The Warsaw connection
Eastern Europe is increasingly on the radar screen of the Luxembourg financial community, a fact reflected by this week’s financial mission to Warsaw and Prague, organised by Luxembourg for Finance.
The Polish capital pulls in business from all over the region and foreign investors are starting to sit up and take notice. The Luxembourg Minister of Finance, Luc Frieden, who is leading the mission, said in his speech in Warsaw that the last three years have not been easy but that short term success has been achieved.
“It has not been easy for citizens, for investors, and it has not been easy for ministers of Finance either, because we were the bad guys who had to tell people that we had to make changes. I think in the short term we managed quite well to find solutions to this crisis”, commented Luc Frieden in his speech prior to a round table discussion between experts from Poland and Luxembourg.
Whereas the free market system dominated the world for a long time, during the crisis it became clear that markets could not survive on their own and that they needed strong political intervention, added Frieden. He was proud to stress that political leaders had been efficient in stopping the recession in the European Union by launching enormous stimulus packages. “After these rescue packages we have to make sure, as citizens and as politicians, that these budget deficits do not lead to huge debts, that is to say to economic problems and higher taxes.”
In order to achieve this ambitious goal, three things are needed: more responsibility, more transparency and better regulation and a different kind of supervision. Responsibility is not about regulation, but about ethical behavior. Minister Frieden criticised the fact that during the crisis many financial institutions deviated from this behavior. That is why management and the board of directors need to take more responsibility: they have to know what is going on in their institutions and have to assess the risk of their financial operations which has not always be the case in the past.
“Where self-regulation doesn’t work, we have to review the rules of regulation. Although I am against overregulation, it is clear that some products in the past have not been adequately regulated. This crisis has shown us that (countries) are deeply interconnected and interdependent and that is why supervision cannot remain purely national,” continued Frieden.
Krzysztof Pietraszkiewicz, president of the association of Polish banks, said that over the last 20 years since the end of communism, the importance of capital markets, investment funds and pension funds has been steadily growing in his country. He added that today the Polish banking system is very competitive because it is modern, financially sound and has good perspectives for growth.
After the president of the Polish banking association remarked that his country was underbanked, Fernand Grulms, CEO of Luxembourg for Finance, quipped that Luxembourg was neither under nor overbanked but that it was just right. “In Luxembourg there are 900 financial institutions –banks, insurances companies, asset management companies and others - and these institutions employ 80,000 people, suppliers and service providers included.”
Claude Kremer, chairman of the association of the Luxembourg fund industry (ALFI) said that both the Luxembourg fund industry and the European fund industry as a whole came through the crisis relatively well. At its worst, the overall decrease in assets under management was 25%, but most of this was due to market movement which has since recovered. Assets under management are now back to pre-crisis levels in most markets.
“The investor lost confidence during the crisis, which is why the fund associations have to take even greater care of their investors”, pointed out Kremer. “If we succeed in these strategies, then the European fund industry has a bright future. We have to work harder at marketing the UCITS product, which is a success story all over the world; but in some jurisdictions you need more transparency and better regulation”.
Barbara Nowakowska, managing director of the Polish private equity association, stressed that this industry is a very robust one in Poland, a country of more than 38 million inhabitants. Regarding the number of funds on the market, it is bigger than many fund associations in Western Europe.
However, in the private equity sector demand from domestic investors is very limited with 72% of equity in foreign hands, mainly investors from the US, Canada and Europe. “Private equity funds have invested 4 billion dollars in more than 700 Polish companies and have introduced 40 companies to the Warsaw stock market”, continued Nowakowska.
Polish banks coped well during the global financial crisis because there were no toxic foreign assets in the portfolios of Polish banks, there is a broad domestic market and a balanced economy with a moderate budget deficit. Regarding the challenges to the economy as a whole, infrastructure has to be developed, the image of the banking sector must be improved and international expansion of Polish financial institutions has to be widened.
Luxembourg is also facing challenges, as Fernand Grulms clearly noted. The customer base has to be expanded to Eastern Europe and beyond. A second challenge is the ongoing war for highly qualified employees, to serve an ever more demanding customer base from all over the world.
Claude Kremer of ALFI concluded that one of the strengths of Luxembourg is this wealth of competence which has been developed over the last 20 years. “Luxembourg has always been a trend setter and not a trend follower. We have paved the way for others. Today, regulatory arbitrage does not exist any more because the rules should be the same for everyone.” CW