said, referring to the Texas-based energy services group that collapsed in 2001 when its off-balance sheet accounting tricks came to light.

French resistance
Not all economists share this scepticism about extending Germany’s debt-brake law across Europe.

Charles Wyplosz, an expert on international economics at the Graduate Institute of International Studies in Geneva, has argued for years that EU-wide budget rules cannot work because they conflict with the sovereignty of the bloc’s member states.

He sees Germany’s 2009 law as a potential “game changer” precisely because it was self-inflicted rather than imposed by Brussels. But even Wyplosz admits that the political hurdles to extending it are formidable.

As a member of a special commission set up last year by President Sarkozy to study the introduction of a debt rule in France, he says it quickly became clear that opposition from lawmakers on the right and left would doom the plans.

In the end, the commission led by former IMF head Michel Camdessus came out with vague recommendations that Wyplosz refused to endorse.

“When the lawmakers in Sarkozy’s own party argued against it, then it was clear there was no majority and it wouldn’t go through,” he said.

That suggests France’s pledge to follow Germany’s lead and write new budget-balancing rules into its constitution should be taken with a grain of salt.

Hungary is another EU country whose commitment to fiscal discipline has fallen victim to shifts in the political tide.

In 2008, Budapest was hailed as a fiscal policy model for setting up an independent council to oversee budget planning and act as a counterweight to spend-thrift governments. Now that council has been stripped of its funding and staff by the new government of Prime Minister Viktor Orban.

Zsolt Darvas, a fellow at the Brussels-based Bruegel think tank, says the case of Hungary shows the risk of imposing fiscal rules in countries where there is no broad public consensus for economic rigour – the rules can vanish as quickly as they come.

He says the real lesson from the eurozone crisis is that markets have taken over as the guardians of fiscal rectitude in Europe by pushing up the borrowing costs of countries who fail to put their finances in order.

“Rules can be good, but markets have become a much more important disciplining factor,” he said.

Wages, pensions, unemployment insurance, welfare benefits and collective bargaining are under attack in many areas as governments struggle to reduce debts swollen partly by the cost of rescuing banks during the global financial crisis.

The EU, which long trumpeted a European social model with a generous welfare state, social partnership between unions and employers and a work-life balance featuring limited working hours and long paid holidays, has lost its swagger.

“The prevailing philosophy is that people have been paying themselves too much in some countries and we should be more like Germany, where people didn’t get a real pay raise for 10 years,” says John Monks, head of the European Trade Union Confederation.

Unlike bankers and bondholders, the European social model is being given a haircut – a light trim in Nordic countries but a brutal short-back-and-sides in some others.

The roll-back of wages and social benefits is toughest in Greece, Ireland, Romania and Latvia, which are under international bailout programmes designed by the International Monetary Fund and the European Commission.

“The messages are the same: cut wages, public sector wages, minimum wages, reduce benefits and raise retirement ages and also reduce employment protection in certain countries,” Monks told reporters in an interview.

Widening inequality
Under the banner of fiscal sustainability, Europe’s mostly centre-right governments are unwinding some cherished gains of the era of social progress that began after World War Two, at the price of widening inequality.

A “competitiveness pact” which German Chancellor Angela Merkel wants the EU to adopt in March includes a greater harmonisation of retirement ages and the abolition of inflation-indexing of wages, according to a leaked draft.

“You cannot share a single currency with completely divergent social systems,” Merkel told the World Economic Forum in Davos.

She and French President Nicolas Sarkozy ran into resistance when they put the proposals to fellow EU leaders, some of whom saw them as socially explosive.

Greek Prime Minister George Papandreou, one of Europe’s few remaining socialist government chiefs, lamented in Davos that the global crisis had speeded a race to the bottom in labour standards and social protection in the developed world.

Emerging countries such as China and India had achieved competitiveness through low wages, no collective bargaining, little or no healthcare and social insurance and disregard for the environment in exploiting resources and production.

“The question for Europe is: do we emulate that model? … because what we are seeing is on the one hand a race to the bottom at the level of the middle class and working class, and at the other end a race to the top,” Papandreou said.

Greece, rescued from the brink of bankruptcy last May, has adopted deep austerity measures in return for EU/IMF loans, including steep public sector pay and pensions cuts.

The conditions include a rewriting of its labour laws that trade unions and the labour minister say would gut workers’ rights to collective bargaining and job security.

Ireland cut its minimum wage by 11 percent to €7.65 ($10.40) an hour under a 2011 budget that forms the basis of its EU/IMF assistance programme.

Where such measures have not been directly imposed by the IMF and the European Commission, they are being adopted out of fear of having to request a bailout (Spain and Portugal), or of the loss of a top-notch credit rating (Britain and France).

Sarkozy forced through an increase in France’s minimum retirement age to 62 from 60 last year over the resistance of trade unions which staged seven one-day strikes.

Spain and Portugal, under much fiercer bond market pressure, have avoided such labour unrest by negotiating social pacts.

The Spanish government, unions and employers signed an agreement at the start of February that will gradually raise the retirement age to 67 from 65, with pensions based on the last 25 years’ earnings rather than the last 15 years.

The accord included a reform of collective bargaining and measures to fight 20 percent unemployment, particularly targeted at young job-seekers and the elderly unemployed.

No alternative?
In words that recall former British Prime Minister Margaret Thatcher, Merkel says there is no alternative to trimming Europe’s entitlement programmes, although Germans will be spared the harsher measures being enforced elsewhere.

But Monks insists that Berlin’s own example proves there is an alternative.

Germany’s booming growth, and the parallel recovery in the Netherlands and Austria, whose economies are intertwined with Germany’s, is based on long-term investments in high-quality manufacturing industry, he said.

“These are not low-wage countries. They have privileged public servants, strong employment protection laws, strong collective agreements.

“These are not short-term, shareholder, value-driven, flexibilised economies. Their prosperity is driven by long-term investment in technology and innovation,” Monks said.

Moreover, Germany subsidised companies to keep staff on the payroll working short-time when order books were empty, enabling them to retain a skilled workforce for the recovery.