It’s not often you get to lift the hood and watch a power struggle going on in the engine room of General Motors. But the vice-president of GM Europe, John Smith, has just provided tantilising details of the arguments over the rival bids for Opel/Vauxhall, the main European arm of the fallen U.S. auto giant. Smith is the chief negotiator on the sale of Opel.
Canadian-Austrian car parts maker Magna has sweetened its offer for General Motors’ main European arm, Opel, by pledging more of its own capital up-front as it tries to burn off Belgium-based financial investor RHJ International, which has GM’s favour so far. But the improved bid doesn’t appear to address the U.S. auto maker’s main concerns about future control.
Two things Opel junkies need to know in today’s news.
1) General Motors has dumped Chinese state-owned carmaker BAIC’s long-shot bid to take over GM’s main European arm. That leaves a two-horse race between Canadian-Austrian car parts maker Magna and Belgium-based financial investor RHJ, loosely associated with U.S. private equity firm Ripplewood.
Neelie Kroes, the EU Competition Commissioner, is right to be taking a hard line on state aid to banks, which will distort competition if not repaid. However, she will have to fight member states like Britain and Germany, which are desperately encouraging banks to lend locally, nursing large losses on their capital injections or trying to avoid massive upheaval in their banking industries.
Lufthansa <LHAG.DE> is milking an antitrust standoff with the European competition regulators to extract maximum cost cuts from Austrian Airlines <AUAV.VI> as it seeks to cement its dominance of central Europe’s skies.
The German flag carrier has held back key concessions to the European Commission needed to secure approval for the takeover of the ailing airline while it squeezes further concessions from Austrian’s workforce and its biggest shareholder, the Austrian government. It won another 150 million euros in savings from job cuts agreed in a third round of AUA cost-cutting this week.
The EU regulator, which supports airline consolidation in principle, is right to insist that the creation of a central European mega-carrier should not be at the expense of consumer choice on key routes such as Vienna-Frankfurt.
Lufthansa, which has set its own deadline of July 31 to clinch the deal, has the Austrians in a tight spot because the cost to the Austrian taxpayer would be far higher if it walked away. The Austrian government holding company, OIAG, says this could cost about 1,400 jobs and imply total costs of 840 million euros. The state has promised to assume 500 million euros of AUA’s 1 billion euros of debt as part of a Lufthansa deal.
The German giant needs to reduce the cost of acquisitions it launched last year before the financial crisis hit air travel.
It has already beaten down Sir Michael Bishop to lower the cost of his majority stake in British carrier BMI [BMI.UL] and has snapped up Brussels Airlines, the successor to bankrupt Belgian flag carrier Sabena.
In the latter case, Lufthansa made concessions to the Commission on routes and take-off and landing slots to avoid restricting competition. But it has balked so far at the most important remedies for the Austrian deal, which concern what would be a monopoly on nine daily flights between Vienna and Geneva, operated jointly with another subsidiary, Swiss, and above all on feeder flights to its Frankfurt Airport hub to connect with its more lucrative transatlantic routes.
If the Commission does not stand firm on these issues, it risks being overturned by the EU’s Court of First Instance, to which rivals Air France-KLM <AIRF.PA> and former Formula 1 racing ace Niki Lauda’s latest venture, Fly Niki, would undoubtedly appeal.
Of course, Lufthansa could let the Austrian deal founder on EU competition concerns in hopes of picking up the pieces of a shrunken or bankrupt AUA later. But it might face competition were the airline’s assets to be sold out of bankruptcy. Both Air France and a consortium of Air Berlin and Fly Niki were interested last time.
So the betting must be that, as with the Belgian deal, it will yield to Brussels’ demands to clinch the deal in the end.
Political and economic logic are set to collide in the byzantine decision-making over the future of German carmaker Opel, the main European arm of fallen U.S. auto giant General Motors.
If politics prevail, as seems likely, the cost to German taxpayers will be higher and the chances of commercial success lower.
Is Germany the new Japan?
Europe’s biggest economy is well on its way to making a key mistake blamed for Japan’s “lost decade” of economic stagnation in the 1990s by failing to clean up its banks decisively.
The obstacles are political rather than financial. Berlin seems determined to avoid telling voters the bad news before a Sept. 27 general election about banks’ expected losses and the likely cost to the taxpayer.
Instead, the government is allowing banks to conceal or defer the full extent of losses on toxic securities and bad loans, and refusing to subject them to public stress tests or to force them to increase their capital. In doing so it risks perpetuating “zombie banks” that are too sick to lend to business and households.
“There are very strong political reasons for the policy paralysis,” says Nicolas Veron of the Bruegel economic think-tank in Brussels. “Nothing can happen before the German election. But Japan waited a decade. We can wait three months.”
It is no surprise that when the European Central Bank flooded Eurozone banks with 442 billion euros in liquidity last month, most preferred to deposit the money back with the ECB overnight or put it in safe government bonds rather than lending to the real economy.
Despite jawboning from ECB president Jean-Claude Trichet and threats by German Finance Minister Peer Steinbrueck, the banks are effectively on lending strike because their problem is not liquidity but solvency.
Anxious to avoid a credit crunch before the election, Steinbrueck failed to convince his European Union peers last week to suspend bank capital adequacy rules pending reforms due later this year. He was also rebuffed by the Bundesbank when he appeared to endorse the idea of the German central bank lending directly to business to bypass a frozen capital market.
Banks are expecting more loans to go sour and heavier losses on impaired assets as the recession bites deeper, eating into their capital base. Their instinct is to draw in their horns and reduce leverage, which got them into the mess in the first place.
The ECB’s latest Financial Stability Review explains why. It estimates that Eurozone banks face a further $283 billion in write-downs by the end of 2010 on top of the $366 billion in losses written off since the crisis began in mid-2007. Rather than forcing banks to recognise those bad assets and remove them from their balance sheets, most Eurozone governments have been playing for time, seemingly hoping that something will turn up.
Close links between Germany’s banks and its political establishment are another reason for reluctance to carry out painful restructuring. The regional Landesbanks and savings banks are key levers of political patronage. In an earlier role as state premier of North Rhine-Westphalia, Steinbrueck was a negotiator with the European Commission on behalf of WestLB [WDLG.UL] and other state-controlled Landesbanks. Of the private sector banks, Commerzbank <CBKG.DE> is on government life support.
Germany’s bad bank scheme for commercial and state banks is designed to stretch out the problem over the next two decades rather than resolve it. Banks may voluntarily put toxic assets into special purpose vehicles guaranteed by the state until maturity, paying an annual fee. But if the assets are worth less at the end than the price assessed by an independent valuer, the liability rests with the banks, not the taxpayer.
Italy, France, the Netherlands, Belgium and to a lesser extent Spain are all in denial about the extent of their banking problems, although the Dutch, Belgians and French have had to spend billions of euros of taxpayers’ money to save Fortis, ABN Amro, ING <ING.AS> and Dexia SA <DEXI.BR>.
Spain has been bolder, creating a 99 billion euro bank rescue fund, expected to lead to a wave of restructuring, tie-ups and bail-outs after the country’s housing bubble burst.
So what does the Eurozone have to do to avoid a Japanese-style prolonged period of stagnation with zombie banks?
Governments should start by telling voters and markets the truth about their banks’ exposures. Far from undermining confidence in all banks, as Steinbrueck contends, disclosure would restore trust in sound institutions and dispel general suspicion.
They should then compel banks that are found wanting to increase their equity capital, either from private investors if they can, or from the state if they must. This may lead to a temporary nationalisation of some sick banks, as Britain did with Royal Bank of Scotland <RBS.L>. Ultimately, banks that are not viable must be broken up or closed down.
The European Commission’s competition department and the Committee of European Banking Supervisors can provide pan-European political cover for governments that fear taxpayers’ wrath at bailing out banks with public money.
The way should be clear once Germany has voted. It would be dangerous to delay any longer. As the Japanese example shows, procrastination merely increases the long-term pain.
With General Motors in a Washington-guided bankruptcy and car makers around the world benefiting from government subsidies, politics has become firmly intertwined with the fate of the global auto industry. Even so, the deal reached in late May between General Motors and a group led by Magna International for GM’s European arm, Opel, smacked of trying too hard to come up with a politically convenient solution.