Banks labour under negative interest rates and ‘zombie’ loan threat

WEF assesses risk of corporate debt shock as fragile companies kept on life support

David Crow

FT Montage

When bank executives descended on Davos last year for the annual meeting of the world’s elite, they did so under a cloud. Just a day before the gathering began, UBS issued a profit warning after its predominantly rich clients pulled $13bn of assets from the bank.

Here was Switzerland’s largest bank and one of the top global wealth managers sending a distress signal from its own doorstep. The world’s wealthy had apparently turned bearish on the economy because of geopolitical tensions and sluggish growth.

It proved to be a sign of things to come. The outlook for global banks has since only deteriorated. In September, the European Central Bank cut rates further into negative territory, putting extra pressure on banks’ profit margins. The Federal Reserve cut US rates three times in 2019, reversing almost all of the increases implemented in 2018.

Moody’s, the rating agency, cited lower rates as one of the main factors behind its decision last month to change its outlook for global banks from stable to negative. Driving this are “rising global trade tensions [and] lower for longer or lowering interest rates, depending on the jurisdiction”, says Laurie Mayers, associate managing director at Moody’s.

Ms Mayers adds that banks are operating with “very high cost structures” that they are “struggling to bring down”.

Improving cost efficiency is particularly tough when banks are having to invest billions of dollars in new digital platforms to compete with fintech start-ups. The spectre also looms of Big Tech companies like Amazon and Google pushing further into financial services.

Other observers are less bearish. Analysts at Morgan Stanley recently turned positive on the European banking sector, though not because they predict a glorious period ahead, but rather because the worst might be over.

Magdalena Stoklosa, Morgan Stanley head of European banks research, notes that interest rates, in Europe at least, have probably reached their nadir. Few expect Christine Lagarde, the new ECB president, to implement further cuts.

“Yes, we are going to stay in this lower for longer structural backdrop and of course [profit] margins are going to be challenged,” Ms Stoklosa says. But she adds that, given the sense that rates may go no lower, “the confidence in earnings is much higher than it was a couple of months ago.”

Mandatory Credit: Photo by STEPHANIE LECOCQ/EPA-EFE/Shutterstock (10489796i) European Central Bank (ECB) President Christine Lagarde attends her first hearing by the European Parliament Committee on Economic and Monetary Affairs, a the European Parliament in Brussels, Belgium, 02 December 2019. European Central Bank President Christine Lagarde at European Parliament, Brussels, Belgium - 02 Dec 2019
New ECB president Christine Lagarde © Stephanie Lecocq/EPA-EFE/Shutterstock

Ms Stoklosa adds that in the third quarter of 2019, 80 per cent of eurozone banks managed to beat earnings expectations, albeit after they were revised lower by analysts. “Analysts have spent the last six months relentlessly cutting our earnings expectations for the banks, particularly for 2020. And I think we’re done, or we’re broadly there.”

Signs suggest that global regulators think that banks have enough capital, after a decade during which lenders were forced to build their buffers to prevent a repeat of the 2008 financial crash. The higher requirements have dragged on profitability, while crimping the amount of excess capital that banks can return to investors by way of dividends or buybacks.

The introduction of new global rules on capital — commonly known in the industry as Basel IV — had raised fears that the buffers would have to be built further when the standards are implemented from 2022. But Randy Quarles, the Fed governor in charge of financial regulation, last month told a congressional panel that overall capital levels at US banks did not need to rise. “We don’t believe that the aggregate level of loss absorbency needs to be increased,” he said.

The ECB is tweaking its rules to make it easier for banks to use debt rather than equity to meet the requirements, giving banks more leeway when deciding whether to return capital to shareholders. The Bank of England last month said it would consult on reforms that would “leave overall loss-absorbing capacity in the banking system broadly unchanged”.

“It looks like Basel IV will be the biggest non-event in the history of capital regulation,” says John Cronin, a banks analyst at Goodbody.

Even if some risks for banks do start to recede, however, there are new threats on the horizon.

They include a surge in loans to highly indebted companies that could quickly fall into difficulty in the event of a recession and struggle to make their repayments.

Last month, the Bank of England warned that the global stock of “leveraged loans” — which tend to be made to highly indebted companies, especially those owned by private equity — had reached more than $3tn, a 30 per cent increase since 2015.

The threats associated with leveraged loans have not escaped the attentions of the organisers of this year’s gathering in Davos. They have scheduled a session entitled “The Rise and Risk of Zombie Firms”. The programme asks: “With cheap money keeping fragile companies on life support, will a recession cause a reckoning in corporate debt?”

If the answer turns out to be an emphatic “yes”, bankers can count on more downbeat Davos gatherings to come.

Erdoğan Wades into the Libyan Quagmire

Turkey’s president, Recep Tayyip Erdoğan, is the epitome of today’s strongman political leader, but his decision to send Turkish troops to Libya may be a step too far. By the time his Libyan gamble sours, as it inevitably will, he will have run out of both luck and friends.

John Andrews

andrews7_Mustafa KamaciAnadolu Agency via Getty Images_erdogansarrijlibyaturkey

WINCHESTER, UK – Foreign critics of Turkish President Recep Tayyip Erdoğan deride him as a quasi-dictatorial megalomaniac. But Erdoğan – who was Turkey’s prime minister for 11 years before being elected president in 2014 – is now a reckless gambler, too.

In short order, Turkey will send troops to Libya at the request of the United Nations-backed Government of National Accord (GNA), which has been besieged in Tripoli for the last eight months by the advancing forces of Field Marshal Khalifa Haftar’s Libyan National Army (LNA).

This will be a military and diplomatic folly. Erdoğan already has the distressing example of the Syrian conflict on Turkey’s own doorstep. Does he really imagine that sending a few hundred – or even many thousand – Turkish troops to aid the beleaguered GNA will somehow resolve Libya’s tragic and bloody turmoil, itself the result of the 2011 intervention by foreign powers that toppled Colonel Muammar el-Qaddafi’s regime?

If Erdoğan expects either a GNA victory or an imminent peace settlement, he is deluding himself. Haftar’s well-equipped LNA has the support of Egypt, the United Arab Emirates, Saudi Arabia, Russia, and (at least covertly) France. With mercenaries from Russia and Sudan on his side, Haftar must feel rather more optimistic than Fayez al-Sarraj, the GNA’s prime minister. Support for the GNA from Turkey and Qatar, along with the fig leaf of UN recognition, weighs rather less in the military balance.

So, what explains Turkey’s entry into Libya’s dreadful conflict as yet another proxy warrior? One factor, often baffling to outsiders, is the ideological and political influence throughout the Middle East – or at least its Sunni Muslim parts – of the Muslim Brotherhood. Founded in Egypt almost a century ago, the Brotherhood favors a transition (peaceful, it has always maintained) to theocratic government. As its slogan proclaims, “Islam is the solution.”

That is a problem for the ruling families of Saudi Arabia, the UAE, and Bahrain, all of which regard the Brotherhood as a terrorist organization seeking to undermine their power. So, too, does the oppressive Egyptian regime led by President Abdel Fattah el-Sisi, who mounted the 2013 military coup that ended the Brotherhood’s disastrous year governing the Arab world’s most populous country.

Only Turkey – specifically, Erdoğan’s Justice and Development Party (AKP) – and tiny Qatar (very much at odds with neighboring Saudi Arabia) view the Brotherhood with enthusiasm rather than alarm. On the almost frivolous premise that my enemy’s enemy is my friend, the fact that Saudi Arabia, the UAE, and Egypt support Haftar is excuse enough for Turkey and Qatar to support Sarraj and the GNA.

The bigger reason for Erdoğan’s adventurism in Libya, though, is that it fits his desire for Turkey to play a determining role in its region for the first time since the demise of the Ottoman empire (of which Libya was once a part). On the surface, that ambition sounds reasonable enough.

Turkey has a population of more than 80 million, the second-largest military in NATO, and a relatively developed economy. It deserves to be treated with respect – which is why the European Union’s obvious reluctance to advance the country’s membership bid is a blow to Turkish pride.

But Turkey’s pursuit of its regional leadership ambition has come at a high cost. When the AKP came to power in Turkey almost two decades ago, Erdoğan’s mentor was Ahmet Davutoğlu, an academic who then became foreign minister and eventually prime minister. Davutoğlu was keen to expand Turkey’s influence abroad, but under the slogan “zero problems with our neighbors.”

How ironic, then, that Erdoğan has created problems with almost all of his neighbors. The EU cannot accept Turkey’s appalling record on human rights, especially following the military’s failed coup attempt of 2016. Israel cannot abide Turkey’s support for Hamas (which is aligned with the Muslim Brotherhood) in Gaza.

And virtually everyone is exasperated by Turkey’s policy in Syria, which features attacking the Kurds – the most effective fighters against the Islamic State – and ambivalence toward several jihadist groups. Significantly, Davutoğlu has broken with Erdoğan and formed a rival political party.

True, Erdoğan’s supporters can justifiably argue that Turkey has become a regional player to be reckoned with. The EU has to be financially generous, or else Turkey may let hundreds of thousands of Syrian and other refugees from war and poverty flood into Europe.

Russia and Iran, which both support Syrian President Bashar al-Assad’s regime, recognize that a settlement of the Syrian conflict will depend on Turkey’s acquiescence – hence the continuing three-party peace process that began three years ago in Astana, Kazakhstan.

Even the United States under President Donald Trump has had to eat a slice of humble pie: Turkey, regardless of NATO sensitivities and American economic threats, stands by its decision to buy a Russian air-defense system.

But the Libyan venture may be a step too far.

On December 5, the Turkish parliament ratified an agreement between Erdoğan and Sarraj that sets a maritime border between their two countries. The Turkish-Libyan deal ignores international law – as the EU, Cyprus, Greece, and Egypt have pointed out.

It also ignores geography, because the Greek island of Crete lies halfway between the two countries. And it threatens the January 2019 agreement between Egypt, Israel, Greece, Cyprus, Italy, Jordan, and the Palestinian Authority to exploit the gas reserves of the eastern Mediterranean.

Erdoğan is the epitome of today’s strongman political leader. But by the time his Libyan gamble sours, as it inevitably will, he will have run out of both luck and Friends.

John Andrews, a former editor and foreign correspondent for The Economist, is the author of The World in Conflict: Understanding the World’s Troublespots.

The Perfect Way to Play Geopolitical Risk: Just Don’t

Equity investors have largely been rewarded for ignoring international political ructions, despite suggestions that such risks are at an all-time high

By Mike Bird

Geopolitical risk has been on the tips of many tongues in financial markets in recent years, but selloffs in equity markets associated with moments of high stress are now notorious for the rapidity with which they reverse.

The U.S. airstrike againstMaj. Gen. Qassem Soleimaniand the retaliatory Iranian missile attacks on Iraqi bases containing U.S. troops now count among the dozens of short-lived geopolitical market panics after which rallies in risk assets have resumed within days, or even hours.

It is taken for granted that political risk has risen.

Indexes like the Economic Policy Uncertainty Index and Geopolitical Risk Index have climbed in recent years; the former set a record high in 2019. Those indexes move up or down in part based on the number of times certain words related to geopolitics or economic uncertainty are used in selected newspapers over a given month.

Those indexes run the risk of circular logic: being told by experts that geopolitical risk is rising leads, perhaps, to more reports of rising geopolitical risk by journalists, jacking the indexes up further.

Nobel Prize-winning economist Robert Engle isn’t so sure that geopolitical risk in markets is all that high right now. In his work, he analyzes the factors driving cross-asset and cross-country volatility. When something affects all asset classes across countries, the cause is likely to be geopolitical. By his measure, such international events haven’t been particularly severe at all in recent years.

A funeral procession for Maj. Gen. Qassem Soleimani in his hometown of Kerman, Iran, on Jan. 7. Photo: Erfan Kouchari/Associated Press 

A significant problem with the relatively small selloffs generated by clashes in the Middle East or North Korean missile tests is that they represent a compromise that is uncomfortable for everyone.

Some investors may believe a missile launch or an airstrike will spiral into something far worse.

Others might think the panic will be short-lived and normal service will resume shortly.

With such bifurcated views, a headline-grabbing event such as Mr. Soleimani’s killing will either be very costly for equities—a major conflict seriously affecting corporate earnings, oil prices and economic policy around the world—or it will cost almost nothing.

Either way, it is hard to make the argument that it is worth the handful of percentage points that it actually knocks off the S&P 500.

The phenomenon of rapidly-reversing geopolitical selloffs isn’t particularly recent. After the September 11, 2001, attacks, Iraq’s invasion of Kuwait in 1990 and the use of American ground troops in Cambodia in 1970, analysts at State Street Global Advisors note that the U.S. equity index returned to its pre-selloff level within less than a month.

In recent years, equity investors have done best when they have largely overlooked geopolitical stress.

Without special insight into the likelihood of brief crises developing into something much worse, that may be the best course of action for most.

For Turkey, a New Chapter in an Old Rivalry

By: Caroline Rose

Turkey and Greece, two of the Mediterranean's greatest rivals, have long sparred over dominance of the region. The center of gravity of this competition has been Cyprus, an island split between its Greek and Turkish occupants.

The island has immense geostrategic value, sitting at the crossing of the Eastern Mediterranean’s main sea lanes, regional energy markets and trade routes.

Control of Cyprus would give a country access to the island's valuable natural gas reserves and exploratory drilling rights, helping it project itself as the dominant Eastern Mediterranean power.

It’s for this reason that Turkey and Greece have accelerated their push to defend their maritime claims in the region. They have done so by employing two competing concepts that attempt to revive their imperial pasts: the Blue Homeland, a notion that harkens back to the Ottoman Empire’s glory days and that Turkey has used to justify expanding its reach farther into the Mediterranean Sea; and the Megali Idea, which implies Greek reestablishment of the old contours of the Byzantine Empire.

These concepts are not just rhetorical; they are part of one of the most complex, entangled geopolitical rivalries today.

But the dynamics of the Eastern Mediterranean are also complicated by other factors. Russia, Syria, Iran and Libya all have interests there. And the growing competition in the region has increased paranoia among Mediterranean powers over sea lanes, navigation and energy resources.

The end result has been a rush to delimit exclusive economic zones (regardless of legal parameters), formation of tighter alliances, escalation of the crisis in Libya and an emerging risk of military confrontation.

The last time the Eastern Mediterranean was under such strain was in 1967, when the Soviet Union formed the 5th Mediterranean Squadron, causing an escalation in tensions between the Soviets and NATO member navies.

With such significant geopolitical shifts emerging in the region, it’s necessary to take stock of its naval landscape: the players involved, their capabilities, their restraints and, most important, their intentions.

An Emerging Naval Power

With competition over offshore gas resources intensifying, Turkey has found it increasingly necessary to bolster its naval capabilities. The Turkish navy is considered one of the four strongest navies in the Eastern Mediterranean. (Greece, Israel and Egypt have the region’s other dominant maritime forces, and the U.S. Sixth Fleet and Russia’s Mediterranean Naval Force also have a commanding presence.)

But over the past two decades, Turkey has pushed to expand its naval capabilities, particularly since tensions in the Eastern Mediterranean have escalated, indicating an increasingly ambitious Turkish naval agenda in the years to come.

For much of the 20th century, naval development was not a priority for Turkey. The inward-looking foreign policy of Mustafa Kemal Ataturk and his successors, in addition to Turkey’s accession into NATO, led to a more limited naval strategy. Ankara didn’t feel the need to enhance its maritime capabilities beyond the ability to defend the Turkish Straits, the Sea of Marmara and the Aegean Sea.

One of Ataturk’s key principles was “peace at home, peace in the world,” an isolationist motto that allowed Ankara to focus on domestic infrastructural and social reforms. The current government has attempted to change this, beefing up the country’s naval capabilities with an accompanying neo-Ottoman narrative led by the Blue Homeland concept, in an attempt to revive what it believes is Turkey’s rightful place as a key naval power in the region.

Geography, however, remains a key constraint in its naval development. The Turkish coastline is long, and the country’s access to the wider Mediterranean is restricted by a series of Greek islands, some located less than 45 miles (72 kilometers) from Turkish territory.

The limited breathing room between Turkey and Greece makes it difficult for Turkey to focus on conventional naval capabilities, particularly since its primary imperative remains defense of its littoral waters.

The Turkish navy therefore has mostly been geared toward coastal defense with a narrow set of operational capabilities.

Still, Turkey has an interest in pushing its buffer zone farther out into the Eastern Mediterranean. Since 2014, it has used gunboat diplomacy – the pursuit of strategic objectives through acts of intimidation at sea – to protect its seismic and exploratory drilling activities across the Eastern Mediterranean, as well as its maritime trade routes. (Turkey conducts 87 percent of its trade through its ports.)

In fact, Turkey has been eyeing greater control of the Mediterranean since the 1970s. Its invasion of Cyprus in 1974, when it annexed 40 percent of the island in its first venture back into the Mediterranean since the collapse of the Ottoman Empire, was a pivotal moment. Since then, several geopolitical “openings” have given Turkey room to flex its muscle in the sea.

Greece’s financial crisis and inability to keep up naval defense spending opened the door for Turkish expansion in the region, while Ankara’s frustration with its dependence on foreign energy suppliers drove it to seek new sources of natural gas.

Turkey’s naval buildup has accelerated markedly in recent years. Its domestic industrial capacity has increased and its navy has been upgraded with retrofittings and new equipment, including cutting-edge propulsion, detection and navigation systems.

Since 2007, the country has tripled its military research and development spending, which totaled $1.2 billion in 2018. Its defense budget totaled $19 billion in 2019, an increase of 24 percent over the previous year.

In addition, Ankara has introduced the MILGEM program, an ambitious project to domestically produce frigates and corvettes for the Turkish navy. As an indication of just how ambitious this project is, the country plans to build 24 new ships – frigates, aircraft carriers (some compatible with the F-35B) and amphibious assault ships – and most are expected to be dispatched by 2023.

The country is also developing six new, slightly longer-range submarines and a series of destroyers for larger, sustained campaigns in the Eastern Mediterranean. Its acquisition of these types of vessels indicates a continuing need for convoy escort missions, as they can accompany Turkish seismic drilling ships in contested continental shelves where there is a risk of conflict between Eastern Mediterranean adversaries.

Turkey has also begun to promote its domestically manufactured equipment abroad in an effort to establish itself as a global arms exporter, which would give the country an economic boost and help it position itself as a Mediterranean industrial power. The expansion of Turkey’s defense industry is perhaps the single biggest development in Turkey’s naval advancement, which could pay dividends economically and strategically for years to come.

Ankara also hopes to begin adding more forward bases, including a naval base in Northern Cyprus, likely in the city of Famagusta close to the Iskele Strait. This base is the centerpiece of Turkey’s emerging maritime strategy, as it will allow Turkey to expand its naval logistics and drilling capabilities and conduct longer-range, long-term deployments deep into the Mediterranean.

In addition, the Turkish Republic of Northern Cyprus is renovating the abandoned Maras port in Famagusta at a cost of $10 billion, likely with Turkish support. The tempo of naval exercises has also increased. In early 2019, the Turkish navy hosted its second-largest drills, aptly named Blue Homeland, and conducted live-fire exercises in the Greek Cypriot exclusive economic zone.

And in May, Turkey will host its largest naval drills, dubbed the Sea Wolf exercises, in the Mediterranean, Black and Aegean seas. These developments all serve a symbolic as well as a strategic purpose: They send a clear message to Turkey’s rivals – namely, Greece, Israel, Greek Cyprus and Egypt – that it is a force to be reckoned with.

The Bigger Picture

While all of these moves to boost Turkey’s naval power may indicate that Ankara is increasingly considering the risks of a large-scale conventional conflict in the Eastern Mediterranean, it’s important to keep in mind that Ankara’s primary focus remains closer to home, especially the defense of its own coastline and Cyprus from threats posed by Greece and its allies.

It’s also worth noting that because of the naval limitations of Turkey’s main rivals in the Mediterranean, a full-blown conflict is extremely unlikely. Greece’s armed forces are estimated to total 360,500 personnel, half of Turkey’s roughly 735,000.

The two countries possess a similar range of submarines, patrol vessels, frigates and sea mine equipment, though Greece’s naval capabilities are more limited than Turkey’s, as many vessels have been decommissioned and are technologically obsolete. And since Greece’s financial crisis, naval modernization efforts have been sluggish.

Athens, however, has the advantage of having regional allies. Greece is a member of the recently launched East Mediterranean Gas Forum, which also includes Egypt, Israel, Greek Cyprus, Italy, Jordan and the Palestinian territories. While the consortium’s primary focus is energy resources, its members have increased naval cooperation and joint training.

Meanwhile, Egypt’s armed forces are larger than Turkey’s, and its naval assets are superior in both quantity and quality, since it boasts a greater number of helicopter aircraft carriers and patrol vessels. But only a few of its surface vessels and Type 033 Romeo-class submarines are serviceable, and the country has fallen behind with updates and refittings as its economy lags. 

Turkey also has its own limitations, which should cast at least some doubt on its prospects to be the undisputed naval power in the Mediterranean. It has nearly 200 naval assets, including frigates, submarines and patrol vessels, but most of them date back to the 1990s, some to the late 1970s, and require updating.

Moreover, Turkey’s possession of numerous short-range, fast-attack craft indicates a limited ability to engage in a distant, sustained campaign in the Eastern Mediterranean – including, for example, a mission to support Libya’s Government of National Accord, which Ankara agreed to assist with a troop deployment back in December.

Still, Turkey’s increased production of conventional naval equipment complimentary to the F-35 and drone capabilities, as well as its plans to bolster its forward bases in Somalia and Qatar and build a naval base in Northern Cyprus, reflects its growing intentions in the region.

Ultimately, to achieve greater power projection, what Turkey really needs is aircraft carriers, nuclear submarines and improved aerial defense to sustain supply lines and amphibious operations. So while it has made some ambitious moves and daring declarations of intent, it still has a long way to go.

For now, Turkey will continue to posture, posing as a dominant naval power while taking minor steps toward expanding its footprint in the Mediterranean.

Month two

Big protests in Paris are Emmanuel Macron’s severest test yet

Putin couldn’t pass pension reform. Can France’s president do better?

The boulevards of the French capital were filled once again this week with banners and balloons, demonstrators, riot police and tear gas.

A transport strike against pension reform, which began on December 5th and continued throughout the Christmas holidays, has now entered its second month. This week lawyers, teachers, hospital workers and others joined the protests.

Railway workers have now been on strike for longer than during the protests of 1995, which forced a previous government, under Alain Juppé, to shelve its own pension reform. On one day in December, more people took to the streets than at any other time under Emmanuel Macron’s presidency.

How and when this conflict ends matters not only to the commuters struggling daily to reach the capital from remote Paris suburbs. It will also be the measure by which to judge Mr Macron’s claim to be able, unlike his predecessors, to “transform” France.

The French mandatory-pension system, made up of 42 different regimes, consumes 14% of GDP, nearly twice the oecd average. Once in their armchairs, the French receive, on average, 60% of pre-retirement earnings, compared with 49% in the oecd as a whole. Thanks to long life expectancy (now 80 for men, 86 for women), they then spend roughly a quarter of a century in retirement.

Those on “special regimes” retire earlier even than the legal minimum age of 62. Train drivers can stop at 50, a legacy of coal-shovelling times. Because today’s pensions are paid by charges on today’s workers, the system needs constant tweaking.

By 2025, according to the official pensions advisory council, the overall pensions deficit will be somewhere between €8bn and €17bn ($8.9bn-$19.7bn).

With just two years left before the next presidential campaign, and having narrowly survived the gilets jaunes (yellow jackets) protests against costly fuel, Mr Macron might have chosen a mere technical fix. A 0.7-percentage-point increase in pension charges, for instance, would close the financing gap by 2025.

But Mr Macron campaigned for the presidency in 2017 on a more radical promise. He vowed to reshape the labour, training and welfare systems so as to encourage job creation, adapt France for a “post-salary” era, ease mobility and protect people rather than jobs.

To this end, Mr Macron vowed in his manifesto to merge the 42 regimes into a single points-based system, with the same rules for all. This will spell the end of the special regimes, which Mr Juppé did not dare to do 25 years ago, as well as even out calculation rules that favour public-sector workers.

The plan, unveiled last month by Edouard Philippe, the prime minister and a former aide to Mr Juppé, will also introduce a minimum monthly pension of €1,000. Those earning over €120,000 a year will pay mandatory charges at a lower rate above that level, but these will only finance others’ pensions, not their own. The head of the employers’ federation, Geoffroy Roux de Bézieux, calls the new system “very redistributive”.

This is not, however, the way the unions see it. The Confédération Générale du Travail (cgt), with its history of la lutte des classes (class struggle), rejects out of hand the proposed new points-based system. It accuses Mr Macron, “a president of the ultra-rich”, of destroying the pension system.

On strike from day one, the cgt refuses to go back to work until the government abandons its plans. This week its members invaded the Paris office of BlackRock, an American asset manager, insisting (wrongly) that the lower pension charges on high salaries are Mr Macron’s secret gift to private pension providers.

Talks between unions and the government resumed on January 7th. Mr Macron says that he has no intention of shelving his reform. So no compromise will satisfy the cgt. Instead the government hopes to reach a deal with the more moderate Confédération Française Démocratique du Travail (cfdt), now the country’s biggest union.

Its leader, Laurent Berger, backs a points-based system. But he has taken part in the strikes because of the new “pivot age” of 64. Introduced by Mr Philippe last month, the idea is to build incentives around this age, to encourage the French to stay at work longer.

Were the government to drop this, in order to split the unions, it would look like a concession too far. At some point, the French will have to accept the need to work longer, if they are not to leave younger generations with an intolerable financial burden. As it is, Mr Philippe has already given way spectacularly to demands from those on special regimes.

He has promised dancers at the Paris Opera, whose regime dates back to 1698, that the points system will affect only new recruits. Prison wardens, air-traffic controllers, pilots, policemen and firefighters have all been promised exceptions. Even train drivers have been told that the rules will apply only to those born after 1985. Teachers, who are poorly paid in France, have been promised more money.

It may be, however, the only basis for compromise with the cfdt. “Economically the pivot age doesn’t make sense,” says Ludovic Subran, chief economist at Allianz, an insurer. “Under a points-based system you leave it to individuals to decide when they have accrued enough to retire.” Much will depend on the momentum over the next week or so. A big turnout was expected for a one-day protest on January 9th.

But overall participation in the strike by railway workers fell from 32% on December 6th to 6% on January 3rd, and among train drivers from 87% to 31%.

Although most polls show people support the strikes, for the first time, one poll has shown the number falling below 50%.

Yet most of the French are also still against the proposed new system.

Poor communication, flourishing conspiracy theories and hostility to the perennially haughty Mr Macron mean that, even now, few believe his claim that he is trying to preserve France’s pension system rather than destroy it.