MAGGIE PAGANO: Why the rich still get richer

When one of France’s richest men, Bernard Arnault of LVMH, went to the corporate bond markets last week to raise around €9billion to help pay for his purchase of US jewellers Tiffany, he made his company even richer.

He raised this new debt over a range of bond maturities from two to 11 years, with two of the five euro tranches being offered at negative yields.

That means the lenders to the luxury goods giant – pension funds and other investors – were in effect paying the A-rated LVMH to borrow their money. Even the longest maturity, an 11-year euro tranche, yields only 0.43 per cent.

Luxury goods firm LVMH raised €9bn over a range of bond maturities from two to 11 years, with two of the five euro tranches being offered at negative yields

In other words, Europe’s central bankers and pensioners are subsidising LVMH to pay $16billion for one of the world’s swankiest jewellery brands. 

This makes the billionaire Arnault and his fellow LVMH investors even wealthier: those that already buy Louis Vuitton handbags can now afford even more Tiffany earrings. 

As F Scott Fitzgerald said: ‘Let me tell you about the rich. They are different from you and me.’

They certainly are. LVMH was able to get such good terms for its debt because the European Central Bank is throwing money around again. 

It recently relaunched a €189billion corporate purchasing programme, otherwise known as more QE, which is driving down yields into negative territory.

What the ECB is hoping to do with this latest programme is cut funding costs for European companies, making it easier for them to invest. 

Whether the ECB’s Christine Lagarde had in mind that LVMH should top up its jewellery box with Tiffany’s trinkets is another matter. M&A rarely creates growth.

But what Arnault knows is that the ECB will underwrite the issue, no matter what the coupon is. And the central bank will probably end up with a slice of the luggage maker.

This extraordinary situation is one of the many unintended consequences of the big bazooka ‘whatever it takes’ gigantic QE programme let loose by the ECB’s former chief, Mario Draghi, after the financial crash to shore up Europe’s economies. Like any addict, the ECB does not seem able to kick its bad habits.

Here in the UK, the Bank of England has come off the QE drugs – for now, at least.

But the withdrawal symptoms are still winding their way through the system, which is why we are stuck with historically low interest rates and weak growth.

The paradox of the LVMH situation illustrates why so many critics claim that ultra-low interest rates and QE have been a disastrous policy.

It’s one that has aided those with assets to become even richer, while most of the population have not benefited. Quite the reverse. What we have is a form of financial apartheid, a polarisation between those at the top and the bottom.

Companies such as LVMH are being paid to borrow money at negative yields while savers are receiving next to nothing for their investments.

At the same time, the squeezed middling classes with mortgages are paying around 3 per cent, small businesses are charged at least 10 per cent or more on business loans while credit cards are still charging an outrageous APR of 22 per cent or more. 

Who said interest rates are low? As always, the poorest in society are the worst hit as they are shafted with interest charges of up to 100 per cent if they buy washing machines from the pay-day loan sharks. These differentials in spending or borrowing power are not healthy.

What can be done to break this financial apartheid? Hopefully, finding a solution is keeping Chancellor Rishi Sunak up at nights as he prepares for the Budget on March 11. He doesn’t have much choice. 

The Bank of England has used up its firepower on the monetary front and is not likely to cut rates any further. 

So there are only limited fiscal levers to pull – the choice being breaking the fiscal rules and more government spending or cutting taxes.

There is little room to spend more, as Sunak’s predecessor Sajid Javid had already announced, in last year’s spending review, the fastest day-to-day Government expenditure in over 15 years, a 4 per cent rise above inflation for next year. That leaves tax cuts, and tax incentives, as the most effective option.

If Sunak, now working mano a mano with No 10, is to help deliver Boris Johnson’s promises of ‘levelling up’, he will need to get out the knife. 

There should be cuts to stamp duty, income tax and national insurance, and incentives for R&D and enterprise zones to stimulate growth. Time to take some risks and avoid Breakfast At Tiffany’s.


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