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French bonus rules risk undermining investor push

Source: Reuters - Thu 27th Aug 2009

France is trying to polish up Paris's image as a financial centre to draw investors away from the City of London but President Nicolas Sarkozy's tough line on bonuses and hedge funds risks frightening them off.

He plans to expand the La Defense business district with new skyscrapers, has cut taxes on the wealthy, proposed changing French rules to allow more securitised bonds and has highlighted the resilience of French banks during the financial crisis.

"For two years now I have been fighting for the attractiveness of Paris as a financial centre so that we're not always lagging behind London, so that our issuance can be done here, so that we can do market operations in Paris" Economy Minister Christine Lagarde told RMC radio on Wednesday.

"We have not given up on that."

Nevertheless, Sarkozy has made an example of French banks ahead of the G20 meetings next month, forcing them to accept new limits on bonuses, threatened to blocked planned EU rules on hedge funds and sought stricter supervision of derivatives.

"Their position is totally contradictory" said Nicolas Bouzou, economist at the Asteres Consultancy.

"The chance of attracting players from London to Paris is practically zero. It's more about stopping French people from going to London."

France is well known for producing high-quality traders from a specialist Master's course at Universite Paris-Dauphine and many of them leave for London upon graduation, travelling back to Paris on the Eurostar train for weekends and holidays. 


Sarkozy is hoping to persuade other G20 countries in Pittsburgh on Sept 24-25, particularly in Europe to adopt the same rules that he has developed for French banks.

He is betting on a growing investor appetite for low-risk products and that public opinion is as sensitive elsewhere as it is in France to the idea that the financial sector helped cause a crisis that has led to a recession and rising unemployment.

But if he fails to convince the G20, French bankers fear that top talent will be driven away. Sarkozy has promised to meet bankers again after the Pittsburgh meeting but said he has no plans to back down even if other countries do not follow.

"The same rules have to be applied everywhere, otherwise these activities will move, will leave Paris and go elsewhere" SocGen Chief Executive Frederic Oudea said earlier this month.

Sarkozy said banks will now be required to defer two-thirds of bonuses paid to traders over three years. If an operation on which a bonus was paid lost money, the deferred part would not be paid. Banks refusing to comply with the new rules would be excluded from state mandates, he said.

Europlace, the organisation charged with running Paris financial markets, is also worried.

"The new measures... must be applied equally and simultaneously at an international level, otherwise Paris risks losing competitiveness and the transfer of its activities and jobs to competitors" Europlace President Gerard Mestrallet, who also heads power group GDF Suez, said in a statement.


Seven hundred companies are listed in Paris with a capitalisation of 1,700 billion euros and the French capital has a strong reputation for asset management.

But it has limited activity in foreign exchange and debt markets and around 80 percent of hedge fund assets in the European Union are managed out of London with only a handful of hedge funds based in Paris.

Lagarde has said France will not accept draft EU rules to regulate hedge funds unless they are toughened up, putting it at odds with Britain which has been trying to dilute them, a factor which is unlikely to help draw hedge funds to Paris.

Investors also say that there are other obstacles to France stealing a march on London as a financial centre, notably restrictive labour laws, and high social charges and taxes.

"It's really about employment, worker costs and tax. So if nothing changes from this point of view, there won't be any change" said Renaud Labbe a fund manager from the Paris-based Seven Capital Management.

"On bonuses, there is a lot of debate about it for the benefit of public opinion. Bonuses have always been higher in London and it's generally accepted that the tradeoff is better job security, and living in Paris."

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