The dominoes have been falling one after the other for the past few months, and the tension peaked on 13 September when hundreds of people rushed into Evergrande’s headquarters in Shenzhen to demand repayment of loans. Now the company has warned of its growing default risk and is exploring options to divest assets quickly. Many analysts are now chanting “the sky is falling” and “it’s 2008 all over again” citing concerns over global contagion. But let’s see if all this doom and gloom has a root in reality. To understand what all of this means for international investors, we need to first look at the big picture and see where all of this started.
The road to disaster
As always, a couple of factors need to fall into place perfectly for such a giant crash to happen.
- Overbuilding
In 2009 hedge-fund manager Jim Chanos famously claimed that China is “Dubai on steroids”. Maybe that’s because every year since, more than 10 million new home units have been sold… every year. That number is five times higher than the US and EU combined. Just looking at it from afar and seeing pictures of China’s ghost towns (towns full of uninhabited residential skyscrapers), one can see that something is not right. But why is that boom lasting for over a decade now? The answer many people point to is the lack of an alternative. Due to the many regulations the government has placed on the finance industry, it’s very difficult for retail investors to invest in anything else other than real estate. That’s why it was commonplace to see people buying 4–5 homes. Ever since, ordinary people have been fighting to circumvent every possible restriction on buying more homes. When the government introduced a restriction on married couples buying only one home — people started divorcing to buy more. The demand in big cities was so feverish that lotteries were introduced, with chances of buying a home as big as 1 to 60. Though greed is rampant, and people are buying property hand over fist, simply because they are confident it will go up in value, developers have built so many units that can’t possibly be inhabited, even if they were free. Currently, the official property vacancy rate stands at 22%, though some analysts claim it’s way higher.
- Demographics
There’s only one world in which such overbuilding could have been justified. In a situation where the population was rapidly growing, an argument could’ve been made that there’s a chance for all of these homes to find their inhabitants eventually. Though looking at China’s demographic picture today, that’s difficult to imagine. The UN analysis shows that the Chinese population would peak in 2030, citing census data. Though, some analysts are suggesting that the population has already peaked in 2020. A quick takeaway, do you know which country’s demographics also peaked during a real estate boom? That’s right — Japan, and it didn’t end well for the property market. The actual situation is even worse than the chart shows and indicates that the demographic decline will be substantial. First, the one-child policy absolutely gutted one generation, so now there are not enough young parents. Second, selective-sex abortion is common in China which is why males outnumber females; and in some regions with more than 20%. The third factor is that industrial companies prefer to hire females because, allegedly, they are easier to manage. That’s why in big cities, females outnumber males, and in the rural regions, it’s vice versa. All in all, the demographic decline seems almost inevitable at the moment, and that puts added pressure on property prices.
- CCP’s dilemma
The other issue that stands out in this crisis is the tough choice the CCP has to make. A home in China is much, much more than a sanctuary - by some estimates, real estate accounts for more than 70% of household wealth. That fact by itself albeit concerning is not the end of the world. What’s making the situation worse is that the real estate industry is crowding out the other, much more productive industries when it comes to investments which has created a huge headwind when it comes to consumer-led growth in the country. That’s what I refer to as the CCP dilemma: Do you A) let the housing market crash and destroy a huge portion of household wealth, or B) continue on the same road, while not investing enough capital to create a high-tech export sector and a true middle class that can lead to domestic growth. We can see that the Chinese Government is moving in a direction where they’re trying to limit leverage in the construction business. Back in August 2020, the CCP introduced the “3 red lines policy”:
- Liability-to-asset ratio (excluding advance receipts) of less than 70%
- Net gearing ratio of less than 100%
- Cash-to-short-term debt ratio of more than 1x
By doing that, I can imagine that they were ready to take some sort of a hit, but perhaps didn’t quite understand just how much leverage there was in the sector. When the measures were introduced, only a few of the B companies were up to par, and hardly any of the CCC.
Needless to say, leverage is the oil that fuels every fire and considering that household debt to GDP rose 30% for the past three years to 62%, the amount of leverage is only making policy decisions harder.
The Catalyst
After this long introduction, we can return to present-day events. By summer 2021, it was evident that residential home sales were slowing, with the highest drop happening in August - a -20% drop in value sold YoY. That’s huge for every developer in the market, and for Evergrande — which was levered up to the gills, it was the last nail in the coffin. That’s why around the start of September, strapped for cash, the firm stopped payments in its wealth management program. Truth is that the problem could’ve been seen even before, around the end of August, when the yield on the Evergrande bonds exploded to the upside.
What was the government’s immediate reaction? With Evergrande’s $320 billion of debt outstanding and fearing contagion across the whole financial sector, the CCP injected $14 billion in the banking system via reverse repurchase agreements. Although if the stress continues, much more stimulus will be necessary.
Contagion risk — real or overblown?
Now that we mentioned the word everyone fears, let’s explore the current market environment and see if there’s really a cause for panic. In the Bloomberg Asia ex-Japan HY index, the top 10 constituents are all Chinese companies and out of them, only the real estate companies are experiencing a rising yield. That being said, this index is highly real estate heavy — 66%. So for the moment, a contagion is apparent. Though it’s only across the real estate sector. We are not preaching that “there’s nothing to see here” or “everything’s perfectly fine”, but we need to be very clear about the type of contagion that’s being observed. For the moment the problem is primarily in the real estate companies - on Monday 21 September, yields went up, while a lot of the financials’ stocks went down in the Hong Kong trading session. Evergrande has a large bond payment outstanding on Thursday 23 September and if they don’t manage to find liquidity for that, the over-leveraged Chinese banks with a large exposure could start sweating.
International contagion
If you’re closely monitoring the news, it’s not hard to be left out with the impression that we are at the brink of a global banking crisis and that the “sky is falling”, but we need to be adamant that for the moment this issue is really China-centric and there are only a few mild signs of international effects. Though we should still mention them. As a consequence of the drop in new construction, the Dalian Iron Ore index has to be closely monitored. It’s down a lot from the July heights, and during August, we’ve also seen the biggest drop in steel output. As we know, China is the biggest import market for a number of commodities, which were necessary to fuel the endless construction. With new construction dropping sharply, this poses a serious headwind for the industrial metals. That’s why we also saw the 3 biggest Australian miners shed a combined market cap of $100 billion on Monday 21 September.
All in all, the situation is far from pretty, and the global market could definitely take a hit on this news. However, we need to be realistic and agree that the current problem is largely isolated to China since their domestic credit market is over-levered, but international banks don’t have nearly as much exposure as they had in 2008. We believe that international contagion is possible, thus investors need to be careful, though it’s highly likely that this contagion will be limited to only a few sectors and companies that have an especially large exposure to China. For the bigger part of the S&P and European companies, I strongly believe that any panic is unjustified.
And for the journalists comparing the current situation to Lehman in 2008, I’ll just point them to one number:
Evergrande has $19 billion in international debt, US federal reserve buys $120 billion bonds per month. Let that sink in.
Virgin Australia confirmed on Tuesday that it has entered voluntary administration, putting 15,000 jobs at risk.
In a statement, the company pledged to continue its scheduled flights that are “helping to transport essential workers, maintain important freight corridors, and transport Australians home.” Travel credits will also remain valid, the statement continued.
The airline’s board of directors has appointed Deloitte’s Vaughan Strawbridge, Sal Algeri, John Greig and Richard Hughes as voluntary administrators.
With 80% of its workforce already stood down, Strawbridge said that there were “no plans to make any redundancies.”
Virgin Australia’s slump marks the first major airline in the Australasia region to enter administration as a result of the COVID-19 pandemic and the ensuing quarantine measures across many countries.
The news has come only days after Virgin Group founder Sir Richard Branson published an open letter to Virgin’s 70,000 employees in which he warned of the consequences of the airline’s potential collapse.
“If Virgin Australia disappears, Qantas would effectively have a monopoly of the Australian skies,” the tycoon wrote. “We all know what that would lead to.”
Despite its requests to the Australian government, Virgin Australia was not issued the $1.4 billion emergency loan that it sought.
Virgin Australia’s difficulties mirror those faced by other major airlines around the globe, which are struggling to cope with increased travel restrictions and a dramatic fall in demand amid the COVID-19 crisis. UK-based airline Flybe also went into administration early in March as the pandemic exacerbated its existing financial concerns.
This week we learned that Flybe, though a tenth the size of Thomas Cook, is in a similar boat and facing the prospect of laying off over 2,000 employees to save its future. Sky News reported that UK-based Flybe is currently trying to secure financing so as to avoid the job cuts.
Administration and accountancy firm EY are currently on standby, but the BBC said chancellor Sajid Javid and the business and transport departments are due to discuss the possibility of a bailout, not by method of financing, but by potentially cutting air passenger tax duty.
Air passenger duty is charged per passenger on each flight and is a government taxation, which if removed could save the firm from its financial woe.
Flybe operates around 75 planes in over 70 airports around Europe. Almost two in five UK domestic flights are operated by Flybe. 2,000 are at risk if the company goes under. This news comes just a year after it was already saved by a consortium led by Virgin Atlantic.
Here negotiations expert at Huthwaite International, Neil Clothier offers exclusive commentary about why negotiations so often fail for businesses on the brink of collapse.
Brexit, the gig economy, the death of the high street, mismanagement wherever the blame may lay, some of the UK’s biggest brands have collapsed in the past five years. From Thomas Cook to Bury FC, the past month alone has seen some shocking negotiation fails. Begging the question, why? Why are some of the Globe’s biggest and most prestigious brands struggling to bring it back from the brink? Why are, presumably, some of the nation’s most senior negotiators struggling to secure deals at the final hour?
The most recent Thomas Cook case is no exception. As a household name and go-to travel agent for UK families for well over a century, this company has self admittedly failed in securing rescue funds and in turn has collapsed. But why?
The failing business model
Thomas Cook was outdated. The rise of the digital economy has seen consumers moving online to book their holidays, and a fast-paced gig economy has seen side offerings such as travel insurance and money being challenged by new and aggressive brands that are more than happy to steal market share from sleeping giants.
Whilst not all businesses can be accused of being sleeping giants - take Bury FC for example – they can be accused of either mismanagement, or failing to embrace the opportunities presented by a shifting consumer mindset. What we’re saying here is that mismanagement doesn’t just include questionable investments and a lack of attention to important matters such as business growth (), it also reaches to matters such as the effective management of contracts, supplier management and procurement.
Time and time again we see struggling businesses, from Debenhams to Toys R Us, BHS to HMV focusing heavily on securing investment at the last hour. But surely, if these cases prove anything, it is that this approach is fundamentally flawed and often does not work.
While desperate boards scratch their heads and frantically seek out investors, they are failing to see what a real negotiation comprises and how this forms the very fundamentals of business management. There are two considerations overlooked as part of this.
Firstly, there are a whole host of negotiation fails that can seriously impact the effectiveness of getting a good quality deal. Secondly, negotiations should not be viewed as the last resort, but should instead form a part of every businesses’ strategy from the offset. A systematic approach to negotiations is a proven tactic of thriving business, in fact UK businesses that implement a systematic approach to their strategy see on average growth of 42.7% over those that do not. So, the answer, in short, negotiate well and as part of day to day business.
Of course, understanding how to execute exactly that is no easy feat, not least when you’re at the brink of disaster.
Poor negotiation tactics
More often than not, negotiations fail due to a lack of understanding around the important role human behaviour has to play as part of any business transaction. There are numerous fails when it comes to negotiating, and even the most accomplished negotiators are guilty of falling fowl of these fails.
This is particularly prevalent when emotions are running high and the pressure is really on. There may be a desperate plea by those seeking funding to have their tale of woe heard by a potential investor. Struggling businesses will attempt to pull on the heartstrings of a prospect. But nobody ever left a negotiation feeling positive about a desperate case. Instead, these negotiations should focus on what is truly on offer. More often than not it is a powerful brand, a proven (if not archaic) infrastructure, loyal staff, a portfolio of quality suppliers and lots of assets. It’s called understanding the value proposition and it’s about knowing and understanding worth.
Once it is established what really is on offer, it’s vital to gauge a true understanding of what it is exactly that a potential investor may be interested in. This can be done by asking questions, and plenty of them. It is vital to understand why a potential investor is around the table in the first place. What do they really want out of a potential deal? What are they willing to concede and what do they view as being the most valuable aspect to the negotiation? In other words, where will they flex and where will they stick. By listening to and establishing these needs and wants in advance, negotiations can be shaped around these requirements.
Alongside this, there are of course plenty of other considerations when negotiating. From failing to prepare for failure, meaning there is no back up plan, to assuming a poker face, which becomes off-putting to investors, there are a whole host of negotiation myths that are adopted around the negotiation table and often cause negotiations to breakdown, simply because rapport is poor.
[ymal]
Avoiding the brink altogether
Of course, there’s one way that all the hassle of seeking funding can be avoided altogether. Avoid the brink full stop. Easier said than done, but there are key considerations businesses can implement to help reverse their fortunes.
When thousands of jobs are in jeopardy, investors and shareholders want fast answers and cost cutting, redundancies and short-term sales pushes are often the go-to solutions. But a long-term strategy is needed if a business has any hope of survival, and this lies in effective negotiations.
Negotiations should have been the go-to solution way in advance of Thomas Cook’s situation, and indeed in any business’ situation when finding themselves with tumbling profits. Negotiations are important not only in order to reduce overheads with current suppliers, but when looking at new ways of working, and new companies to work alongside. Thomas Cook is not alone, this is something that the entire high street is suffering with, but many overlook the crucial role that strategic negotiation can play.
Applying a systematic approach to negotiating on every deal can bring major benefits, and the “negotiate with us or we go out of business and you lose us as a customer” position can be used as leverage. In the short-term, particularly at times of trouble, this approach is essential. Businesses in this situation need to consider the areas in which the opportunity to negotiate to save money and improve cash flow is available across the entire organisation. This includes a whole range of considerations - Huthwaite research data shows that six out of the top ten most effective margin maximising strategies relate to negotiation. These being: Improving productivity (53%), Reducing overheads (53%), Cost-effective purchasing (50%), Improving customer retention (49%), Reducing fixed costs (48%), Managing general operating costs from suppliers (41%).
When all is said and done, negotiations are an essential tactic that can truly save the fates of misfortune for companies across the UK, regardless of their size. Whether a business is on the very edge of collapse, desperate to claw back some control, or futureproofing for a rainy day, effective and systematic negotiations are nothing short of essential. I’ll say it again, if you want to avoid the brink negotiate as part of day to day business, if you’re on the brink, negotiate well.
As Debenhams becomes the latest casualty of the failing British high-street, Neil Clothier, Head of Negotiations at global sales and negotiation skills development company, Huthwaite International, which over the past 30 years has trained senior negotiation professionals across the globe, examines how businessman Mike Ashley has approached the situation. Has his aggressive approach irreparably damaged his chance of a successful takeover, or does it show his passion for the brand and its stakeholders?
Ashley’s negotiation techniques
With the announcement of Debenhams’ struggle to turn a profit and pay back any proportion of its mounting debt, Mike Ashley – on paper at least – should have been a favourite to take over the running of the department store chain, rescuing it from the brink of collapse. However, unfortunately for Mr Ashley and his now worthless assets, the Debenhams lenders have taken a different tact.
For Mike Ashley, it could be that his reputation preceded him, and ultimately thwarted his efforts. In business, as in life, a reputation for a heavy-handed approach, a penchant for taking risks, and a very narrow approach to negotiation can leave our peers feeling wary.
Over the past few years, we have seen Ashley adopt a particularly aggressive approach to his negotiations time and time again, with a ‘my way or the highway’ attitude. This technique is well known throughout the world of business, and indeed politics, often referred to as the ‘mad man’ technique, an approach used by some of the most powerful people in the world – namely Presidents Trump and Nixon among others. Its characteristics include emphasising an initial stance – often extremely bold or aggressive – which will then help pave way for a lesser, but still related, demand. It also makes one’s opponents think that the negotiator is unpredictable and willing to do anything to get their way – which may even mean pulling out of the deal altogether.
In a sensitive negotiation environment such as this, a more nuanced approach is often needed. In business negotiations, compromise is key – an effective outcome would result in a win-win for both parties involved, but this relies heavily on both parties being willing to negotiate in the first place.
However, while it’s a risky approach, it does work on occasion. In this case, it’s likely Mr Ashley headed into these negotiations with a bold stance because he quite understandably wanted to protect hundreds of jobs and shareholder assets. However, this display of passion was not well received and has led to the Debenhams lenders steamrolling in and wiping his offer off the table – which has certainly been a source of contention for many.
In a sensitive negotiation environment such as this, a more nuanced approach is often needed. In business negotiations, compromise is key – an effective outcome would result in a win-win for both parties involved, but this relies heavily on both parties being willing to negotiate in the first place. With Mike Ashley wanting to do things his own way, and making that very clear, and the Debenhams lenders ultimately in the position of power – potentially possessing negative preconceptions of what entering into business with him would look like – it doesn’t leave Mr Ashley with much of a leg to stand on, unless he’s willing to make serious concessions to the offer he’s put forward or can put forward a far more persuasive case.
Reversing Debenhams’ decision
Negotiations are about compromise for both parties and focusing the commentary on what is mutually beneficial for all key stakeholders involved. In the case of Debenhams entering into administration, Mike Ashley must look to emphasise that it’s not just his own personal investment at risk, but that of other shareholders, lenders, and the jobs of thousands of employees and impact on contractors too. This case, if put forward in the right way, should ultimately align with Debenhams’ intentions.
In the case of Debenhams entering into administration, Mike Ashley must look to emphasise that it’s not just his own personal investment at risk, but that of other shareholders, lenders, and the jobs of thousands of employees and impact on contractors too.
It is vital that negotiators in this type of sensitive situation steer clear of harsh language and rash behaviour, and instead take a much more thoughtful approach, remaining open and flexible in order to create the positive climate needed for a successful negotiation. This is never more important than in the final stages of a negotiation process, or indeed in this case when Mike Ashley will be looking to persuade parties to reopen talks. It means ensuring that both parties are willing to head back to basics and reassess the ideal outcome for both sides and adjusting the tone of his discourse accordingly, and this could prove to be a far better strategy yielding greater success than the mad man approach.
It will be interesting to see the final outcome of the Debenhams takeover, and whether Mike Ashley does indeed get his way. However, what’s concerning is that he is already falling into the habit of ‘dirty negotiation tricks’ – often a last resort – which are designed to deliberately irritate the opposition and provoke them into action. In this case, we see rash public outbursts, a controversial post-announcement statement expressing his opinion that the Debenhams deal was simply ‘a long-planned theft’ and his new threat of legal action. These, of course, will completely close off the chance of any future productive dialogue, so it would make sense for Ashley to change tact if he wants any further progress. In some instances of negotiation, putting ego or frustration aside and recognising and respecting opponent power can result in the best outcomes
Website: www.huthwaiteinternational.com
If you want to hear about how Huthwaite International can help your team increase negotiation skills and business revenue for your company, contact enquiries@huthwaiteinternational.co.uk
MPs squarely blamed the “recklessness, hubris and greed” of Carillion’s directors for the debacle.
Carillion’s collapse wreaked financial havoc on public services across the UK. Thousands of workers saw their jobs vanish overnight. Yet Carillion’s directors walked away relatively unscathed. One year after the company’s demise, Anca Thompson from Excello Law explores how corporate accountability can be imposed on public services firms.
In 2016, Carillion was the UK’s second largest construction company with annual revenue of over £5 billion and 43,000 staff globally. Yet the company was clearly not too big to fail. As the media trawled through the wreckage left by Carillion’s collapse, many commentators asked: “Where were the regulators?”
A joint report by two House of Commons select committees found that directors had prioritised executive bonuses and shareholder dividends over pension payments for staff - even as the company veered towards bankruptcy.
"The chronic lack of accountability and professionalism now evident in Carillion’s governance were failures years in the making. The board was either negligently ignorant of the rotten culture at Carillion or complicit in it."
The report stated that: “The chronic lack of accountability and professionalism now evident in Carillion’s governance were failures years in the making. The board was either negligently ignorant of the rotten culture at Carillion or complicit in it.”
Carillion’s auditors, KMPG, also came in for criticism, with one MP saying he would not trust the firm to audit the contents of his fridge. MPs found that Carillion’s Finance Director thought that making adequate pension payments for staff was “a waste of money”.
The joint committee recommended a wide-ranging overhaul of the UK’s systems of corporate accountability. The Financial Reporting Council’s Code of Corporate Governance, issued in July 2018, is perhaps a modest first step in the right direction. Yet a year after the Carillion fiasco, the question still being asked is: how can effective corporate accountability be imposed on public services firms?
At the point of its demise, Carillion held live public contracts to build Crossrail, HS2, hospitals, schools, roads and other critical infrastructure. It was also responsible for maintaining railways, 50,000 military houses and half of the country’s prisons. When profit-making companies become crucial to building and maintaining essential public infrastructure, the ordinary public interest in good corporate governance becomes a national interest.
The anniversary of Carillion’s collapse saw plans to exert tighter controls on public service contractors being backed by 65% of 750 directors. These plans would involve the creation of a new Public Service Corporation and enhanced legal obligations for companies to balance their responsibilities to shareholders and other stakeholders, including employees, creditors, pensioners and local communities.
Yet a year after the Carillion fiasco, the question still being asked is: how can effective corporate accountability be imposed on public services firms?
Section 172 of the Companies Act, 2006 already sets out a general director’s duty to promote the success of the Company and in doing so “have regard” to the interests of the company’s employees, the community and the environment, for example, when running a company. Having such notional general duties on the statute books is well and good. However, the crucial thing is how such duties are defined, monitored and enforced.
While paying increased lip service to ideals of corporate responsibility is a positive step, the real question is how meaningful reform will be brought to fruition through specific regulation and law. A key question is how to monitor the impact a company has on local communities. Whole towns and cities can come to rely for their economic survival on a single large corporation. The government’s £60 million incentive for Nissan to build new lines of cars in Sunderland springs to mind. Yet companies providing key public services clearly must have a particular duty to consider the public good.
The way that oversight of public services companies is exercised will be critical to securing successful change. The precise extent of directorial accountability should be specified in practical and comprehensible terms. What criteria will guide a board of directors facing such broad responsibilities? What is the balancing exercise when directors’ duties to employees and shareholders, for example, stand in stark opposition? Should community, government, taxpayers or employee representatives have a seat on the boards of companies performing public services?
The suggested solutions have ranged from the reform of directors’ limited liability to breaking up the Big Four accountancy firms, who were roundly criticised for their lenient handling of Carillion’s books. Others suggest that if directors were largely paid in shares - which they could not sell for a number of years - then it would be in their personal financial interest to ensure the long-term viability of companies.
On the other hand, if the UK’s corporate governance regime becomes too draconian, do we risk scaring away foreign investors and the jobs they bring? Would such a move be wise when many investors are already concerned by the uncertainty surrounding the actual political climate of indecision when we exit the EU and how?
Whatever solutions the government eventually alights upon, the way that any new corporate governance regime is defined and implemented will require a great deal of fine-tuning in order to strike the delicate balance between free enterprise and good corporate citizenship. I think the times are moving towards a sensible compromise that will certainly benefit civic attitudes and society overall.
The study, conducted by independent survey company Censuswide asked 1,000 members of the UK public about their views on the economic outlook for 2019.
A total of 44% of respondents said they expected a financial crisis worse than 2008. Additionally, over a third of those polled (41%) said they are expecting to see a housing crash happen this year.
Only 14% of the population said they had forgiven the banks after the 2008 financial crash, according to a new poll from Spearvest, the wealth management firm.
As well as this, there is a significant distrust from consumers that banks have their best interests at heart. The survey found that over half (55%) did not believe this to be true, with only 13% believing they did.
The poll also found that consumers want banks to do more for good causes with 60% believing that banks should donate and fundraise for charities more.
Wael Al-Nahedh, CEO of Spearvest comments:“With widespread concern around the performance of the housing market and the wider economy, 2019 already looks set to be a challenging year for investors. It’s also clear that the financial services industry needs to do much more to win back trust of the public, supporting good causes and demonstrating a genuine commitment to charitable giving.”
(Source: Spearvest)
With the 10th anniversary of the Lehman Brothers’ shocking and unprecedented bankruptcy this month, Katina Hristova looks back at the impact the collapse has had and the things that have changed over the last decade.
Saturday 15 September 2018 marked ten years since the US investment bank Lehman Brothers collapsed, sending shockwaves across the financial world, prompting a fall in the Dow Jones and FTSE 100 of 4% and sending global markets into meltdown. It still ranks as the largest bankruptcy in US history. Economists compare the stock market crash to the dotcom bubble and the shock of Black Friday 1987. The fall of Lehman Brothers was a pivotal moment in the global financial crisis that followed. And even though it’s been an entire decade since that dark day when it looked like the whole financial system was at risk, the aftershocks of the financial crisis of 2008 are still rumbling ten years later - economic activity in most of the 24 countries that ended up falling victim to banking crises has still not returned to trend. The 10th anniversary of the Wall Street titan’s collapse provides us with an opportunity to summarise the response to the crisis over the past decade and delve into what has changed and what still needs to.
As we all remember, Lehman Brothers’ fall triggered a broader run on the financial system, leading to a systematic crisis. A study from the Federal Reserve Bank of San Francisco has estimated that the average American will lose $70,000 in lifetime income due to the crisis. Christine Lagarde writes on the IMF blog that to this day, governments continue to ‘feel the pinch’, as public debt in advanced economies has risen by more than 30 percentage points of GDP – ‘partly due to economic weakness, partly due to efforts to stimulate the economy, and partly due to bailing out failing banks’.
Afraid of the increase in systemic risk, policymakers responded to the crisis through quantitative easing and lowering interest rates. On the one hand, quantitative easing’s impact has seen an increase in asset prices, which has ultimately resulted in the continuation of the old adage, the rich get richer and the poor get poorer. The result of Lehman’s shocking failure was the establishment of a pattern of bailouts for the wealthy propped up by austerity for the masses, leading to socio-economic upheavals on a scale not seen for decades. As Ghulam Sorwar, Professor in Finance at the University of Salford Business School points out, growth has been modest and salaries have not kept with inflation, so put simply, despite almost full employment, the majority of us, the ordinary people, are worse off ten years after the fall of Lehman Brothers.
Lowering interest rates on loans on the other hand meant that borrowing money became cheaper for both individuals and nations, with Argentina and Turkey’s struggles being the brightest examples of this move’s consequences. Turkey’s Lira has recently collapsed by almost 50%, which has resulted in currency outflow and a number of cancelled projects, whilst Argentina keeps returning for more and more loans from IMF.
Discussing the things that we still struggle with, Christine Lagarde continues: “Too many banks, especially in Europe, remain weak. Bank capital should probably go up further. 'Too-big-to-fail' remains a problem as banks grow in size and complexity. There has still not been enough progress on how to resolve failing banks, especially across borders. A lot of the murkier activities are moving toward the shadow banking sector. On top of this, continued financial innovation—including from high frequency trading and FinTech—adds to financial stability challenges. In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.”
The Keynesian renaissance following that fateful September day, often credited for stabilising a fractured global economy on its knees, appears to have slowly ebbed away leaving a financial system that remains vulnerable: an entrenched battalion shoring up its position, waiting for the same directional waves of attack from a dormant enemy, all the while ignoring the movements on its flanks.
If you look more closely, the regulations that politicians and regulators have been working on since the crash are missing one important lesson that Lehman Brothers’ fall and the financial crisis should have taught us. Coming up with 50,000 new regulations to strengthen the financial services market and make banks safer is great, however, it seems that policymakers are still too consumed by the previous crash that they’re not doing anything to prepare for softening the blow of a potential new one. They have been spending a lot of time dealing with higher bank capital requirements instead of looking into protecting the financial services sector from the failure of an individual bank. Banks and businesses will always fail – this is how capitalism works and no one knows if there’ll come a time when we’ll manage to resolve this. Thus, we need to ensure that when another bank collapses, we’ll be more prepared for it. As Mark Littlewood, Director General of the Institute of Economic Affairs, suggests: “policymakers need to be putting in place a regulatory environment that means that when these inevitable bank failures occur, they can fail safely”.
In the future, we may witness the bankruptcy of another major financial institution, we may even witness another financial crisis – perhaps in a different form. However, we need to take as much as we can from Lehman Brothers’ collapse and not limit our actions to coming up with tens of thousands of new regulations targeted at the same problem. We shouldn’t allow for a single bank’s failure to lead us into another global crisis ever again.
Finance Monthly delves into the potential impact of an ‘Amazon tax’ and the alternative solutions that can help the struggling British bricks-and-mortar retailers.
With a series of high-profile collapses and CVAs, including the recent turbulences that House of Fraser is faced with, Britain has seen its fair share of high-street horror stories in 2018. Stores like Toys R Us UK, Maplin and Mothercare are all facing extinction, whilst online retailers such as Amazon are stronger than ever, cashing in $2.5bn per quarter and paying less and less corporation tax with Amazon’s UK tax bill falling about 40% in 2017, and it paying just £4.6 million ($5.6 million). In times like these, the UK retail industry has naturally called on the Government to review its outdated corporation tax system and take action to help the struggling high street. Chancellor Philip Hammond has in turn announced that he is considering a special retail tax on online business, dubbed the ‘Amazon tax’, in order to establish a “level-playing field” for online retailers and high-street shops. But is a new tax really the solution that will balance the market out? Will it be the solution that traditional trade needs?
Is Amazon’s Existence the Biggest Problem?
Consumer habits are changing rapidly with the continued growth of online shopping, but the truth is that the extraordinary success of web traders is only one of the aspects to consider when looking for the reasons behind the decline in traditional retail. And even though a hike in the tax that Amazon pays may seem like a necessary and logical step, it will be nothing more than a minor distraction from the bigger issue and something that will mainly benefit the Treasury.
It is worth noting that the UK store chains that have collapsed recently did so due to not having the right products at the right prices, not staying up-to-date with consumer trends, not targeting the right customers or not investing enough in their businesses. Surely, online-only merchants have transformed the trade landscape and the UK tax system needs to be adjusted in order to reflect the current retail dynamics – especially when Amazon’s tax bill for 2017 was only £4.6 million on £2 billion of sales. But is the fact that the web giant is paying such a low amount of tax the reason for the collapse of a number of bricks-and-mortar retailers? I think not.
Moreover, as Bloomberg points out, an internet shopping tax could end up backfiring and hurting the bricks-and-mortar retailers it is intended to help. According to the British Retail Consortium, in 2017, more than 17% of sales were made online. Over half of them were with businesses that also have shops. Thus, retailers such as Next Plc, which has both online and offline businesses, could face “a double tax whammy”.
The Real Problem
Driving restrictions around city centres, increased parking charges by local councils and state demands such as minimum wage legislation and Sunday trading laws have had a negative impact on bricks-and-mortar retail. Then there is the main challenge in the face of sky-high business rates which have been the bane of countless entrepreneurs trying to establish a high-street presence. In an article for The Telegraph, Ruth Davidson wrote that the UK retail sector, which makes up 5% of the country’s economy, is paying “25% of all business rates, over £7 billion per year”. One might argue that in order to help bricks-and-mortar retailers and keep British town centres bustling with thriving commerce, politicians could perhaps work towards reducing the financial burden they’re faced with, before punishing web giants for offering an easy and convenient way to shop in this digital era. In order to keep up with their online competitors, traditional stores need to focus on technology innovation and redesigning the experience that the modern-day customer expects. But most importantly, they need the budget to do so and a reduction in business rates for high-street stores could be one way to provide them with some extra cash to invest in technology.
Another thing to consider, as Andrea Felsted suggests, could be raising business rates for offices and warehouses and cutting them for shops. That would “address the disparity between shopfront-heavy retailers and online-only businesses, which rely on distribution centres to serve their customers”.
A potential Amazon tax for all web-only retailers will not help bricks-and-mortar retail to innovate. Surely, it will level the playing field, but apart from that, all we can expect will be a slowdown in online shopping without doing anything to solve the current problems that traditional traders are struggling with.
A series of high-profile collapses and CVAs in recent months are clear signs of the challenging conditions currently facing the UK High Street. While many retailers are facing falling sales and increased overheads, it is the stores that fail to adapt to changing consumer habits, such as Toys R Us, which end up paying the price.
By putting a strong business strategy in place to harness the growth potential of e-commerce channels, retailers can mitigate the risks posed by their rising cost base and stay ahead of competitors in this fast-moving industry.
Increased consumer caution, food price inflation and wage stagnation have all contributed to High Street incomes being squeezed. Factors such as the increased National Living Wage and minimum pension contributions, when combined with the introduction of the apprenticeship levy and higher business and property rates mean that many retailers are facing higher overheads than ever before.
The growth of the ‘bricks-to-clicks’ phenomenon has been accelerated by the rise of the ‘on-demand economy’, with consumers less willing to wait to get their hands on goods and more online retailers offering same-day delivery. Developments in technology have also streamlined the online shopping experience, with processes such as returns now easier than ever before. As a result of these changes, it is no surprise that footfall on the High Street is falling, with many shoppers choosing to avoid the crowds and find products at a competitive price online.
With consumer habits changing rapidly, it is essential that retailers build their business models accordingly. Toys R Us is a prime example of a chain which failed to move with the times. As well as relying on large, highly-stocked warehouses, which proved costly to run, it failed to invest in the development of an effective online sales channel with expedited shipping options. Securing access to customer data, via methods such as targeted marketing, will allow retail businesses to adapt quickly to new trends before they are able to have a negative impact on sales.
A number of retailers, including Mothercare, have recently announced an intention to secure a company voluntary arrangement (CVA), which could allow them to restructure their finances and agree voluntary repayment schemes with creditors on a one-to-one basis. Helping the business to continue trading and the existing management team to retain control during negotiations with creditors, this route is often viewed as a more attractive option than pre-pack and other types of administration. However, large numbers of empty stores could have the effect of driving more consumers online, away from the High Street, as well as increasing the likelihood that local councils will try to raise business rates to account for the potential shortfall in payments.
Taking action at an early stage to negotiate shorter leases with landlords could enable retailers to cut costs. Additionally, allowing companies to take advantage of the most profitable times in the retail calendar and hire staff only when needed, pop-up stores could reduce costs and increase flexibility.
Consumers are increasingly treating bricks-and-mortar stores as ‘showrooms’, allowing products to be viewed first-hand before finding them online. With this in mind, retailers should employ a joined-up approach, with on and offline sales channels. If businesses are going to encourage repeat business and meet consumer expectations in the future, simply offering a website is no longer enough. It must complement or even enhance the in-store experience, whilst reflecting the brand identity and being quick and easy to navigate. For example, we may see more customers venturing into stores for product advice, supporting the overall decision-making process, before carrying out their transactions online.
As e-commerce delivery slots become shorter and shorter, it is increasingly important for High Street retailers to have a strong logistics network in place, especially around Christmas and other key times in the retail calendar. Locating reliable local suppliers could also help to ensure supply chain agility, facilitating short lead times whilst allowing stores to vary their purchases depending on what is selling well.
While there is no doubt that these are challenging times for retailers, physical stores will continue to play an important role as part of the consumer buying process. For this reason, the High Street is unlikely to disappear completely. By heeding shifting consumer habits and adapting their business model accordingly, retailers can stay ahead of the curve and secure their position in the High Street for many years to come.
The collapse of Monarch is “a not-to-be-ignored red flag” for people on the cusp of retirement, warns the boss of one of the world’s largest independent financial services organisations.
The warning from Nigel Green, founder and CEO of deVere Group, comes as Chris Grayling, the Transport Secretary, today faces questions over Monarch Airlines, once one of the UK’s biggest holiday airlines, which ceased trading at the beginning of this month.
Mr Green comments: “The high-profile collapse of Monarch, together with the accusations of asset-stripping, leaves yet another pension fund in question. Indeed, its collapse should serve as a not-to-be-ignored red flag for people on the cusp of retirement.
“It has been reported that the pension fund, which is in the government’s lifeboat rescue fund, the Pension Protection Fund (PPF), could have been left short when it went under back in 2014.
“The PPF is an invaluable resource. But with UK final-salary pension schemes now having an alarming £1.6tn of liabilities and a £224bn deficit, and the problem only getting worse, it can be reasonably assumed that it is perhaps seriously feeling the squeeze. How many more high profile collapses could it sustain?”
He continues: “The truth is despite rising equity markets and a global outlook looking relatively rosy, many firms are still battling to fund their pension schemes.
“It is crucial for pension members to understand exactly what represents a risk to their pensions and how these can be mitigated.
“In the same way people have their cars regularly serviced, it is now more important than ever that individuals seek independent advice on an annual basis to ensure that they are completely aware of their pensions and how much they should expect to receive in retirement.
“Regularly reviewing and taking action on your financial planning strategy, where appropriate and possible to do so, will mean that you’re less likely to receive an unwelcome shock upon retirement.”
Mr Green concludes: “Now is the time that savers should ensure that they are properly diversified to mitigate the increasing threats to their retirement funds.”
(Source: deVere Group)
Following Monarch Airlines’ recent closure 110,000 passengers were left overseas according to reports. The overall cost of returning these passengers was reported last week at £60 million. In addition, nearly 1,900 jobs were lost as a consequence of Monarch ceasing trade, and the collapse of this 50-year-old airline is the largest ever for a UK airline.
So why did Monarch drop to administration? Terror attacks in Tunisia and Egypt, increased competition and the weak pound have all been reasons pinned to the airline’s demise.
This week Finance Monthly asked experts in the aviation industry and market analysts about their thoughts on the reasons behind the collapse, and the overall impact this ruin will have on markets, customers, travel and other airlines.
Mike Smith, Company Debt:
The collapse of Monarch airlines to someone born in the fifties will be a sad day as it was a very popular carrier in the 70’s and 80’s. If you went to Lanzarote you probably used Monarch at some point. With the advance of low cost airlines, the pressure was always on and with paper thin profit margins any business error is punished severely.
As far as customers are concerned if they booked the holiday themselves and paid by credit card they will be covered under section 75 of the Consumer Credit Act. In effect the ‘card’ company is as liable as Monarch provided the flight cost more than £100. If a holiday was booked online through an ATOL registered travel agent they will be protected there too. Typically, you are covered for flight, car hire and hotel accommodation.
So, in the main the bulk of travellers will be compensated. A question I would pose is, what does it say about us as a society when a company such as Ryan Air apparently thrives, whilst Monarch bites the dust. I’m sure there are some who will say that it was a failing airline and an ‘accident waiting to happen’ and there is some truth in that. Personally, I will be sad to say it disappear from the radar.
Richard Morris, Partner, Whistlejacket:
£60 million for 110,000 rescue flights is a considerable sum of money, and it raises a few questions. At an average cost of £550 per repatriation flight, they are budgeting for an awful lot of complimentary peanuts. I’d guess a lot of free champagne will be served in the boardrooms of the other airlines who have been asked to step into the breach and bring everyone home.
However, there’s a great brand opportunity here for all the ‘rescue’ airlines. A grand gesture at this point, reducing some or even all of the cost, would buy them a lot of brownie points, with passengers, government and the wider tax paying public, and it won’t cost them anything like £60m to do it.
Before the Government (or the airlines) start shelling out, the insurance companies and credit card companies will be asked to bear much of the cost. Plus, that £60m is the gross cost to the government, therefore net costs to airlines will presumably be considerably cheaper.
Social content opportunities will abound as the ‘rescue flights’ bring folk home and grateful passengers give their thanks. It’s hardly airlifting people from a war zone, but being trapped abroad with no ticket home is still an unsettling experience. My guess is, passengers will be putting their names up in lights as a result.
It will take speed, creative thinking and agility, but making a big gesture now on the costs of this operation will pay dividends to the brands that offer to underwrite the rescue. In a UK airline industry beset by British Airways IT crashes and strikes, Ryanair flight cancellations and now Monarch falling into receivership, there’s a gaping good news void begging for a right-thinking brand to fill it.
Quick someone. Put your hand up first.
Alex Avery, MD, Pragma’s Airports, Travel and Commercial Spaces:
Causes for Monarch’s collapse
Looking at the causes of Monarch’s collapse, there’s a few factors going, not least a change in the markets it serves. The political instability in many of its key markets, such as Egypt and Tunisia, has mean it had to scale back flights to these destinations and compete more directly with short-haul European carriers, which is a very competitive market.
The exchange rate is another factor that’s impacted airlines. For Monarch, the majority of revenue is generated in pounds whilst the cost of fuel and aircraft leasing is paid out in dollars. The pound depreciating has impacted Monarch substantially.
Given the pressures in the market, it’s possible other airlines will follow Monarch’s collapse. This means we’ll be left with a few of the large legacy players, like BA and Lufthansa - who are subsidised by long-haul – and the dominant low-cost leaders, dominating what is a more and more challenging market to operate in.
Impact on market
There’s a lot of movement in low-cost at the moment - mergers and a move towards strategic partnerships. Traditional low-cost players like Norwegian, are growing very fast adding long-haul and transatlantic into the mix, and developing partnerships with other low-cost carriers. The easyJet and West Jet venture has proved successful, enabling travellers to buy a single ticket that connects a partner carrier to their long-haul flight. Low-cost players are now breaking into the hub and spoke model which has previously been the domain of the bigger players.
How businesses can manage this
Airlines have had to contend with the decline in consumer loyalty; as the division between traditional players and new entrants closes, so the polarisation of customers has narrowed. With less distinction between propositions, it’s trickier to retain customers, who in turn opt for convenience and cost and are pretty much agnostic to airlines. The onus is now on carriers to build loyalty through enhanced propositions, and expanding revenue growth through add-ons, such as car parking and hotel and transport bookings.
It’s understandable that the fall-out of the Monarch crisis will have made some businesses jittery about how their people travel. We’d expect to see a short-term uptick in legacy carriers, as companies opt for trusted, dependable options. We have short memories, though, and pretty quickly, cost will drive people back to low-cost.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
