The benefits of the euro are already being celebrated in Paris, six months after the currency's launch. When the French Treasury issued its latest bond, the 10-year benchmark OAT, it managed to pull off something that just a few years earlier would have been mission impossible.
"It would have been like an elephant in a china shop," explains Sylvain de Forges, chief executive of the Agency France Tresor. "We had to wait for the arrival of the euro. What we have done just wasn't possible in the French franc market. Now perhaps we are still an elephant, but a smaller one and the shop size has increased many times." According to Mr de Forges, this is proof that the euro market is a success. The e7.7bn deal was twice oversubscribed. "There are still some sceptics about the euro," he says. "But they are far removed from reality."
The advent of the euro signalled the start of a campaign by the French to launch Paris as the most important financial centre in the euro-zone. No one questions London's dominance as an international financial centre, but in terms of Europe, Paris is already establishing itself. The new euro-zone is an area that includes 12 countries and more than 300 million people. It is also the largest trading partner in the world economy, accounting for 19% of world exports.
According to Arnaud de Bresson, managing director of Paris EUROPLACE, the representative body that promotes Paris as a financial centre, the French are well on their way to establishing Paris as a financial hub. "In Europe there will be fewer financial centres and the competition is open," he says. Mr de Bresson cites the equity market, the bond market and the nascent mutual funds market as some of the main advantages Paris has over its competitors.
Euronext's debut
On the equity side, the main effect of the introduction of the euro has been the abolition of frontiers and the development of a pan-European market. The equity market was given a huge boost by the establishment in September 2000 of Euronext. Euronext is the merger of the Paris, Amsterdam and Brussels stock exchanges. Since then the London international financial futures and options exchange (Liffe) has been added to the member list, as has the Lisbon stock exchange. Jean-Francois Théodore, Euronext's chairman, says it wants to "offer the greatest pool of liquidity in Europe, to reduce costs for users and lead the integration process among European financial markets". Once the integration process is complete, Euronext will provide a unified cross-border trading system for cash products, as well as a single trading system for derivatives, a shared clearing and netting system and a single settlement procedure.
"Euronext has the advantage of being the first pan-European trading platform," says Mr de Bresson. "Its attraction for investors is the fact that they can trade from one single point. It also creates a real dynamic between the markets in terms of experience, innovations and exchange of capital." With a market capitalisation of more than e2000bn and trading volumes of e1.7bn, Euronext is Europe's second leading exchange after London, and Europe's largest in terms of trading volume.
Growth has been dramatic; the capitalisation of Euronext Paris is the equivalent of 100% of France's GDP, compared with just 27% in 1990. Last year, 45 new players entered the market, bringing with them e12.7bn of new equity.
According to Dominique Hoenn, chief operating officer of BNP Paribas, it is the fixed-income market that has really benefited from the introduction of the euro. "There are fewer legal and tax implications in the fixed-income market," he explains. "Especially on the corporate side, we have seen a lot of players keen to tap the market. For the first time they have the capacity to issue in their own currency and tap the whole European market."
Patrice Ract Madoux, chairman of CADES (Caisse d'Amortissement de la Dette Sociale), set up to repay the debts accumulated by the social security system between 1994 and 1998, agrees. "The market is much more fluid. It is a lot less expensive - the range between bid and ask is smaller than before, which is good news for investors. In my experience of selling euro bonds all over the world, there is beginning to be a strong change of attitude; the doubts about the euro are fading away," he says.
Paris leads the way
According to figures from the Bank for International settlements, Paris now leads the European corporate bond market with $160bn in outstandings, compared with London ($150bn) and Frankfurt ($45bn). As of April 2002 total outstanding negotiable French government debt came to e68bn, representing 45% of GDP. "It is the largest government securities market in Europe in terms of outstandings, as well as the most innovative," says Mr de Bresson.
The acquisition of Liffe by Euronext has given a boost to Paris's already developed derivatives market. During the first quarter of 2002, Euronext.Liffe traded more that 181 million contracts, an increase of 30% over the first quarter in 2001, and more than any other derivatives exchange in the world. For fixed-income derivatives, Euronext.Liffe is the European leader for short-term interest rate products. It has increased by 17% since the beginning of the year: a volume of over 40 million contracts. "We are traditionally strong in these areas," says Mr Hoenn. "We have a lot of gifted students leaving university with qualifications in maths and physics and deciding to join banks instead of pursuing careers in industry. All over the world you find French people manning the derivatives desks of banks."
The general feeling is that banks in France are abandoning the global player approach and focusing more closely on the domestic and European markets.
"The global concept is now decreasing in value," says Alec de Lezardiere, executive vice-president of Crédit Agricole Indosuez. "Five years ago that was all anyone talked about; they all ran around buying US banks and setting up offices all over the world. We are now seeing a phase where they are refocusing on old strengths, which for the French banks means servicing European corporates first."
Mr de Lezardiere believes Paris is a key financial centre because several French banks are headquartered there, although he acknowledges that a London base is essential. "We have two hubs: Paris and London, and a local presence in all European countries."
Calls for creativity
In terms of client needs, the French banks are having to be highly innovative. According to David Benmussa, head of sales and products at Société Générale Global Securities Services, the asset management side of the business has become increasingly demanding. He says: "More than anywhere in terms of asset management you have to find a way to create something. When the funds were just making between 40% and 42% it was easy.
"Now they have to increase performance by including innovative treasury products. In conditions like these, they have to be less worse than the others."
For Alain Biscaye, head of global trade service at BNP Paribas, the global concept is still vital. BNP has 54 world trade centres and wants to increase that number to 70 by the end of the year. "We have a presence in 85 countries. The aim is to create our own trade finance network and develop our trade finance services through this network," says Mr Biscaye. The bank started to implement the strategy just over two years ago and has seen a growth in business of between 30% and 40% in regions where trade centres have opened.
IT vital to success
Mr Biscaye says that crucial to the success of the trade centres is the technology that can link the various centres, giving clients immediate answers and providing them with a one-stop-shopping service in terms of financing, guarantees and local information on potential importers. "The import trade finance business is still a domestic business," he concludes. "The domestic bank will always be in the right place to win deals. But for the export business in general you need an international presence."
According to Mr de Forges, the French banks have benefited from their foreign counterparts and their presence in the capital has resulted in an increasingly sophisticated market. "We try to be one step ahead of the rest of the market and to promote new products throughout Europe as well as to find new ways of being active in the market," he says. "But you must remember that JP Morgan was in Paris before Crédit Lyonnais and that we learnt a lot from banks such as them. Even if, at the beginning, there was a real attitude of 'don't let the wolf in the door.' Now they are always swapping staff, ideas, lawyers and advisers. It's a melting-pot of real value that Paris has taken advantage of."
On the downside, Paris could lose out to other financial centres if the government does not change its taxation and elements of its social policy. "It is undoubtedly one of the handicaps we have," says Mr de Bresson. "We are working very hard to get things changed. There is no doubt we have to find a better way to achieve a balance between good services and reducing costs for international operators." Most players think there will be reform, but that it will be marginal. "I cannot imagine a revolution like a special tax treatment that would concern investment bankers based in France. A possible reform could be to give special tax exemptions to foreign executives working in France," says Mr Hoenn.
The implementation of the 35-hour-week is seen as damaging. "This was a bad reform," says a source. "We are lobbying for some alleviation from supplementary hours." According to Maurice Nhan, head of global securities services at Société Générale, it is usually on Wednesday that you realise you have done your 35 hours. "The only option we have is to work around it, by taking more holiday or a day off in the middle of the week. But of course the bank has to hire extra staff to cover those that are away."
Clearly there is some way to go if the European Commission is to achieve its objective of a single European financial market by 2005.
According to Mr Hoenn, it has already happened on the fixed-income side, but he voices concern over the plans for the equity markets. "Concerning the equity market, the interpretation of the new ISD (Investment Services Directive) is quite difficult: the impression I have is that instead of consolidating, they are fragmenting the market. If we follow the route we seem to be taking I think it looks likely that the equity market will follow the same path as fixed income. This has two main implications; first, it will be difficult for the smaller companies to access the market and, second, the retail business will be almost eliminated. The large players won't be interested in it. I may be wrong of course. We are discussing an evolution and no one can say that there is one single model that is a good one."
Centres of excellence
Rather than either London or Paris taking over as financial centre in Europe, Mr Hoenn envisages a situation whereby each become centres of excellence. "In 10 years' time, we might have, for example, equities covered from London, fixed income in Frankfurt and custody and settlement in Paris," he says.
Meanwhile, it looks as though Paris is moving in the right direction towards European domination in terms of the euro-zone. It is not as far behind London as some imagine in terms of foreign financial institutions. So far, 473 banks and financial firms have set up in Paris - the figure for London is 550. Both French and international companies seem to favour Paris as headquarters for their European operations. A study by Fortune magazine in 1998 found that sales of international businesses located in Paris totalled close to $807bn, compared with $567bn for those in London and $154bn in Frankfurt. The Paris figure must surely be higher now and looks likely to keep growing.
As Mr Nhan sums up: "Paris has a vital role to play, especially as London has opted to stay out [of the single European market]."
