Keith Mullin, IFR Editor at Large
For those of you who haven’t yet seen IFR’s 2000th issue supplement, you don’t know what you’re missing. It’s a wonderful series of reminiscences looking back at the almost-40 years since IFR began publishing in 1974. As part of our look-back, we pulled together a list of 40 key stand-out deals over that period. It’s a fascinating list of some truly awesome transactions.
All of the deals were striking in one way or another but I was struck in particular by one from 30 years ago that stood out and for a very specific reason that’s very pertinent today and which I haven’t seen covered anywhere else.
In 1983, the European Economic Community (EEC), the forerunner of the European Union, sold an innovative bond/FRN/loan combo predominantly in US dollars but with a tranche denominated in pre-euro composite European Currency Units. It wasn’t so much the deal’s novel four-part structure or its Ecu4bn-equivalent size (huge for its time) that caught my attention, notable though both of those elements were.
The financing was the largest capital markets transaction launched by any entity away from the US or UK government. The US$1.8bn seven-year FRN with a investor call at five years (with a 12.5bp pro rata cash payment after two years if investors gave up the call) was the largest-ever Eurobond at the time while the Ecu150m three-tranche fixed-rate issue was at the time the largest Ecu deal. The widely syndicated US$1.3bn seven-year Euroloan was massively over-subscribed, while the US$350m four-year Eurobond also met a warm reception.
But as I say, it wasn’t the terms and conditions, it was the very specific use of proceeds that screamed out at me: all the cash went directly to the coffers of France’s embattled president François Mitterrand, whose crisis-ridden economy was close to running out of money.
Bailout
In other words, it was an EEC bailout in the form of a joint and several community Eurobond and Euroloan, the very concept that has been causing so much angst and gnashing of political teeth ever since the eurozone sovereign crisis erupted in the aftermath of the global financial crisis. IFR’s coverage of the deal at the time contained this fabulous line: “within an hour of the EEC Ecu4bn-equivalent global financing being signed, the funds will be on-lent to France via a ceremony which will take place in the room next door”.
I spoke to a banker the other day who worked on the deal 30 years ago and remembers it very well. “The 1983 EEC deal was a milestone for the development of the international capital markets. The entire transaction was the forerunner of what is being suggested today; namely to borrow in the name of the EU and channel the money to countries that have borrowing problems in their own right,” he said.
The funds came just in time for France. If you recall it was a difficult time for the country. Jeffrey Sachs and Charles Wyplosz in a paper on President Mitterrand’s reign, were clear on the reasons: “the economic management of France under the Socialists in the 1980s is widely regarded as a major failure”, they wrote.
Economic bust
Mitterrand had swept to power in 1981 and pursued a classically dogmatic and radical Socialist statist agenda, nationalising huge swathes of the French economy (including dozens of banks and seven large industrial conglomerates), increasing taxes on the rich, massively increasing the size of government and government spending as well as upping wages of civil servants and employees of state-owned companies in order to boost demand and drag the country out of recession. He also showered the banks with low-cost money. It was the ultimate stimulus programme.
No surprise: the budget deficit ballooned to three times its size, nationalised companies made huge losses that dwarfed their investment budgets; while inflation grew out of control to twice the levels in the US and Germany. Mitterrand was forced to devalue the French franc three times to keep exports competitive yet growth proved elusive and hugely undershot other members of the EEC. Things had got so bad that the president expropriated funds from the populace via a forced government loan equivalent to 10%of taxable income.
By 1983, France’s international payments position had become critical. Mitterrand undertook a policy U-turn and switched to painful austerity, imposing currency controls and putting up trade barriers to stem the flood of imports, and threatening to yank the franc out of the rigid European Monetary System and allowing it to float. Long story short, his efforts paid off; by the mid-1980s the budget was broadly back in balance and inflation had fallen sharply.
The bailout was a vital lifeline for France and the EEC got its pound of flesh by imposing some heavy conditionality on the financing. Common bonds have, of course, now been vetoed by the German government despite support from the IMF and OECD – and France’s current president François Hollande – because Angela Merkel reckons they create moral hazard in the form of disincentives for troubled governments to push through structural and budgetary reforms and risk increasing Germany’s cost of borrowing.
German government officials justify their intransigence by hiding behind their mantra that common bonds are not allowable under EU treaties. For sure a lot of EU legislation has been enacted since 1983 but I’d be curious to see where the Maastricht Treaty or other landmark inter-government treaties specifically outlaw them.
Burden-sharing is off the agenda at the present time. But the example of the 1983 EEC package debunks the myth of moral hazard and it should be put out there as a working illustration.