Luxembourg will suffer the knock-on effects of a severe economic crisis. But its relatively healthy and resilient financial ecosystem and the resources deployed by the government should cushion the shock, believes Pierre Ahlborn, Administrateur-Délégué of Banque de Luxembourg, in this interview published in Paperjam magazine.
Interview published in Paperjam - May 2020
I am expecting a severe economic crisis that will affect the whole world. The shock we are experiencing is likely to have a damaging effect on the southern hemisphere, a point that is sometimes overlooked. The global economy will therefore be very badly affected. This will obviously have serious repercussions on the Luxembourg economy. Luxembourg is more dependent than any other European country on the economic health of its neighbours and partners. We import almost everything we consume, and we also export a lot of industrial goods and financial services.
No, because, as I have just pointed out, Luxembourg is very dependent on the rest of the world. Although the country is starting out from a healthy position, that is not the case for all – some Southern European countries, for example, were already hard hit by the 2008 crisis. Very few countries have the same capacity as Luxembourg to offer partial unemployment benefit or substantial aid to cushion the shock. Part of the economic fabric, however healthy, will be destroyed. Luxembourg will suffer the knock-on effects of the severe consequences of this crisis.
Since 2008, many measures have been put in place in Europe and the United States to ensure that the financial sector as a whole will be more resilient. Overall, we entered this crisis with a relatively healthy financial system. The banking sector is a key component of this financial ecosystem and it too is more resilient than it was during the 2008 crisis. In general, the banks are robust; they have good levels of liquidity and solvency. The central banks are also providing the markets with sufficient liquidity. The banking sector is therefore part of the solution to this crisis. It is ready to support the real economy, to grant moratoria, to offer COVID-19 overdraft facilities and to support its clients, both private and professional. And at Banque de Luxembourg, we have strengthened our Business team to cope with the influx of questions, requests for advice and loans.
It's our duty. We are one of the six banks serving the business community in Luxembourg. We specialise in family businesses, they are part of our DNA. As a private banker, we work with them, beyond the financial aspects, to pass on their tangible and intangible assets, and we help families prepare for the next generation to take over. We try to be more than a financial adviser. So, for us, participating in this initiative is totally logical.
Nearly all our business clients have already contacted us. First of all they want to be sure of their liquidity so they will be able to meet their commitments in terms of rent, salaries, etc. The prime concern of family businesses is their ability to pay their employees. Their staff matter a great deal to them. They all want to make sure that their lines of credit are available and that their banker is prepared to support them.
Initially, no. But now companies are starting to become aware of some of the more indirect implications of the crisis. One of their concerns is the slow response from the authorities. But there are also many open questions: when will the recovery actually happen, under what conditions, or what rules will companies have to comply with and how will they be affected? Health and safety rules may well reduce staff productivity. Take a small niche business, for example, which had won a public or private contract before the crisis at a fixed price, having based their tender on a certain level of profitability. If staff have to comply with additional safety measures, if workers can’t travel together in the same van, if they have to work two metres apart and be regularly disinfected, etc., it won’t be possible for the company to maintain the same level of productivity as under normal conditions, and the job will be more expensive. It is not at all certain that their client who awarded the contract will take account of the more difficult conditions due to the health and safety restrictions and honour the extra cost. These companies are therefore starting to realise that there is a risk they will incur losses, even on jobs which they initially thought would be profitable.
Very effectively, I think. The scale of the measures, which amounts to around 14% of GDP, is what is needed at the moment. I can understand that companies want quick responses, but sometimes it is better to talk through all the issues and design the tools thoroughly. We have had regular discussions with the Ministry of Finance, the Ministry of the Economy and the group of bankers on the practical aspects of the aid plan. Everything that has been done had to be decided very quickly, we had to look at what neighbouring countries are doing, take the good ideas on board and adapt them to the Luxembourg context. In my view, the result achieved, based on constructive dialogue, is very good. I understand the impatience of businesses, especially as there is real urgency in certain sectors, but speed and haste should not be confused.
Yes, I think so, but I am especially worried about the economic crisis that will come a little later. Even if we survive the next few months, the longer-term impacts should not be underestimated, including on the property sector, which has held up well so far.
We are very fortunate because many of our current clients were already with us during the 2008-2009 crisis. We managed their assets successfully then. We didn’t receive any complaints, had no disputes to manage. We were already very cautious about market valuations even then, and we were defensively positioned. We continue to be very averse to risky assets, both in our advisory business and in our discretionary portfolios and investment funds. Our relative performance is excellent, which is reassuring for our clients. They see that we can weather turbulent times and that we favour the preservation of their wealth rather than speculation and the lure of quick profits.
Many companies are developing resilient business models and will recover quickly from this crisis.Pierre Ahlborn, Chairman of Banque de Luxembourg’s Executive Committee
We have been particularly active in contacting our clients, discussing the situation with them and explaining how we perceive the crisis and the markets. We have made this a priority. Some projects for the future are progressing more slowly at the moment, investment programmes are being rolled out less quickly, and we are spending more time keeping in touch with our clients. So it's very intense from a relationship point of view, even if communication is filtered through technology like the phone or videoconferencing.
No, we haven't seen any panic. On the contrary, we are recording net subscriptions to our investment funds and we have signed many new discretionary management mandates since the beginning of the crisis. Our advisers are being extremely proactive. We publish videos every week and we send our clients documents by email. We call them regularly, we are maintaining close contact with them. That's essential in a situation where everyone, next to concerns about their health and that of their loved ones, is also concerned about their reserves and wants to ask their banker about their assets. The market correction has reduced the aggregate base of these assets. That’s perfectly normal. We have seen some clients take advantage of the correction to strengthen their positions. The markets have been rising for many years, and despite the stock market correction, valuation levels are very high. Many clients have been waiting for a stock market correction for some time so they could adjust their allocations.
We must remain very cautious. We do not advise our clients to take advantage of every downturn to seize new opportunities. But from time to time, you have to reconsider the general situation, reassess your allocations and do what is required of a prudent banker.
Many companies will be able to rebound, especially those that have little debt. And those that produce the goods and services the world needs. The digital planet, whether it's e-commerce or software production, also stands to benefit. All these sectors will emerge victorious from this health crisis. Many companies are developing resilient business models and will recover quickly after the crisis. These are the types of stocks that we recommend investing in, as well as very sound bonds such as US or German sovereign bonds.
None of us can prophesy what will happen in our country, and certainly not on the stock market. It is not certain that all aspects have yet been factored in by the equity markets, especially the point that this crisis is global and is affecting healthy companies in sectors such as catering, transport and tourism. This virus is destroying a healthy part of our economy. I’m not convinced that the scale of this disaster has yet been reflected in stock market prices, and hence that we are safe from a further correction.
I’m not convinced that the scale of this disaster has yet been reflected in stock market prices, and hence that we are safe from a further correction.Pierre Ahlborn, Chairman of Banque de Luxembourg’s Executive Committee
2019 was a good year in many respects, but not for the profit and loss account of private banks since the interest rate situation deteriorated significantly in the first half of 2019. The situation was already challenging in this respect. But we consider ourselves very fortunate. In the end, our business is still operating, albeit in a different configuration, but working from home on this scale cannot be a sustainable solution. We have a job to do, our employees receive a salary and our clients continue to trust us. We can't complain.
Yes, we have budgeted for falling interest rates and stock market valuations in fairly extreme scenarios. All this could lead to a significant drop in our full-year earnings, by 20% to 30%. But, I repeat, I am not worried in the short term, our model remains very resilient. However, I am a little more concerned for the long-term outlook of Luxembourg’s private banking sector. This sector has benefited substantially from the Europe that has been built over the last 50 years. But now we are seeing a kind of renationalisation of markets in Europe, and the same is true for the savings markets. As private banking is mainly positioned on this savings market, the business is becoming more challenging.
Capitalism has already changed a lot, especially under pressure from the younger generations. However, there will always be financing needs, there will always be wealth creation. Accumulated wealth has to be reallocated to finance the renewal and development of new businesses and initiatives. In this respect, capitalism is a system that works. The question is how to allocate these resources. For my part, I am a great believer in socially responsible investment and respect for the environment. I believe that this health crisis, which is an exercise in solidarity – particularly with regard to the older, more exposed generations – will become an example in the history books of a society that had to make choices between economic wealth and public health. This is completely in line with the fight against global warming, which is currently taking a back seat. All this is part of a movement to overhaul capitalism.
Of course. You only have to look at the positioning of the entire Luxembourg financial sector, its desire to be a pioneer in SRI, the exemplary role played by the Luxembourg Stock Exchange, or the positioning of many investment funds in the renewable energy sector, for example. It’s no longer about hardcore capitalism. I am sure that this health crisis will sound like an alarm bell for the whole planet. It highlights certain limits in our appropriation of the Earth.
We have already been certifying our range of investment funds for the past several years. We have specific SRI mandates in our discretionary portfolios. This is a long-term process. We have to keep redefining the criteria, which are sometimes subjective. It calls for a lot of knowledge and expertise and, in the midst of the crisis, we decided to recruit additional SRI specialists. At Banque de Luxembourg, we see ourselves as a pioneer in this field, but it is a path being followed by all the banks in Luxembourg.
