WORLD BUSINESS NEWSPAPER

TUESDAY 5 MAY 2015

EUROPE

blah

Sleepless nights

Carnival of nonsense

The good times are over in the

world of private equity PAGE 15

UK election campaign has only peddled

hogwash JANAN GANESH, PAGE 9

IMF takes hard

line on aid as
Greek surplus
turns to deficit

blah

blah

Relegation works for football,

not careers ANDREW HILL, PAGE 10

End of the road Chinas rural labour pool

dries up, calling time on migrant miracle

Greece is so far off course on its $172bn

bailout programme that it faces losing
vital International Monetary Fund support unless European lenders write off
significant amounts of its sovereign
debt, the IMF has warned Athens eurozone creditors.
The warning, delivered to eurozone
finance ministers by Poul Thomsen,
head of the funds European department, raises the prospect of the IMF
holding back its portion of a 7.2bn
tranche of bailout aid that Greece is trying to secure to avoid bankruptcy.
About half of the 7.2bn, which is currently the subject of intense negotiations between Athens and its creditors
in Brussels-based talks that resumed
yesterday, is due to come from the IMF.
Without the funds, Greece is expected to
run out of cash this month.
Eurozone creditors, which hold the
bulk of Greek debt, are adamantly
opposed to debt relief. But IMF support
is crucial both to its funds and to sustaining European backing for the Greek
bailout, particularly in Germany.
According to two officials present at a
contentious meeting of eurozone
finance ministers in Riga last month, Mr
Thomsen said initial data the IMF had
received from Greek authorities showed
Athens was on track to run a primary
budget deficit of as much as 1.5 per cent
of gross domestic product this year.
Under existing bailout targets, Athens
was supposed to run a primary surplus
government receipts net of spending,

i Buyout groups disturbed by rivals

The leveraged buyout the 30-year-old model that
sees private equity groups buy a business with debt,
then cut costs to raise cash to pay it back is under
threat, sparking self-confessed paranoia. PAGE 15

i Russia gears up to mark end of war

Moscow is preparing for its biggest
commemoration in decades of the
second world war but critics say
president Vladimir Putin is stoking a
narrative of a Russia under attack
from a hostile west. PAGE 3

excluding interest payments on sovereign debt of 3 per cent of GDP in 2015.

With the large surplus now turning
into a sizeable deficit, Greeces debt levels would begin to rise again, forcing
Athens to take drastic austerity measures or eurozone bailout lenders to
agree to debt write-offs to get Athens
debt back on a sustainable path, the IMF
believes. Officials said Mr Thomsen specifically mentioned the need for debt
relief during the three-hour meeting.
The IMF thinks the gap between the
two realities is very large right now,
said one official involved in the talks. He
noted that both Athens, which is resisting new reforms, and eurozone creditors will probably fight the IMF on the
issue. Three years ago, the IMF refused
to disburse its portion of the aid tranche
because of similar fears Greek debt was
not falling fast enough.
The IMF signed off only after eurozone ministers agreed to consider, but
never implemented, writing down their
bailout loans to reduce Greeces debt to
substantially lower than 110 per cent
of GDP by 2022. It currently stands at
176 per cent.
Most officials believe a deal is unlikely
at a meeting of eurozone finance ministers on Monday. But some hope to make
enough progress to allow the European
Central Bank to relax the cap it currently has imposed on Greek sales of
short-term debt. If Athens is able to sell
additional treasury bills, it would temporarily relieve its cash crunch.

i Brussels tax credit questions raise fears

Italy and Spain are defending their use of tax credits
to bolster their banks capital as alarm rises in
southern Europe over a possible Brussels probe into
whether they constitute illegal state aid. PAGE 2

i Spanish centrists sense changing mood

Albert Rivera, head of Ciudadanos, the centrist
emergent force in Spanish politics opposite the lefts
Podemos, hopes to capture a changing mood, saying
people have moved on from simple anger. PAGE 2

i Iran bourse poised for nuclear deal

Tehrans stock exchange says it has been using the
countrys period of isolation to prepare its
infrastructure for the moment when a nuclear deal
is signed and it can throw open its doors. PAGE 4
Turning point: 278m workers from villages have moved to cities since 1978 Kevin Frayer/Getty Images

i Haitong hires for expansion ambitions



End of the
migrant
miracle

GABRIEL WILDAU SHANGHAI

Chinas labour force is shrinking and the migrant miracle

that powered its industrial rise
is mostly exhausted, removing
the key drivers of the countrys
meteoric growth, according to
leading economists.
The transformation will lead to
slower growth, reduced investment and a loss of competitiveness, increasing the urgency of
reforms to fuel new sources of
expansion, they warn.

Greek minister out of friends page 2

Gideon Rachman page 9

Today the Financial Times

begins a series on the end of the
miracle the three decades of
rapid growth fuelled by unprecedented migration of labour
from the unproductive farm
sector to work in factories and
construction.
Consensus has emerged that
China has reached the point at
which the once-inexhaustible
pool of surplus rural labour
dries up and wages rise rapidly.
Now we are at the so-called
Lewis inflection point, said Ha
Jiming, chief investment strategist for private wealth management at Goldman Sachs in
Hong Kong. The working-age
share of Chinas population
peaks this year at 72 per cent,

then it will start to fall even

more rapidly than what we saw
in Japan in the 1990s.
Cai Fang, director of the
Institute of Population and
Labour Economics, estimates
Chinas potential gross domestic product growth will fall to
6.1 per cent from 2016-20.
Since Deng Xiaoping
launched market reforms in
1978, 278m migrant workers
from rural villages have moved
to the cities. But the process is
now mostly complete. Mr Cai
said: From 2005 to 2010, the
growth rate of migrant workers
was 4 per cent. Last year it was
only 1.3 per cent. Maybe this
year it will contract.
At the turning point page 7

New McDonalds chief s long-awaited

strategy for revival fails to impress
NEIL MUNSHI CHICAGO

Former HP boss Fiorina

joins race for White House
Report i PAGE 4

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3.60
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Kc100
DKr32
E20
4.10
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2.50
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Ft990
Rup150
3.50
US$5.50
Kshs300
KWD1.50
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LBP7500
Litas15/4.34
3.60

Macedonia
Malta
Morocco
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Poland
Portugal
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Russia
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Dh15.00

McDonalds has pledged to restructure

and cut costs in a long-awaited plan to
revive flagging sales, but analysts questioned whether its new chief executive
had done enough to catch up with a revolution in consumer tastes that he
admitted it had failed to navigate.
In the last five years, the world has
moved faster outside the business than
inside, Steve Easterbrook said in a 23minute video yesterday. I will not shy
away from the urgent need to reset this
business.
The British chief executive, who took
over from Don Thompson in March,
said the plan to become a modern, progressive burger company acknowledged the reality that our recent performance has been poor.
McDonalds sales have suffered as US

consumers have shifted from burgers

and fries to healthier food. Mr Easterbrook said new marketing and menu
items would highlight its use of fresher
and more natural ingredients.
Analysts applauded the $300m in
annual cost savings the company plans
to deliver by 2017, and a restructuring
that will allow it to focus on its most
important markets. But shares traded
down as much as 1.4 per cent following
the announcement, which some analysts saw as sparse on details given the
expectations that had been building
since Mr Easterbrooks appointment.
Standard & Poors also downgraded
the companys credit rating from A to Aafter it said it would ramp up share buybacks to return $8bn-$9bn to shareholders this year. S&P said it could cut
the rating another notch if US and Chinese sales did not pick up. We think the

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THE FINANCIAL TIMES LTD 2015

No: 38,845

big challenge will be wooing millennials

and turning around [comparable] store
sales, said Efraim Levy, analyst at S&P
Capital IQ. Fast-food operations like
McDonalds are losing millennial consumers to so-called fast-casual restaurants like burrito chain Chipotle, which
are growing two to three times as fast.
Under Mr Easterbrooks plan, the
company will be reorganised into four
segments, grouping markets with similar characteristics. The two biggest,
each accounting for 40 per cent of operating income, are the US and international lead markets including Australia, Canada, France and the UK.
High-growth markets including
China, Italy, Poland, Russia, South
Korea, Spain and Switzerland account
for 10 per cent of operating income,
while the foundational markets segment includes 100 other countries.

World Markets

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Briefing
i Cisco chief to step aside after 20 years
Cisco Systems has announced that chief executive
John Chambers is to step aside after 20 years,
handing the baton to Chuck Robbins, head of sales,
and ending one of the tech worlds most closely
watched succession sagas. PAGE 13; LEX, PAGE 12

3 Athens faces loss of next loan tranche

3 Creditors strongly oppose write-offs
PETER SPIEGEL BRUSSELS

Fear and ranking

Euro Libor 3m
%chg UK 3m
-0.85 Prices are latest for edition

66.17

66.46

-0.44

1175.95

1180.25

-0.36

price

yield

chg

98.98

2.12

0.00

100.37

1.96

0.00

101.18

0.38

0.01

100.43

0.36

0.00

93.42

2.83

0.00

100.54

-0.23

0.00

Data provided by Morningstar

Chinas Haitong Securities is set for a hiring spree in

Europe and the Americas to become a world
leading investment bank by doubling the size of
the Portuguese operation bought last year. PAGE 13

Datawatch
Share of agriculture
in national output
% of GDP, 2013 (selected countries)
Spain
Italy
France
OECD members
Canada
US
Japan
Germany
UK
0
Source: World Bank

Agriculture
contributes a
smaller proportion
of output in the UK
than in any other
major economy.
The World Bank
estimates the share
of agriculture in
global output
around 3 per cent
has halved over
the past 20 years

FINANCIAL TIMES

Tuesday 5 May 2015

INTERNATIONAL
GLOBAL INSIGHT

Competition concerns

PARIS

EU banks defend use of tax credits

Italy, Spain, Portugal and
Greece quizzed on legality
of schemes to boost capital
JAMES POLITI ROME
TOBIAS BUCK MADRID
CHRISTIAN OLIVER BRUSSELS

Italy and Spain are defending their use

of tax credits to bolster their banks capital, to try to fend off a possible European Commission probe into whether
these schemes are illegal state aid.
Margrethe Vestager, EU competition
commissioner, has asked Italy, Spain,
Portugal and Greece for information on
so-called deferred tax asset schemes,
which allow banks to accumulate future
tax credits from credit losses. Although
the EU has not decided on a full investigation, it has raised alarm in southern
European capitals and in their banks.

Pier Carlo Padoan, Italys finance

minister, last week said he had met Ms
Vestager in Brussels about the possible
probe, and Italy was supplying the information requested. I had a very frank,
very useful, very constructive meeting
with commissioner Vestager, he said.
The Italian position is that there is no
state aid problem with DTAs, Mr
Padoan said.
Spain is also disputing the need for an
inquiry. The guarantees on deferred
tax assets cannot be considered state aid
because they are not applied in a discriminatory way to a single sector but to
any Spanish company, an official at the
economy ministry said.
Lobbyists for Italian and Spanish
banks are also weighing in more aggressively. Giovanni Sabatini, chief executive of the Italian Banking Association,
said the move had been surprising.

I find it bizarre to think that a measure that is intended to level the playing
field between Italian banks and those of
other countries should be considered
state aid, Mr Sabatini said.
Italian banking officials note that the
main purpose of the DTAs is to offset the
impact of the countrys tax treatment of
credit losses on non-performing loans,
which can only be deducted from taxable income over a long period of time.
Until 2013, the deduction had to be
spread over 18 years, but two years ago
that was shortened to five years. Still, in
many EU countries a full tax deduction
can be taken immediately, they note.
DTAs are compensation for a disadvantage, one senior Bank of Italy official said at a briefing on financial stability last week. Our stance is that they are
not state aid, he added.
Italian officials have also pointed out

Brussels blog
Leaked legal
opinion: EU
too loose with
budget rules?
ft.com/
brusselsblog

Anne-Sylvaine
Chassany

that the penalty imposed by the countrys tax system is procyclical, meaning
it gets worse in unfavourable economic
conditions such as the current one.
Jos Mara Roldn, president of the
Spanish Banking Association, said:
Spain has only tried to compensate for
the distortions created by different tax
regimes in Europe. It does not create a
competitive advantage for our banks.
He added that the solution in Spain
was based on international banking regulations, and on EU law itself. We did
not invent anything. This step was foreseen by the Basel III regulation and the
European legislation that implemented
it. It was also part of the banking bailout
programme, Mr Roldn said.
Whether pressure from Rome and
Madrid helps to stamp out any EU probe
is unclear. Officials in Brussels described
the case asbeing inveryearlydays.

Centrist surge. Poll shift

Upstart party leader hails new era in Spain

Rivera says rise of his
Ciudadanos and its rival
Podemos ends old certainties
TOBIAS BUCK BARCELONA

Spains political scene used to be like a

boxing match between two heavyweight
parties. Now, it looks more like one of
those fights spinning out of control, with
intruders storming the ring, fists flying
and no clear idea as to how it all ends.
For the moment, though, the man
landing the heaviest punches seems to
be Albert Rivera, the youthful leader of
the fast-rising Ciudadanos party. Mr
Rivera heads a centrist movement that
was founded in Catalonia nine years ago,
mainly as a platform to combat the
regions independence movement. In
recent months, however, it has drawn
voters from all over the country.
According to one recent poll, Ciudadanos has eclipsed Podemos, the
other brash entrant, and could win as
much as 20 per cent of the vote in a general election due at the end of the year.
Sitting in his basement office in the
Catalan parliament, Mr Rivera says he
has no doubt Spain is experiencing the
dawn of a new political era. The old
two-party system, he says, is giving way
to a four-way contest between the two
established forces, the ruling Popular
party and the centre-left Socialists, and
the two newcomers. The era of absolute
majorities and monolithic governments
is over the time of shifting alliances
and cross-party deals has come.
We may be heading for a situation
that was unthinkable until recently, Mr
Rivera, 35, says in an interview with the
Financial Times. There might be
reforms that require the support of
three or even four parties. Those negotiations will be very tough. But I am not
afraid of them.
Ciudadanos rise from regional
minority party to national contender
has invited obvious comparisons with
the anti-establishment Podemos. Both
are trying to capitalise on voter frustration with established parties, which
have been hit by the crisis and a string of
corruption scandals.
Mr Rivera says he shares much of the
political diagnosis offered by Podemos,

Albert Rivera at
a Ciudadanos
rally in Madrid
last month. The
party has grown
from regional
minority party
into national
contender in
nine years
Pablo Blazquez
Dominguez/Getty Images

but not its prescription. The solutions

that Podemos proposes are obsolete.
They stand for a very interventionist
model, for more state control. They
blame the system we blame the people who have corrupted the system.
If voters are now shifting from
Podemos to Ciudadanos as polls
appear to suggest it is because the
country has moved on, says Mr Rivera.
Podemos channels peoples anger
and people are very angry. But I think
what is happening now is that people are
saying: OK, I am angry, but now lets get
to work. People have moved on from
simple anger.
Mr Rivera is hoping to capture the
changing mood by appealing to voters
heads, not hearts. The party has
released a battery of detailed reform
proposals, with a particular emphasis
on the tax system and the labour market. The Ciudadanos programme,
developed by a team that includes Luis
Garicano from the London School of
Economics, reflects the partys liberal
economic stance: it calls for a sharp
reduction in income and corporate tax,

A private bank unlike

any other.

but seeks to balance the cuts by eliminating tax loopholes and deductions.
The liberal label has never been well
explained in Spain, he says. People
think that a liberal vision of the economy is incompatible with social sensitivity. I think they are perfectly complementary. I dont want a Spain without

People are very angry

[but] they are now saying:
OK, I am angry, but now
lets get to work
public education, a public health system
and public pensions. But neither do I
want a Spain where the economy is
dominated by state intervention and
monopolies.
Analysts say the rise of Ciudadanos
appears to have checked the Podemos
surge, as well as tentative signs of Socialist revival. The party poses a far bigger
threat, however, to Mariano Rajoy and
the ruling PP. Until recently, Spains
prime minister had reason to hope the

FINANCIAL TIMES
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or Frances President Franois Hollande, unemployment has been a plague. Since the socialist
leader was elected three years ago, it has crept up
and settled above 10 per cent of the labour force,
a level not seen since the mid-1990s. A record
3.5m people are out of work in the eurozones second-largest economy, including nearly a quarter of those aged 25
and under.
The government has responded with a campaign to simplify Frances rigid labour code and loosen some of the regulatory burdens that hold back smaller companies from
hiring. Yet the statistics show little improvement.
For Mr Hollande, whose approval ratings are at historical lows, his political career is on the line. He has vowed not
to run for president a second time if unemployment does
not decrease by the end of his five-year term in 2017.
Yet what if the president could sit back and count on
powerful demographic forces to save him? That is one conclusion to be drawn from a study published last week by
France Stratgie, a government-affiliated think-tank.
The study which was conveniently released the day
after the government announced a rise in jobseekers for
March predicts that, on average, 619,000 jobs will be
freed up each year by workers going into retirement.
This is potentially huge. Retiring baby boomers, born in
the three decades of prosperity that followed the second
world war, are expected to account for roughly 80 per cent
of all jobs up for grabs between now and 2022. That is up
from 411,000 a year in the mid-1990s, and up from
565,000 during the presidency of Nicolas Sarkozy, who
was defeated by Mr Hollande in 2012.
The danger is that
The France Stratgie
economists have sought France may tone
to measure the impact on
down attempts to
the job market depending
on different economic add more flexibility
scenarios. In what they
to the job market
consider the most likely,
which factors in a 1.4 per
cent annual growth rate, unemployment is set to slide
below 8 per cent in 2022. Even under the worst-case scenario, which is based on an average 1.1 per cent annual
growth, unemployment is set to fall to 9.7 per cent by then.
While the trend of retiring workers may be common
across the continent, France stands out because it boasts
one of western Europes highest birth rates. That should
boost its growth potential over the long term, and therefore its ability to create jobs. By contrast, Germany is
expected to lose about 740,000 jobs by 2025 because of a
declining population, according to Cedefop, an EU labour
agency.
The danger posed by the demographic trend is that
France may tone down or abandon politically-sensitive
attempts to bring more flexibility into the job market,
economists worry. The message is not that we dont need
reforms. We do. Those levels of unemployment are
nowhere near satisfying, said Jean Pisani-Ferry, the economist who led the study.
Franois Rebsamen, the minister whose labour market
bill is to be voted on in parliament by summer, has
rebuffed any temptation to slow the pace of reforms. We
also need to make sure those jobs are filled, he said last
week, noting there was a problem with skills in the workforce. Many of the posts being vacated by pensioners are
not the high-skilled, high-wage jobs of the knowledge
economy that politicians like to tout. The single largest
category affected will be cleaners, of which France will
need 350,000 news ones before 2022.
Still, the demographic trends identified by the report
suggest that the winds are not all running against France.
Mr Hollandes effort to rejuvenate the economy has also
received an unexpected boost of late from a weak euro,
cheaper energy prices and record low interest rates.
Ageing baby boomers may not be enough to bring back
full employment soon. But they may be one of the reasons
why Mr Hollande for all of the nations ills seems confident he will run again for president in two years.
Anne-Sylvaine-Chassany@ft.com

Eurozone crisis

Greek finance minister runs short of friends at highest level

ANNE-SYLVAINE CHASSANY PARIS
PETER SPIEGEL BRUSSELS
STEFAN WAGSTYL BERLIN

30 global locations www.efginternational.com

trend towards political fragmentation

was a problem only for the left.
Now for the first time in decades, centre-right voters have a genuine alternative. Current polls suggest that no single
party will win more than a quarter of the
vote an outcome that could leave Mr
Rivera in the role of kingmaker.
He insists, however, that Ciudadanos
will not serve as junior party in a coalition government, and rules himself out
for the position of deputy prime minister.
Instead, he calls for ad hoc coalitions
on different issues, no matter who
comes out on top in the election.
Maybe we will have one ally for economic themes, another one for social
issues, a third for democratic issues, and
everyone together if we face an international issue of state, he says.
For many Spaniards, and not a few
foreign investors, the idea that the country stands on the cusp of a shifting and
instable new era is a cause for concern.
Mr Rivera, however, sees a chance to
revitalise the countrys democracy. A
different Spain is coming, he says.

Frances ageing baby

boomers offer Hollande
lifeline to run in 2017

In Riga at the end of April, Greece may

have lost its last friend in Europe. At
the eurozone meeting in the Latvian
capital, Michel Sapin, the French
finance minister who once adopted a
sympathetic tone towards Yanis Varoufakis, joined the chorus of criticism
against his Greek counterpart.
Greece must go faster now, Mr Sapin
said, echoing the frustration voiced by
the other European finance ministers at
the gathering. Were wasting time, and
time is precious.
In what may be an attempt to rescue
the relationship, Mr Varoufakis will
today pay a last-minute visit to the
Frenchman in Paris.
At the start of the current crisis, Mr
Sapin stood out as the most prominent
defender of Greeces new Syriza government, urging his European counterparts
to compromise with the debt-laden
country. When Mr Varoufakis stopped
in Paris in February to plead for a new
bailout, Mr Sapin said Athens needed
time to put together a list of reforms.

We need serene days so that the Greek

government can breathe, he said then.
French government officials say
his tougher stance simply reflects
impatience at the lack of progress in
negotiations and Athens looming
repayment deadlines. It does not reflect
any change in substance, they insist, as
France has always requested that
Greece fulfil its debt obligations.
Talks are not progressing as fast as
they should, one Paris official said.
But the change of tack has triggered a
sense of relief in Berlin and other capitals that France is now unambiguously
aligned with its fellow European powers. It has also helped assuage suspicions
of French leniency, with Paris in the past
three years having railed against austerity and battled with Brussels over its
own missed deficit targets.
Over the past two months Mr Sapin
has grown frustrated with Athens, and
officials say his interventions in closeddoor sessions are nearly as hardline as
those of Wolfgang Schuble, his German
counterpart.
A senior official close to Germany
said: Even the French, who over the
past five years have always been very

decent to the authorities in Greece, have

realised there is no rendezvous with
reality in Athens. There is no action.
According to people present at one
of Mr Varoufakiss first eurogroup
meetings in February, Mr Sapin spoke
up early in the debate to press for a
change in attitude towards Athens.
But that sentiment was not shared.
The next minister to speak was Italys
Pier Carlo Padoan, normally seen as a
proponent of flexibility in the EUs fiscal
policy. He took a very different line,
arguing Greece had to stick to the rules
of the existing bailout programme. No
other minister spoke up in defence of
Athens after that, officials said.

Michel Sapin left, talks to Yanis

Varoufakis at a Brussels meeting

People who have spoken with

Mr Padoan said he, like many other
ministers, had grown impatient with Mr
Varoufakis, who early in his tenure publicly claimed Italian sovereign debt was
unsustainable. This prompted a public
rebuke that chilled relations between
Rome and Athens.
Since the February 20 agreement to
extend Greeces 172bn bailout into
June, Mr Sapin has become far less
accommodating. According to two eurozone officials at the Riga meeting, Mr
Sapin was angry over delays caused by
discussions about irrelevant logistical
issues such as where meetings should
be held and who should attend even
though both sides knew the substantive
differences they had to resolve.
Like other ministers in Riga, Mr Sapin
told Mr Varoufakis that the boundaries
of the current programme had to be
respected, saying that while eurozone
creditors could be flexible, such flexibility had to be within the structure of the
existing programme the line Mr
Schuble has taken since the start of the
stand-off. He also argued that Mr Varoufakis must respect the eurozones rules.
See Gideon Rachman