TheChek News Flow

The bad news for the pound is not all in the price

Sterling faces further pressure as market worries mount over rising UK imbalances

Like many major currencies, the pound has fallen sharply over the past 12 months. It has dropped from as high as 1.40 against the dollar in the middle of 2021 to 1.15, fractionally above its March 2020 pandemic lows.

Other than briefly in the mid-1980s, it’s never been weaker. Indeed, after a year of trending lower, various sentiment and technical models, not surprisingly, suggest the downside to the pound is now limited.

For contrarian traders, therefore, that’s a signal that now is the time to start building long positions in the pound. The argument is that sentiment is so widely bearish that all the bad news is in the price and the currency is notably oversold.

While generally a rewarding way to approach markets, every once in a while those types of contrarian bets fail. In particular, they typically fail when the macro theme driving the markets is unusually strong, compelling and overwhelming. This is probably one of those times.

The US economy looks destined for recession in 2023. The debate now occurring among many in markets is whether the recession will be mild or severe. In the mild camp are those who cite limited western economic imbalances. Driving the concerns of those worrying about a severe recession are the expected future high levels of interest rates and their impact upon a corporate sector with large shares of zombie companies kept alive only by the low cost of debt.

Either way, recessions lead to a sharp tightening of liquidity, which is something that is about to be accentuated by the US Federal Reserve’s quantitative tightening programme, the unwinding of its great asset buying spree to support the economy and markets. From this month, the Fed’s planned reduction of its balance sheet doubles to $95bn a month from initial levels in June. That, coupled with rising interest rates, drains liquidity from global markets.

In the good times, when liquidity is abundant, economies can run significant economic imbalances. Structural balance sheet factors (whether households, corporates or governments) are rarely of interest to market participants when the good times are rolling. In the downturns, though, they are (almost) all that counts.

Unfortunately for the UK economy (and its incoming prime minister), Britain is the worst offender, among the major western economies, in terms of imbalances.

One good catch-all measure for imbalances is the current account balance — effectively an aggregator of the fiscal, household and corporate sector imbalances. The UK is now (on the latest data) running a deficit equivalent to 8 per cent of gross domestic product. While some question marks exist about the accuracy of the first-quarter data, the trend of the past two years is clear. The country is living, as the former Bank of England governor Mark Carney put it, on the “kindness of strangers”. Going into the financial crisis, that imbalance caused the UK economy problems when it was 3.5 per cent of GDP. In the run-up to the early 1990s recession, it reached about 4.5 per cent of GDP.

Adding to the woes, productivity growth (a measure of true wealth creation) has all but flatlined since 2010, implying the UK economy is not creating much new sustainable income with which to pay its bills.

That poor productivity trend reflects the rise of zombie companies and the over-financialisation of the British economy, as well as the lack of capital investment. In effect, though, it means that much of the economic growth in the past 12 years has been somewhat illusory. That is, either built on more debt, less savings and/or a wealth effect from rising asset prices.

Further adding to its challenges, the country also has a central bank that seems reluctant to embrace the need for higher UK rates (and thereby defend the currency level). And if Liz Truss implements promised tax cuts as prime minister, then imbalances will surely grow.

As such, and given that impending US and therefore global recession in 2023, the dollar’s rapid rise against sterling looks set to continue, with the pound heading for parity against the dollar (and perhaps beyond) over the next six to 12 months. If that is correct, then one hedge (in a world lacking in obvious means of hedging) is to buy insurance against the risk of loss on UK government debt, ie five- and 10-year credit default swap instruments.

At a time of large current imbalances and tight liquidity it becomes essential to “live within your means”. Market worries over the UK will rise as its imbalances increase. The kindness of strangers can only be stretched so far.

Instagram has received the second-highest fine under the European Union General Data Protection Regulation with a €405 million bill – the highest was a €746 million penalty to Amazon last year. This fine is due to a violation of children’s privacy, including the publication of kids’ email addresses and phone numbers.

The report comes from Politico. The publication says this is the third time the Irish Data Protection Commission fined a Meta-owned company and that the regulator imposed the fine “after having to trigger a dispute-resolution mechanism to resolve other European data protection authorities’ input on the penalty,” meaning this decision took extra time

According to TechCrunch, this complaint focused on the “platforms’ processing of children’s data for business accounts and on a user registration system it operated.” Previously, children’s accounts were set to “public” by default, making them more easily targeted by ads, apart from other safety concerns.

The publication talks about the fact that the GDPR contains “strong measure requiring privacy by design and default generally,” something Instagram wasn’t able to deliver at the moment.

To Politico, a Meta spokesperson commented on the matter:

“This inquiry focused on old settings that we updated over a year ago, and we’ve since released many new features to help keep teens safe and their information private,” a Meta spokesperson said. “Anyone under 18 automatically has their account set to private when they join Instagram, so only people they know can see what they post, and adults can’t message teens who don’t follow them. We engaged fully with the DPC throughout their inquiry, and we’re carefully reviewing their final decision.”

The Irish DPC has still another six investigations into Meta-owned companies and it declined to comment on this penalty to Instagram.

In February, Meta threatened to pull Instagram and Facebook in Europe over privacy laws. Regulators have challenged the company, which not only didn’t go out of business in the country, but it’s now facing its third fine. You can read more about it here.

Decision to push ahead with proposal to spin off consulting arm could lead to firm splitting in late 2023

Ernst & Young’s leaders are expected this week to give the green light to splitting its auditing and consulting businesses, paving the way for the biggest shake-up in the accounting profession in more than 20 years, according to people familiar with the matter.

The accounting giant’s global executive committee, which oversees the firm’s 312,000-person worldwide network, met on Labor Day to put the finishing touches to the plan for a worldwide breakup, the people familiar with the matter said. The committee is expected to approve the plan later this week, which will trigger votes on the deal by EY’s roughly 13,000 partners, who stand to make windfalls averaging more than a million dollars each.

The split, penciled in for late next year, would separate EY’s accountants who check the books of companies such as Amazon Inc. from its faster-growing consulting business of advising on technology, deals and other issues.

EY’s move could radically reshape the accounting landscape if it goes to plan, industry watchers said.

An EY spokeswoman said discussions were ongoing and that “at this time, no decision has been made on moving to the next phase.”

Berlin breaks domestic political taboo about postponing its longstanding nuclear phaseout after Russia shut down gas supplies

BERLIN—Germany will keep two of its three remaining nuclear-power plants online past their December shutdown deadline in an effort to buttress its power supply after Russia halted gas flows, the government said Monday.

The decision, earlier reported by The Wall Street Journal, is a compromise between members of a government that includes nuclear-energy supporters and the Greens, a party that was born from the antinuclear movement.

The move, which will require new legislation and a vote in parliament, marks the latest policy U-turn for Germany, which has for decades pursued a policy of simultaneously phasing out nuclear power, coal and—soon—gas in a bid to transition Europe’s biggest economy to renewable energy.

Russia’s invasion of Ukraine in February prompted Germany to increase military spending after decades of underinvestment, to deliver weapons to Ukraine despite a longstanding ban on supplying weapons to conflict zones, and to reopen coal- and oil-fueled power plants despite a commitment to reducing climate-warming CO2 emissions.

Two nuclear-power plants in the south of the country—Isar 2 in the state of Bavaria and Neckarwestheim 2 in Baden-Wurttemberg, which are operated by E.ON SE and EnBW AG , respectively—will remain online until April, instead of being switched off in December as intended under a 2011 plan. A third will be shut down and replaced by oil-powered plants, Economy Minister Robert Habeck said.

“Nuclear energy is and will remain a highly risky technology, and its highly radioactive waste will burden countless future generations,” Mr. Habeck, a Green leader, said. “There is no playing with nuclear energy.”

Nuclear power plays a marginal role in Germany’s energy mix, contributing 6% of all power generated in the country in the first quarter of the year, according to government figures—down from more than 12% over the same period last year, when Germany had twice as many nuclear-power plants.

Still, Mr. Habeck unveiled the decision after an expert analysis of the power grid he had commissioned showed that Germany might need the extra power provided by the plants under certain scenarios. This is especially the case for the south of the country, which is home to some of Germany’s largest businesses but whose grid is poorly connected with northern Germany’s numerous wind farms.

Germany’s European Union neighbors, as well as the bloc’s executive body, have called on Berlin to extend the life of its nuclear plants to stem the crisis caused by the economic confrontation with Russia.

Mr. Habeck ruled out extending the life of the two plants after April. No new nuclear fuel would be purchased for the extension, he said, and the plants would run on their existing fuel.

The decision could still create tension in the government. Christian Lindner, finance minister and leader of the pro-business Free Democratic Party, said Monday that the nuclear plants should remain online at least until 2024, when Germany is expected to start receiving gas exports from Gulf states and the U.S.

While Germany’s nuclear phaseout has enjoyed cross-party backing for years, opinion polls in recent months have shown broad support for extending the lives of the country’s last nuclear-power plants, and even a majority for restarting recently decommissioned plants.

Move is IWGB union’s latest step in its six-year campaign for formal collective bargaining

Deliveroo is being challenged in the UK Supreme Court over the rights of its riders, just months after the delivery app signed a voluntary agreement with the GMB union that granted self-employed members collective bargaining on pay.

In May, the London-based company pledged to pay its 90,000 riders at least the minimum wage after costs, but only while the riders were actively delivering an order, rather than during the full working day — including while they were waiting to collect food at a restaurant.

The IWGB union, which has the largest membership of app-based couriers in the UK, has been seeking to get formal collective bargaining rights since 2016, a campaign that has escalated to the Supreme Court, although a date for the hearing has not yet been set.

The fresh challenge comes as Deliveroo faces headwinds as consumers cut back on spending on non-essential items like takeaways, and operational and staffing costs increase with inflation.

The IWGB argues that the company’s arrangement with the GMB does not change Deliveroo’s working practices as riders are still classified as independent contractors and are therefore not entitled to rights such as sick or holiday pay. The agreement with the GMB is voluntary and called a “partnership deal” rather than formal union recognition.

“It is outrageous that Deliveroo is continuing to spend hundreds of thousands of pounds fighting the IWGB in court over collective bargaining rights when it has just granted collective bargaining rights to another . . . union,” said Alex Marshall, president of the IWGB. “Deliveroo should be investing this money in courier pay and conditions, rather than trying to silence its workers who only want a seat at the table.”

A series of UK court rulings challenged gig economy employment models last year. While the courts ruled that drivers for ride-hailing app Uber were workers, Deliveroo riders were classed as self-employed.

“This case focuses solely on narrow issues related to the right to collective bargaining in the UK,” the company said. “Deliveroo is proud to offer flexible, self-employed work enjoyed by tens of thousands of riders across the country. Deliveroo riders can be their own boss while also having security while they work.”

The company offers riders free insurance, which covers some periods of illness and includes support for new parents, it added.

In its half-year results last month, Deliveroo’s pre-tax losses widened to £147mn; a noticeable contributing factor was a rise in staffing costs driven partly by the company employing more people in its technology team.

Après l'invalidation par la justice de leur descente dans les locaux du siège de LVMH à l'automne 2019, les limiers de Bercy persistent et attaquent la décision devant la Cour de cassation. Les services de la Direction générale des finances publiques cherchent à percer les mystères d'une holding belge du groupe de Bernard Arnault, qui affiche 18 milliards d'euros d'actifs.

Après une "perquisition" administrative annulée par la justice, la Direction générale des finances publiques (DGFIP) repart à l'assaut du groupe LVMH. Le fisc français suspecte depuis plusieurs années le groupe de luxe dirigé par Bernard Arnault de réduire ses impôts en concentrant sa trésorerie au sein de LVMH Finance Belgique. Cette structure, basée à Bruxelles depuis 2008, fait office de "banque interne" pour les filiales du groupe et a longtemps bénéficié d'une fiscalité plus clémente accordée par le royaume de Belgique.

D'après nos informations, loin de jeter l'éponge, les services de Bercy ont entamé un nouveau recours devant la Cour de cassation contre LVMH. Représentée par le cabinet Foussard-Froger, la DGFIP a obtenu une audience devant la haute juridiction le 8 novembre et tentera de sauver son contrôle fiscal.

La descente avenue Montaigne invalidée

Au cœur du litige, la visite domiciliaire que la Direction nationale d'enquêtes fiscales (DNEF) a effectué au siège de LVMH. Les limiers du fisc s'étaient rendus par surprise avenue Montaigne à Paris les 11 et 12 septembre 2019. Les 66 agents fiscaux en étaient repartis avec près d'un million de documents comptables concernant 64 sociétés du groupe de luxe. Une opération rondement menée et juridiquement cadrée par une ordonnance, accordée la veille par un juge des libertés et de la détention du TGI de Paris.

Mais, en juin 2020, LVMH est parvenu à annuler l'ensemble de la procédure fiscale devant la Cour d'appel de Paris. La brigade de vérification de la DNEF a même été condamnée à remettre les documents récoltés à son propriétaire. Un sérieux revers pour les services de la DGFIP qui ont vu l'intégralité de leurs saisies annulée. Et une victoire par KO pour LVMH et le Cabinet Turot qui le défendait, l'un des plus réputés en matière de litiges fiscaux. Son fondateur, Jérôme Turot - major de l'Ecole nationale d'administration (ENA) et issu de la promotion Voltaire -, était épaulé dans ce dossier par la firme Cleary Gottlieb Steen and Hamilton pour mettre hors d'état de nuire la DGFIP, conseillée pour sa part par le cabinet Urbino Associés.

Ultrasensible, cette affaire est d'autant plus intrigante que les services fiscaux ont enchaîné les déconvenues juridiques. Leur entrain à contrôler le premier groupe français a été stoppé une seconde fois aux portes de la Cour de cassation. Son premier président a purement et simplement radié le dossier porté par la DGFIP en 2021, privant cette dernière de développer ses arguments devant la plus haute juridiction. Ceux avancés par LVMH semblent avoir été entendus. D'après ses conseils, le fisc n'aurait pas exécuté la décision d'appel en raison de la conservation de copie de documents originaux récupérés lors des visites de saisie. Toujours selon le groupe de luxe, les limiers auraient emporté à Bercy une quantité "non proportionnée" de documents. Sur les 1 098 333 pièces saisies, LVMH a fait valoir que 35 479 d'entre elles comprenaient des échanges par e-mail avec un avocat. Après avoir identifié les documents par mots-clés, les requérants considèrent que ces fichiers étaient couverts par le secret professionnel.

Les soupçons du fisc

Les services de Bercy se sont résignés à restituer ces documents. Ils ont ainsi pu obtenir l'examen de leur pourvoi par la Cour de cassation, qui se déroulera le 8 novembre. L'enquête sur le rôle joué par LVMH Finance Belgique, la société du groupe de luxe dans le collimateur du fisc français, pourrait donc être relancée en cas de victoire. Si la DGFIP a ciblé une série de sociétés du groupe (UFIPAR, Sofipar, LVMH Investissements, Sofidiv, etc.), c'est bien cette holding belge qui a motivé l'action coup de poing dans les locaux de Bernard Arnault. LVMH Finance Belgique exercerait, selon les arguments du fisc transmis au magistrat ayant autorisé la saisie administrative, "une activité de gestion de trésorerie intra-groupe sans souscrire les déclarations fiscales y afférentes" et qui "omettrait de passer ainsi les écritures comptables correspondantes". Autre objet de curiosité : le rôle exact de cette holding dans des opérations financières menées sur des produits dérivés complexes.

A quelques semaines de l'audience, le rythme des réunions devrait donc s'intensifier entre les équipes de Montaigne à Paris et celles de l'avenue Louise à Bruxelles, où la Blue Tower abrite de multiples sociétés financières appartenant au magnat du luxe. Car le fisc suspecte également LVMH Finance Belgique de "se soustraire au paiement des impôts sur les bénéfices et de la taxe sur la TVA, en se livrant à des achats ou des ventes sans facture ou en délivrant des factures ne se rapportant pas à des opérations réelles". Parmi les autres griefs listés, tous contestés par le groupe de luxe en justice, le fait que l'équipe belge ne serait compétente que pour une simple activité de back-office administrative et comptable.

L'absence de professionnels aguerris pour gérer des opérations complexes au sein de cette structure renforce les suspicions des services de la DGFIP. Celle-ci y voit davantage une boîte aux lettres, l'ensemble des opérations financières étant en réalité pilotées depuis l'avenue Montaigne. Un argument là aussi contesté par le groupe de luxe. Au total, les services de Bercy s'intéressent à 400 comptes bancaires, propriété de 120 filiales du groupe et gérés outre-Quievrain. C'est cette même société belge qui centralise la trésorerie du Groupe Les Echos-Le Parisien, dont le cash traverse tous les jours la frontière pour atterrir en Belgique.

Les actifs bondissent de 4 milliards d'euros

Au-delà de cette procédure en référé, de nombreuses questions de fonds restent en suspens. Plusieurs exercices de la holding LVMH Finance Belgique consultés par La Lettre A apportent déjà un premier lot de réponses. Premier constat : le boom des affaires de LVMH depuis la pandémie s'est traduit par une augmentation colossale de l'actif circulant - celui qui peut être monétisé à moins d'un an - de LVMH Finance Belgique. Il passe de 16,8 milliards à 20,8 milliards d'euros sur le dernier exercice. Un bond essentiellement constitué par l'augmentation des créances détenues sur les autres sociétés du groupe. D'autre part, la holding fait état de multiples opérations sur des produits dérivés complexes, avec des contrats de swaps de devise atteignant 11 milliards d'euros (calls) et 13 milliards d'euros (puts).

Sans conteste, la Belgique reste depuis plus de dix ans une véritable martingale en matière fiscale. Comme l'a constaté La Lettre A, une petite dizaine de sociétés financières du groupe de Bernard Arnault y sont encore implantées. Le Canard enchaîné avait révélé en 2017 que le groupe de luxe a pu bénéficier de près de 900 millions d'euros de déductions diverses d'impôts au plat pays entre 2010 et 2016 à travers deux sociétés, Le Peigné - absorbée en 2021 - et le fameux LVMH Finance Belgique. Si plusieurs des ristournes fiscales ont depuis été remises en question, l'absence d'imposition des plus-values financières y est toujours de mise, et le plat pays demeure un petit paradis fiscal pour les sociétés financières des grands groupes européens.