PHLX Gold/Silver Sector (XAU)

[long-gone]

To:mikesloan who wrote (528)
From: mikesloan Tuesday, Jul 15, 1997 1:37 AM
Respond to of 82910

Additional signs of the new world order?
Don't mention the euro as Germany
prepares for E-Day to dawn in City

The Times July 15/97

For bankers, an affirmative answer to the question Sprechen
Sie Deutsch could become vital to their careers. Speaking
German may soon be essential for working in the City.

For years, the growing number of Germans in the City have
been subjected to the time-honoured taunt of "don't mention
ze war". Their employers had either bought old British houses
such as Kleinwort Benson or established new head offices in
London. During induction weeks, the German bankers were
told to humour the Brits and their hang-ups. The jibes were
met with well-practised smiles and the peace was kept in City
wine bars.

But the balance of power seems to be dipping the other way.
The war that currently dominates wine bar talk is the war
between Frankfurt and London as financial centres. And this
time, the Germans could be on the winning side.

Frankfurt has ambitions to match London's position as the
best place in Europe to take large amounts of money. Of
course, this is not the first time they have said this. So far, the
usual response from the British has been a belly laugh. No
more. Now, it is British bankers who smile politely with a hint
of embarrassment and try to recall a few German O-level
phrases. What has happened?

Frankfurt has assembled an impressive set of levers to propel
itself towards pole position. And it has recruited the Paris
exchanges as partners. For the first time in its history, the City
is facing a serious threat.

Germany began its assault on London's market position with
a total reform of the way the equity and futures markets
operate. In 1994, insider dealing was made illegal to counter
accusations that the German markets could not be trusted
because of the lack of effective supervisory control.

Reserve requirements imposed on all banks by the
Bundesbank were also gradually lifted to improve Frankfurt's
attractiveness. And German companies were encouraged to
break with tradition and seek listings rather than be owned
privately by large institutions.

The Frankfurt stock index, the Dax, has doubled in little more
than two years, closing at an all-time high yesterday. Last
year's flotation of Deutsche Telekom was Europe's biggest.

But getting the local trading environment right was never
going to be enough to challenge London's position.
Frankfurt's trump card is the single European currency, which
is only about 350 working days away.

It is on the euro that Germany is pinning its hopes. What
impact the single currency - and Britain's absence from it -
could have on the flows of money is particularly obvious to
businessmen operating and banking on both sides of the
Channel. Bernd Pischetsrieder, the chief executive of BMW,
which owns Rover, recently said: "If Britain should stay out
for a long time at the beginning [of Emu] the financial capital
of Europe will be Frankfurt, not London."

European companies such as BMW or Unilever would be
likely to see Frankfurt as the best place to see their shares
listed after a re-denomination of the shares into euros. Not
only would the need for currency conversions be greatly
reduced but Frankfurt would also be the home of the
European Central Bank, which will set euro interest rates.

Furthermore, if Britain stayed out of Emu, British-based
banks run the risk of not being admitted fully to Target, the
new pan-European payments system. The Bundesbank and
the Bank of England have for months been locked in talks
over the system.

Under the thin disguise of academic debate between central
bankers, the two institutions have been battling for their
respective interests. Frankfurt is trying to keep non-Emu
members out of Target by arguing that it needs to retain the
fullest possible control. London has taken up the familiar
theme of a multiple-speed Europe in which an independent
British financial centre would have priority links with the
Continent.

The ferosity with which the Target debate is being pursued in
Frankfurt has surprised the Bank. The Bundesbank is a
recent convert to Frankfurt's cause. Only now that it is about
to lose power to the European Central Bank, has it shed its
studied indifference.

London's strong point over the last decades had always been
the unrivalled liquidity of its markets. Pension fund money,
Arab money, small savers' money - a vast amount of it was
available in London while continental exchanges suffered at
times from a lack of buyers and sellers.

Frankfurt has had to acknowledge that it is unlikely to match
London's liquidity overnight. At least on its own. The heads
of the bourse and the futures market came up with a plan to
combine their operations with the next biggest financial centre
in Europe - Paris.

The French connection has now reached an advanced stage.
The two stock exchanges say they will start trading on single
joint computer screen from the middle of next year.

The futures exchanges are aiming to do the same but at the
momemt Paris still operates an open-outcry system.
However, J”rg Franke, a board member of the Terminb”rse
in Frankfurt, said that a link-up was likely after an expected
move to screen-trading in Paris.

Only last week, Liffe, the London futures exchange,
reaffirmed its commitment to open-outcry trading as the most
efficient system, guaranteeing the highest degree of liquidity.

Herr Franke retorted that screen-trading reduced market
participants' cost by half.

The argument over trading systems is really a metaphor for
the different cultures of banking on respective sides of the
Channel. London is staking its future on the traditional
techniques that generated fortunes over decades, while
Frankfurt is copying the more technically advanced methods
of the highly successful American banks, which are now just
as dominant in Frankfurt as they are in London.

In Frankfurt, the British low-tech option is considered as
redundant as the House of Lords. German bankers see
themselves winning in the race with London because they pay
more attention to new methods that can boost profits.

Ulrich Schr”der, a policy analyst at Deutsche Bank, said:
"Due to a new consciousness, Continental centres such as
Paris and Frankfurt will improve their performance and close
the gap to London."

The official City's reaction to Frankfurt's ambition has been
marked by complacency. When The Times first contacted
the London Stock Exchange regarding the alliance between
Frankfurt and London, the exchange knew nothing about it.
Gavin Casey, the LSE chief executive, remarked that the
Continental exchanges have tried to co-operate before and
failed. He delighted in recalling that 35 per cent of top
European companies are listed in London. But even Mr
Casey had to admit that Emu is a threat.

The City's favourite statistic with regards to Frankfurt is a
survey of the number of banks situated by the River Main.
Some 7 per cent of Frankfurt's banks left the city last year.
But the Frankfurt Chamber of Commerce said the closures
were mainly by less prominent banks that had not been doing
business in the city.

The large investment banks are all increasing staff levels in
Germany at the moment. For British bankers, this is no time
to discard old German textbooks and O-level notes. The
arrival in massed ranks is expected in Frankfurt on E-Day,
the day the euro becomes legal tender, most likely to be
January 1, 1999.

Until such times, their German colleagues will tell each other
in the wine bars of the City: "Don't mention the euro."

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