Sara Ledwith and Jack Watling, 13 September 2013
LONDON, (Reuters) - Britain's economy is picking up at last but the country has a problem it didn't face after previous recessions and which even now remains hard to detect: the corporate undead.
Thousands of companies have subsisted through the downturn thanks largely to accommodating bankers and very low interest rates. As the economy gathers pace, some will recover and flourish, but the weakest of these "zombie firms" will find that competition and a shortage of cash spells the end.
More than a million people are employed by businesses showing signs of acute distress, according to the Association of Business Recovery Professionals, R3.
If recovery does kill off the weakest, that may mean unemployment gets worse before it gets better, which in turn may be a cue for the Bank of England to keep interest rates lower for longer, casting its forward guidance in a new light.
"A growth in activity means a growth in competition - demand for working capital - and those that can't keep pace potentially fall behind or over-extend themselves," said Lee Manning, a partner at accountants Deloitte.
The "zombie" phenomenon emerged in the 1980s and 1990s when U.S. savings and loan associations and Japanese banks staggered on thanks to cheap money.
In the UK now, "zombie" firms are commonly defined as loss-makers which, helped by low borrowing costs, can only service their debts. Cash is so tight, even a slow month in the holiday season can finish them off. Where past "zombies" have been mainly in financial sectors, experts say Britain's are widely spread, including service companies, manufacturers, builders and retailers squeezed by recession and online shopping.
To prove this, insolvency experts refer to company failures. These jumped in the months after the financial crisis began, then fell sharply in 2009 as the Bank kept shaving rates.
Now as demand is picking up, so are insolvencies: In the second quarter they ran at about 4,000 a month, says Britain's Insolvency Service. That was still behind their average rate in 2009-12 but higher than in the first quarter of 2013.
"I'm sure in some cases we have kept companies alive for too long," a senior executive at a leading UK bank told Reuters. "You've got to be mindful that we saw it as nursing companies back to financial health and getting a better bank as a result."
'ZOMBIE' LIABILITIES AT 1 PERCENT OF GDP?
So how many 'undead' businesses are there?
R3's estimates are based on surveys of business owners. It says the "zombie count" - firms able to pay only the interest on their debt - has declined to just over 100,000 from a peak around 160,000 in November 2012.
But it says more than 200,000 UK companies - nearly 8 percent of the total - are in acute distress, either negotiating with creditors or struggling to pay due debts.
R3 estimates that at least 497,000 people are employed by "zombie businesses", and 1.3 million by acutely distressed ones. That adds up to about 4.4 percent of the British workforce.
"Businesses with such serious cashflow problems may find that the day of reckoning is not too far off," wrote R3 president Liz Bingham in a June report.
Another assessment, from corporate watchdog Company Watch, quantifies the risky debts on companies' balance sheets.
At Reuters' request, the group analysed the accounts of all companies registered in Britain and identified more than 227,000 that are in negative equity - a technical measure of insolvency which is the business equivalent of homeowners whose mortgage debt is bigger than the value of their property.
Company Watch found these companies in the UK have a combined negative worth of just under 70 billion pounds. Business services, construction and media are the areas with the heaviest liabilities, according to the analysis.
Many of the firms will have shareholders who are ready to support them, but Company Watch economic models predict that, over the next three years, around a quarter will be unable to repay their debt. That is equivalent to a liability of 17 billion pounds, equal to about 1 percent of annual GDP.
"The risk is that there will be a flood of ... corporate failures which could escalate insolvency numbers dramatically," said Nick Hood, head of external affairs at Company Watch.
Recovery is risky for cash-poor firms because orders rise, suppliers put up prices and rivals cut theirs to win market share. Companies whose cash is already absorbed by interest payments have little room for manoeuvre to fulfil extra orders.
"A zombie often cannot take advantage of an improving economy," said Phil Pierce, a Leeds-based partner at insolvency specialists FRP Advisory. "As the economy improves and the company's turnover grows, so too does its need for available working capital to fulfil orders and cash flow is squeezed."
JOBS IN THE BALANCE
Guessing the firms' potential failure rate is little more than a stab in the dark: Many will be lifted by the recovering economy, and people who lose jobs at one company may find work with another.
But if the jobs were to be lost at the same rate as Company Watch expects the debts to turn bad, then up to one-quarter of the total would be at risk. That's 124,000-325,000 jobs, or potentially as much as 1 percent of those currently in work.
Under new governor Mark Carney, the Bank has pledged to keep rates at their record low of 0.5 percent while joblessness - at 7.7 percent and declining - exceeds 7 percent. Carney has said "a great many" jobs - over a million in the private sector - need to be created to bring unemployment down to 7 percent over three years, and rates may stay low even then.
If insolvencies speed up to the point where they outpace new businesses, such job creation may be harder. The Bank declined to comment for this article.
Whether or not recovery forces zombie firms to close, the problem highlights the hard choices facing policymakers. The central bank's ultra-easy money has helped reduce insolvencies, protecting jobs in viable companies during hard times. Yet it also propped up firms that are now holding back the 'creative destruction' which some think underpins free-market capitalism.
"There are a lot of companies taking up hospital beds... Where you get more insolvencies you will probably find that it is better for the survivors, but there will be higher unemployment," said Russell Cash, an insolvency expert at FRP Advisory.
(Additional reporting by Olesya Dmitracova and Matt Scuffham in London; Editing by John Stonestreet)
First Published by Reuters on 13 September 2013.
Jack Merlin Watling, 10 September 2013.
LONDON (The Gisborne Herald) - “LOOK at the children dying or slaving away in arms factories. Their corpses are justification enough to bomb Syria; consequences be damned.”
That is the bellowed humanitarian appeal of those preparing another military adventure in the Middle East. Yet for all the noise, our leaders are vigorously pursuing inaction. The emerging policy is a directionless and ineffective political statement with no strategic or practical merit. We need to be honest about what intervention is and what it will cost. Without that honesty we should stay out.
The logic of humanitarian intervention is simple. Governments have a duty of care for their people and when they fail it others must assume responsibility. Civil wars fall into a special category, but bombarding civilians and gassing suburbs arguably constitutes a breach of care.
Yet the Obama administration and its allies are either incompetent or dishonest, since their proposed “limited strikes” will either fail to strike anything of importance or be extensive rather than limited.
The fighting in Syria is not being fought with co-ordinated and sophisticated weapons. Much of the shelling and civilian casualties come from localised bombardments with improvised launchers and DIY munitions. The fighting is spread across urban areas and it is difficult to distinguish between Free Syrian Army and government troops or government militias.
Even chemical weapons are being used at a battlefield level. Although it was a large attack that prompted calls for intervention, Le Monde has found that chemical attacks are being carried out regularly in localised areas to flush out FSA fighters. Most of the weapons firing these munitions could not be targeted with cruise missiles. Bombing a few pieces of military infrastructure will have no effect on their use.
We can bomb Syria and destroy some runways, stockpiles and hardware, but it will not force the fighters apart or prevent the localised use of chemical weapons, nor will it deter the continued assault on civilian populations. The attack will be ineffective and could undermine the US by reminding everyone that America is above international law.
The move would not even be popular in Syria as many fear that limited strikes will lead to an immediate retaliation against civilians to show that the strikes were ineffective.
If civilians are to be protected then it will be necessary to establish a no-fly zone and force the combatants apart. If chemical munitions are to be eliminated it will require close air attack co-ordinated by ground troops marking targets, as was the case in Libya. To carry out such an operation will be a huge undertaking and we will most likely be required to sustain a military presence for a prolonged period.
Exactly what it will take cannot be calculated until we have an objective. If the defence of civilians is the objective then we can calculate the necessary input of troops and munitions. Until such an objective is clearly defined, however, we cannot calculate the ways and means. At present the objective appears to be to look busy without actually doing anything.
Only once we have established what it will take to make a difference can we decide whether we have the blood and treasure to carry out the operation. Syria could be another Kosovo, but before any intervention is undertaken we must be prepared to sustain another Iraq.
If such a price is too great and we deem it unrealistic to uphold our duty of care then we should do away with the farce altogether. So long as there is no strategy there should be no action.
Originally Published in the Gisborne Herald, 10 September 2013.
Lionel Laurent, 8 September 2013
PARIS (Reuters) - The Champs-Elysees lures millions of tourists every year to enjoy shopping at the Elysees 26 mall, poker at the Aviation Club, plush cars and futuristic architecture in the Citroen showroom, or feather-clad showgirls at the Lido cabaret.
But for all their Parisian charisma, none of these attractions are French-owned. They belong to the royal family of Qatar, a resource-rich emirate about 3,000 miles (5,000 km) away.
Some Muslims may frown on investments in gambling, alcohol and high-kicking dancers, but over the past few decades the buildings have helped bolster Qatar's global portfolio of trophy assets, including London's Harrods and Singapore's Raffles Hotel. The latest French addition was a chain of upscale malls under the Printemps banner, bought by a fund controlled by Qatari royals in August for 1.7 billion euros (1.42 billion pounds).
For oil-rich royalty from the Arab Gulf, part of the attraction of the United Kingdom has been the fact it charges no taxes on profits foreign investors make when they sell real estate. Five years ago, Qatar sealed a similar agreement with France. The treaty was agreed by former centre-right president Nicolas Sarkozy in 2008, and is one of the most generous Qatar has secured, exempting Qatari investors from taxes on the profits they make when they sell properties.
In a country where 3.6 million people lack decent housing, according to Abbe Pierre, a charity, that is controversial.
Politicians, including some in Francois Hollande's new Socialist government, have been critical. In April budget minister Bernard Cazeneuve called the treaty "an exception that we do not wish to duplicate." Others have asked if the accord brings economic benefit to compensate for the lost tax revenue.
The government has said it is examining the treaty, but an official at the French finance ministry told Reuters that Qatar's purchases don't have to be declared, so it is impossible to see how much tax is at stake.
A Reuters examination of regulatory filings, court documents and other data sheds new light on Qatar's property assets. Reuters mapped around 40 properties in France that are owned by Qataris, a total investment of 5.9 billion euros ($7.8 billion) over the past decade, including 4.8 billion since 2008. At current values they would be worth around 6.3 billion euros.
The Qatari state and its sovereign wealth fund own about a dozen of the properties, together worth around 3 billion euros, Reuters found; the rest belong to members of the ruling al-Thani family. A personal fund set up by Sheikh Hamad bin Khalifa al-Thani, the previous emir, controls about nine of them; his children, including the current emir, six. The rest were bought either by other relatives, or businessmen with strong ties to the al-Thanis, such as Ghanim bin Saad al-Saad.
Each property is owned by a holding company that is itself held by one or more entities, some of them outside France. This makes it hard to track when properties change hands, to see how much tax the French have forgone with the deal.
If there had been no treaty, though, market values at the end of 2012 suggest the French government would have collected at least 145 million euros in tax if the entire portfolio were sold and taxed at the lowest applicable rate, according to Reuters calculations which were assessed by three experts.
While that's less than a day's gas export revenues for Qatar, in France it would equate to a year's pre-tax pay for some 4,500 schoolteachers or nurses.
The Qatari authorities and the sovereign wealth fund Qatari Diar did not respond to questions. Chadia Clot, whose company French Properties Management handles private investments made by the al-Thani family, did not respond.
Gilles Kepel, a professor at the Paris Institute of Political Studies, Paris, said Qatar's financial gains symbolise how the emirate has gained influence by spending its resource wealth, but has also triggered friction.
"Qatar has had a full-speed-ahead investment strategy in France, forged under the previous French administration," said Kepel. "But this has led to antagonism."
A POPULAR DEAL
In 2008, a report for the French parliament praised the tax arrangement for encouraging Qatari investment in French real estate which "can only benefit the French economy." The treaty has several clauses to promote the exchange of information and prevent abuse, and France has similar arrangements with other rich oil states such as Kuwait and Saudi Arabia.
Qataris have been particularly active since the deal was sealed. From the Virgin Megastore flagship to the Hotel Martinez in Cannes, from football club Paris Saint-Germain to farmland in Normandy, Qatari royals have acquired dozens of properties.
"It is thanks to these tax advantages that the Qataris are the only ones buying French property at the moment," said Philippe Chevalier, head of French real-estate broker Emile Garcin. "I would support more of these advantages."
The treaty allows state-owned Qatari entities to avoid capital gains tax - the lowest rate would be 34.4 percent - on any profits made selling French property, whether held directly or via subsidiary companies. Private Qatari investors are entitled to the break as long as they hold the property in an investment vehicle that also has 20 percent in non-property assets. The treaty applies to all purchases made since January 2007.
Buoyed in part by Qatari investors, Paris luxury property prices have risen by approximately 14 percent since 2008, according to data for the highest-priced residential bracket tracked by real estate analysts Investment Property Databank (IPD).
France may have caught up with Britain in attracting Qatari investments, according to data from research firm Real Capital Analytics (RCA) on the UK commercial property market. Qataris have spent about 4.5 billion euros ($5.9 billion) on publicly disclosed commercial and development sites in the UK since 2008, the data shows.
Keeping up with the British was, say former French trade officials and policy analysts, one reason to agree the treaty in the first place. In 2008, oil producers were riding a boom in commodities just as centres like London, New York and Paris took a hit from the financial crisis. Many Western capitals were keen to capture investment: Paris was promoting Islamic finance, and saw the deal as a way to spur growth.
"What this treaty does is effectively put Paris on a level playing field with London - just not for everyone," said John Forbes, a London-based real-estate consultant.
Aside from the United Kingdom, only Ireland has offered Qatar the same exemption and that only since 2012, a review of more than a dozen of the emirate's bilateral tax treaties shows. At home, Qataris face no personal income taxes but some businesses could be taxable at up to 10 percent on gains from the sale of property.
"The exemptions ... are on the generous side, even by the standards of other French treaties," said Charles Beer, managing director at consultancy Alvarez & Marsal. "This level of treaty exemption is rare, if not unknown, in other countries' treaties."
Just a stone's throw from the Champs-Elysees, the magnificent Peninsula Hotel shows how the treaty - which was an update of a pact dating back to 1990 - favours Qatari investors.
Promising a "new level of distinction" for the Paris luxury hotel market, for the time being the hotel is hidden behind scaffolding and a corrugated-iron fence. It's due to open in 2014 after a six-year renovation project. It was originally a business centre owned by the French state, which collected 460 million euros when it sold it to a Qatari bank in 2007. The property was later transferred to a Qatari sovereign wealth fund focused on hotels.
After the initial sale, the valuation rose. In 2009, it hit 500 million euros when China's Hong Kong and Shanghai Hotels (HSH) said it had bought a 20 percent stake in the project for 100 million euros. At end-2012 market prices, the whole building was worth an estimated 550 million euros, based on IPD data.
If HSH had sold out then, it would owe at least 3.4 million euros in taxes on a capital gain of 10 million. Qatar, meanwhile, would face no tax at all on its much bigger capital gain of almost 80 million euros, according to the treaty.
A spokeswoman for HSH declined to comment beyond saying the company followed all tax laws and had no intention of selling the Peninsula stake; it is a "long-term investment." Qatari representatives did not respond.
Property experts say the luxury real-estate deals that are encouraged by the tax treaty mainly benefit a small circle of investors.
"We are always told this type of agreement is designed to promote investments in France but this is money that is not going into the economy," said Olivier Duparc, a Paris-based notary. "Taxes are going up for everyone except the Qataris, it seems."
In offices overlooking the Place de la Concorde, where revolutionaries guillotined aristocrats in the 1790s, Syrian-born Guy Delbes runs property company Elypont, which manages several French assets on behalf of Qatar's sovereign wealth fund.
He points out that Qatar's tax advantages are on a par with those given to some other Middle Eastern investors in the 1980s and 1990s. "The notion that Qatar has advantages that other countries do not" is wrong. Indeed, a 2009 report by the Senate showed Kuwaiti state-owned entities are also exempt from capital gains tax on property, while Saudi Arabia has been given similar, though fewer, advantages.
However, Kuwait has not made any commercial property acquisitions in France since 2007, according to RCA, which compiles data only on commercial property. Saudi Arabia bought over 900 million euros of commercial property in the same period, RCA research shows.
Buyers from both states have made other investments, particularly in residential real estate, that have not emerged in public. But real-estate agents say they are not as active as the Qataris, and regulatory filings yield little information on private investments. These include a luxury home opposite the Eiffel Tower owned by the late Saudi Crown Prince Sultan bin Abdulaziz al-Saudi and a Kuwaiti family's flats near the Avenue Montaigne.
The French finance ministry said it can't count Saudi Arabia and Kuwait's tax-free purchases because, like Qatar's, they are not declared. Government officials from Saudi Arabia and Kuwait declined to comment.
Some French lawmakers suggest the Gulf Arab nations are even competing for French tax concessions: Qatar used the Kuwaiti precedent to renegotiate its treaty in 2008 and today the United Arab Emirates is using Qatar's to pressure the French for the same sort of gains.
"The United Arab Emirates are not at all happy because Qataris have a better tax treatment," said Nathalie Goulet, a centrist senator from Lower Normandy, who spoke to UAE officials during a fact-finding mission to the Arab Gulf earlier this year. She finds the French concessions "extravagant" and says the fact that Qatar's neighbours are complaining is a sign the treaty is wrong.
"Our deficit has destroyed our freedom," she said. "The Qataris are here to buy, whilst we are selling our family jewels."
UAE Finance Ministry Under-Secretary Younis Haji al Khoury said Qatar's tax treatment in France was a matter for those two countries. Asked whether the UAE was seeking renegotiation, he said: "We have not yet negotiated these terms. This is an internal matter and we'll do it in due time if we need to." The French ministry said its priority would be to improve exchange of information.
Taxes matter a lot in France: The country's total tax take was 43 percent of GDP in 2010, according to the Organisation for Economic Cooperation and Development (OECD), far bigger than the United States' 25 percent or the United Kingdom's 35 percent. A generous healthcare system and faith in the state have helped governments sell tax rises to the public, which are needed to trim a 90-billion euro budget deficit.
It isn't possible to see what Qatari investors have done with their French investments. Many owners use interlocking holding companies which make it hard to verify transactions, and if one company buys another, it often leaves no trace.
But property records suggest some may be selling to each other.
One company, Zubarah, was set up in 2009 by Mohamed Ahmed Ali Jassim al-Thani, an adviser to the Qatari Foreign Ministry, and Turki Ahmed Ali Jassim al-Thani, described as a Qatar resident. Records show it was used to buy a 1.2 million euro six-bedroom house near the resort of Annecy in the Alps with outdoor hot tub. About 10 months later, in June 2010, Ahmed sold virtually all his 40 percent stake in the company to Turki. The company is not required to submit annual financial statements, so the tax picture is unclear.
The al-Thani family did not respond to requests for comment.
THE SUM OF FRENCH FEARS
Resentment is building. Last year, Qatar offered to invest in promising businesses in the deprived suburbs, but met hostility among some politicians who stoked fears of a foreign power winning influence among poor communities. The Qatari fund has since joined forces with a state-owned French bank, Caisse des Depots, which said it has not yet made any investments.
In May, Socialist Senator Jean-Yves Leconte - a member of Hollande's own party - asked the government what measures it would take to end the tax breaks that made France "particularly attractive, if not quite a tax haven" for Qatar.
Others, such as the Communist Party's Eric Bocquet and members of Hollande's own party, have asked for clear figures showing what has been lost to the French treasury. Far-right lawmaker Marion Le Pen - niece of National Front leader Marine Le Pen - has asked the government to scrap the treaty.
Some of the objections are a populist response in a harsh economic climate, according to Karim Emile Bitar, of foreign-policy think tank IRIS. "We reached a moment when Qatar became the sum of all French fears... Fear of Islam and fear that France would lose its sovereignty," he said.
If France were to renegotiate the treaty, the French finance ministry official said, it would also mean sacrificing advantages: "Renegotiations are made according to our strategic priorities."
(Additional reporting by Leigh Thomas and Julien Ponthus in Paris; Himanshu Ojha, Jack Watling and Tom Bill in London; Sara Webb in Amsterdam, Regan Doherty in Doha; Stanley Carvalho and Sami Aboudi in Abu Dhabi; Angus MacDowell in Riyadh; Sylvia Westall in Kuwait; Alexandra Hoegberg in Hong Kong; Edited by Sara Ledwith)
First Published by Reuters, 8 September 2013.
Jack Merlin Watling
Jack is a journalist and historian. He formerly worked as planning editor at NewsFixed, and has contributed to Foreign Policy, Reuters, the Guardian, Vice, the Herald Group and the New Statesman.