The ECB is in a pickle

This is an audio transcript of the FT News Briefing podcast episode: ‘The ECB is in a pickle’

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Marc Filippino
Good morning from the Financial Times. Today is Friday, September 1st, and this is your FT News Briefing.

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Eurozone inflation is being a little stubborn, and UBS reported the biggest quarterly profit ever for a bank. Plus, Switzerland wants to clean up its reputation so it’s cracking down on money laundering. I’m Marc Filippino, and here’s the news you need to start your day.

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The European Central Bank is facing a bit of a dilemma in the run-up to its meeting later this month. Inflation data from the eurozone came in just a tad hotter than expected yesterday, even as core inflation edged down. Here to talk about it is the FT’s Frankfurt bureau chief Martin Arnold. Hey, Martin, how’s it going?

Martin Arnold
Well, I’m holding up a bit like eurozone inflation, actually.

Marc Filippino
Nice. So great segue. Give us a recap, where is inflation across the eurozone right now?

Martin Arnold
Inflation has overall stagnated in August at 5.3 per cent. That was unchanged from the previous month and that was a little bit higher than economists had expected.

Marc Filippino
Yeah, economists had been forecasting something closer to 5.1 per cent for headline inflation, which is close to what we got yesterday. But yeah, it’s still a little higher. So, Martin, I’m curious, how are some of the biggest economies in the eurozone faring right now? They’ve been dealing with higher interest rates for a while.

Martin Arnold
They are not faring great. For instance, the biggest economy is Germany, and that’s stagnating. And all the signs are pointing to a very weak third quarter. So the surveys of purchasing managers, the consumer confidence surveys that we get, all of these soft indicators are really pointing that actually there’s been another down step in activity. So it’s really a pretty weak picture, and the question is whether that weakness will be enough to bring inflation down to the ECB’s 2 per cent target.

Marc Filippino
Which brings us to the next ECB meeting, which is on September 14th. So, you know, like two weeks from now, what are the stakes there?

Martin Arnold
This meeting is really in the balance. Economists I’ve spoken to have talked about it as a coin toss. And for the first time in a year, the ECB decision is really finely poised. They have raised rates for nine consecutive meetings. It’s been an unprecedented tightening of monetary policy, the most severe tightening in the history of the euro. And now they’re at the point where they’re near the end. And it’s just a question of deciding whether are they more concerned about inflation getting stuck above their target or are they more concerned about doing too much and driving the economy into a prolonged downturn and possible recession, which could be painful in terms of jobs and competitiveness of the region.

Marc Filippino
Martin Arnold is the FT’s Frankfurt bureau chief. Thanks, Martin.

Martin Arnold
Thanks, Marc.

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Marc Filippino
UBS said yesterday it recorded a $29bn gain thanks to its takeover of Credit Suisse. UBS shares rose 6 per cent on Thursday. I’m joined now by the FT’s European banking correspondent Owen Walker. Hey, Owen.

Owen Walker
Hey, how’s it going?

Marc Filippino
So Owen, break down that number for us, a $29bn gain. What does it mean exactly?

Owen Walker
It sounds like a big number, and it certainly is a big number, but really it’s just an accountancy gain. It’s got nothing to do with the way that UBS or Credit Suisse have performed in recent months. It’s just a reflection really of the discount that UBS made in getting such a cheap price when it bought Credit Suisse five months ago for $3.4bn.

Marc Filippino
Oh, so it’s an accounting quirk. Got it. How is the bank’s business doing more broadly, then?

Owen Walker
Well, UBS has done relatively well this year. If you compare a lot of its divisions to where they were a year ago, things like investment banking is down significantly. But that’s a similar story to other European banks and other Wall Street banks. Its asset management division is down a fair amount, but then that’s to do with an asset sale it made last year. So that’s a kind of an unfair reflection. And then its wealth management business, which is its bread and butter really, again, that’s not doing as well as it was last year though it’s still very, very profitable for the bank. So, you know, overall, UBS is kind of quietly ticking along, though this kind of Credit Suisse deal is very much front and centre in terms of where its attention’s focused at the minute.

Marc Filippino
Credit Suisse, of course, was a legacy institution with a lot of history before it finally imploded earlier this year. What are some of the challenges UBS has faced in integrating Credit Suisse into its business?

Owen Walker
I mean, one of the big problems they faced initially was, because Credit Suisse had been such a dire straits for so long, a lot of its clients had given up on it and were pulling money out. And that was really what set on course its kind of death spiral. And Sergio Ermotti, UBS’s chief executive, he’s saying that one of their big priorities at the minute is trying to win back that business. And secondly, it’s about integration. These takeovers, these mergers are fraught with difficulties from IT platforms and integrating those two cultural fits and making sure two businesses can run together. And you don’t get, you know, sort of competition between people who are supposed to be on the same side. And so these are the things that the UBS management team and board have been grappling with for several years now.

Marc Filippino
That was the FT’s European banking correspondent Owen Walker. Thanks, Owen.

Owen Walker
Great. Thanks very much.

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Marc Filippino
Swiss banks hold trillions of dollars in foreign assets. A big reason why they’re so popular? Their discretion. Switzerland has lagged behind other European countries when it comes to transparency and curbs on money laundering. And the country has been under growing pressure to do something about it. Now, it’s decided to take action. Here’s the FT’s Sam Jones who covers Switzerland.

Sam Jones
Karin Keller-Sutter, the Swiss finance minister, proposed a package of measures to tackle money laundering and the use of illicit funds in Switzerland. The main proposals are for a national register of beneficial owners. So if these measures become law, then it will be a legal requirement for all corporate entities or trusts in Switzerland to register with the Swiss government who the ultimate beneficial owners of them are, who the ultimate financial beneficiaries of them are. Now so far, Switzerland is the only country in Europe which doesn’t have such a register. So this is quite a big step.

Marc Filippino
Sam says another part of the package relates to the Swiss advisory industries. They cater to corporate entities and trusts that look after people’s money, and they keep it secret.

Sam Jones
The second element of the package is a raft of requirements for lawyers and accountants, those service providers to wealthy people, to abide by money laundering reporting requirements that are currently enforced on banks. So from now on, lawyers, for example, will also have to conduct due diligence on the clients that they accept, and they will have to report any suspicions to regulators. Now, there’s a whole Swiss finish to all of this. So none of this is necessarily going to be public. For journalists like me, there aren’t going to be suddenly a wealth of new information sources that we can access. The register and these reporting requirements will all be conducted behind closed doors, but it is still a significant step.

Marc Filippino
The proposed changes will go through a consultation process before they’re submitted to parliament next year.

Sam Jones
So a lot could change between now and then. And there are already a few points for concern in the proposals. You know, they sort of say, for example, that accountants and other advisers to wealthy individuals in Switzerland, although they will be bound by new rules on due diligence and on know-your-customer research and that kind of thing and anti-money laundering requirements, compliance with those measures will be self-policed. So it will be up to industry bodies to regulate whether their participants are compliant with those measures, which, you know, many critics are already saying is a glaring loophole in all of this. And it’s entirely the problem that the Swiss don’t adequately police these measures. That’s at the centre of the criticism of Switzerland so far.

Marc Filippino
Sam Jones is the FT’s Austria and Switzerland correspondent.

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Hey, guess what? Our FT Weekend Festival is tomorrow in London. Speakers include Jesse Armstrong, Rachel Reeves and many others. And as a briefing listener, you can claim a special discount. We’ve got that promo code in our show notes. Before we go, a quick correction. We said in yesterday’s show that Terry Gou, the Taiwanese tycoon and Foxconn founder, was running for president with an opposition party closely aligned with China. That was a mistake. Gou has urged opposition parties to join forces with him in the forthcoming election, but they haven’t agreed to do so. And Taiwan’s opposition parties are not closely aligned with China, although they do favour an easing of tensions with Beijing.

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You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. The FT News Briefing is produced by Kasia Broussalian, Sonja Hutson, Fiona Symon and me, Marc Filippino. Our engineer is Monica Lopez. We had help this week from Monique Mulima, David da Silva, Michael Lello, Gregory Meyer and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio, and our theme song is by Metaphor Music.