Germany stumbling

["Ian Murray" <seamus2001@xxxxxxxx>]

When Germany feels the chill so do we all
Knock-on effect for the euro

Saturday June 23, 2001
The Guardian

Yesterday's business confidence figures from Germany were very
worrying - not least for Wim Duisenberg and his colleagues at the
European Central Bank. It is not simply a question of whether Germany
is teetering on the brink of recession, though the signs do not look
exactly healthy.

It is the knock-on effect on the rest of the euro area and on the
euro. Germany is the single currency area's biggest economy. As
Germany slows it will inevitably act as a drag on the rest of the
eurozone - and on others as well.

One of the hopes of those praying for a rally in the euro was the
prospect of eurozone growth outstripping that of the US economy. In
such circumstances eurozone assets would become more attractive than
dollar denominated ones, prompting a shift in investment flows which
would benefit the beleaguered single currency.

The evidence, from both sides of the Atlantic, is far from clear but
it is no longer a racing certainty that the eurozone will be able to
show the US a clean pair of heels in the growth stakes.

At the very least that will give pause to those who might have thought
of switching out of the US into Europe. Given the slide in its value
since its launch two-and-half years ago, the euro is scarcely in a
position to challenge the dollar's safe haven status.

There is a psychological aspect too. The euro was designed as a
surrogate German mark in order to give it some thing of the aura
enjoyed by the German currency, the anchor of the old exchange rate
mechanism.

That, however, has helped create a situation where international
investors looking for a health check on the euro simply look at the
performance of the German economy. The picture emerging from
Brandenburg to Bavaria is not one to encourage any enthusiasm for the
euro.

So where does that leave the ECB? It could cut interest rates which
might help growth. But such a move is already priced into the market.
After that there is not much left than fervent prayer.

Telecom debt


During the tech boom, we all became very blasé about big numbers.
Every figure seemed to have a "bn" behind it. Millions were old
economy.

The big numbers are still around, except now they refer to debt rather
than equity. The telecoms problem is well known, but in dealing with
it there is a scare-mongering view that the job has only just begun.

Here's one view being talked around the London market by corporate
debt specialists at the moment.

The back end of the tech splurge last year saw banks in the US and
across Europe go berserk, issuing huge short-term credit lines on the
basis that these would be replaced shortly by big bond issues (which
never happened). Typically these credit lines were 364-day facilities,
since lending beyond one year increases the amount of money banks have
to set aside to maintain their capital adequacy ratios.

One estimate says that $120bn (£85bn) worth of European telecoms bank
debt comes up for renewal between July and September this year - and
well over 10% of this relates to France Télécom, the owner of Orange.

How and when all this might be dispersed among bond and equity
investors is anyone's guess. But it will be a painful process.

Off-menu


Steak-frites chain Groupe Chez Gerard is carving out a nice little
niche for itself in exotic profit warnings.

Its back catalogue of reasons for poor trading includes the Kosovo
war, the Soho pub bombing and the refurbishment of the royal opera
house. Yesterday, the company announced it had been hurt by another
national event - foot and mouth disease.

It is a well documented fact that Americans have shunned Britain,
after watching reporters clad in space suits spout nonsense about the
dangers of the outbreak. So there was little surprise among analysts
that Chez Gerard's profits will be lower.

Much more worrying was a brief reference in the warning to poor
trading at the company's Manchester restaurant. One of only three
openings outside London, the site has failed to win the hearts of
trendy Mancunians because of its heavy menu and uncomfortable bar.

At one point, Chez Gerard was talking about opening 20 restaurants in
two years, mainly in the provinces. The fact that it has slipped up on
its third has set alarm bells ringing, and a 23% dive in the shares is
an understandable reaction.

Sceptics have always stressed that it is much harder to roll out a
luxury chain than to produce carbon copies of a glorified fast-food
joint such as Pizza Express. Diners spending £40 a head want a touch
of exclusivity, which is hard to achieve in a national brand. By
expanding too fast, Chez Gerard is in danger of over-cooking its
entrées.