Banks

BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Economy

Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Archive | November, 2016

L&G enters property lending

Posted on 30 April 2012 by

Legal & General has made its first foray into property lending as the insurer bids to take advantage of the gap in the market created by the retreat of bank finance.

The company will announce on Tuesday that it has agreed to provide Unite, the UK’s largest developer and manager of student housing, with a £121m loan. The move is the start of what L&G hopes to build into a multibillion-pound lending business.

    It is the latest example of an insurer looking to get a foothold in the real estate financing market. The appetite among banks to hold debt secured against property has dwindled during the past two years, as overexposure to the sector and regulatory changes put pressure on new lending.

    The loan also marks a watershed for L&G, which first looked at the idea of commercial property lending almost a year ago but pulled back amid worsening market conditions. The insurer held negotiations with 150 prospective borrowers before agreeing with Unite. L&G is looking to make another property loan in the coming weeks.

    Ashley Goldblatt, head of commercial lending at L&G Investment Management, said the company had looked at applications that could not get lending from the banks. “We looked at a lot, but you have to wait for the right one to come along and then grab it. It is a bit like marriage.”

    He added that L&G would target medium to long-term lending agreements where it could negotiate fixed rather than floating-rate repayments to match its long-term liabilities. The property lending business will be entirely financed by policyholders’ funds.

    The loan to Unite, which is secured against a portfolio of student dormitories in London, Manchester and Bristol, represents a 60 per cent loan to value and is fixed at 5.05 per cent for 10 years. The cost of the loan is below the 5.7 per cent average Unite pays for its debt.

    Joe Lister, Unite’s chief financial officer, said securing the loan was a testament to the strength of the company and marked an important step for it.

    Insurers are tipped to become an important force in the property lending market this year and next as regulatory changes force banks to pull back.

    Reforms being ushered in under Basel III – the third accord in a sequential updating of global banking regulation – will increase the cost of capital banks must hold against commercial property loans.

    Both Aviva and Prudential, two of L&G’s UK rivals, already have property lending businesses.

    Possible Direct Line purchaser emerges

    Posted on 30 April 2012 by

    Edi Truell’s new bid vehicle has approached Royal Bank of Scotland about a possible multi-billion pound purchase of its Direct Line insurance arm.

    Tungsten, co-founded by the founder of private equity group Duke Street Capital, has made an informal expression of interest in the business, which analysts estimate could sell for up to £4bn.

      The state-backed bank had received approaches from several other parties – mainly private equity groups – in recent months, people familiar with the matter said.

      However, RBS still plans to float Direct Line towards the end of this year, believing it can extract a better price by going down the initial public offering route than it could by selling the business to a private equity buyer.

      Analysts have questioned the ability of private equity buyers to raise the required funds and meet increasingly demanding capital requirements.

      RBS was ordered to dispose of its insurance arm as part of a far-reaching state aid agreement settled after the bank received £45bn of government support following its near collapse in 2008.

      Mr Truell set up Tungsten with his brother Danny, chief investment officer of The Wellcome Trust, one of the UK’s largest charities. Tungsten plans to list by the end of May.

      Michael Spencer, chief executive of the interdealer broker Icap, and Peter Kiernan, a former head of UK banking at Lazard, are among the individuals to agree to become board members.

      Lloyds Banking Group on Monday denied a report in the London Evening Standard that Tungsten made a takeover approach for Scottish Widows, its life assurance and pensions business.

      Meanwhile, people with knowledge of the process said Tungsten had not made a formal bid for Direct Line.

      Direct Line is Britain’s biggest personal motor insurer by number of policies. Its brands include Churchill and car breakdown service Green Flag.

      The home and motor insurer swung into profit in 2011, posting an annual operating profit of £454m after rising bodily injury claims pushed it to a £295m loss a year earlier.

      Ahead of the expected IPO the group has quit unprofitable businesses, reduced the number of sites from which it operates and cut its exposure to riskier areas.

      Direct Line raised £500m through a bond sale in April, the latest step in its plan to spin off from RBS.

      Aviva faces pressure on pay plans

      Posted on 30 April 2012 by

      Andrew Moss of Aviva

      Leading shareholders in Aviva have warned that the insurer still faces significant opposition to its pay plans and leadership even after its chief executive waived his salary increase.

      Andrew Moss, who last year received £2.69m in salary and bonuses, made a concession to investors unhappy with the group’s performance by turning down a £46,000 pay rise.

        But several leading institutional investors said they remained dissatisfied, saying the pay revolt was a sign of broader concerns about the company’s performance.

        “No-one supports Moss,” said a top 10 shareholder.

        Aviva is undergoing another shake-up under Mr Moss, who is under pressure to improve the group’s performance.

        The insurer has lined up Goldman Sachs to advise on a possible sale of its US business, people familiar with the matter told the Financial Times on Monday.

        Aviva is the latest company to come under pressure from shareholders over pay.

        Nearly a third of Barclays shareholders failed to support the bank’s pay report at its annual meeting last week and in the US investors have voted down pay policies at a growing list of companies including at Citigroup.

        Mr Moss had been awarded a 4.8 per cent increase to his base salary of £960,000, which Aviva said reflected “his performance, experience and contribution since his appointment”.

        The Aviva chief’s pay, excluding a long-term share incentive plan worth as much as £3.39m, climbed 8.5 per cent in 2011 – a year in which shares in the FTSE 100 insurer lost about a quarter of their value.

        One influential shareholder said: “In the context of concerns about performance of the group and the executive team, why on earth did the remuneration propose a such a rise for the CEO?

        “The response was universal criticism. It demonstrates … a wider point – how poorly some remuneration committees are working.”

        Yet much of the shareholder concern about Aviva’s remuneration policy was directed against plans to pay Trevor Matthews, who was brought in to run its UK business last year, about £2.5m.

        Aviva is not changing the arrangement for Mr Matthews, who is taking on further responsibility, but said it would review how it would “compensate future joining executives for the loss of entitlement from their previous role”.

        Another top 10 shareholder said: “I would be surprised if Moss is still there in a year’s time.”

        In a statement, Scott Wheway, chairman of Aviva’s compensation committee, said: “We take the views of our shareholders seriously.”

        He added: “A number of shareholders have indicated that they would like to see a different approach to the way we compensate senior directors on recruitment and an even closer correlation between our pay packages and shareholder returns.”

        John McFarlane is due to replace Lord Sharman of Redlynch as chairman at the end of June.

        Aviva shares closed down 8.6p or 2.7 per cent at 308.1p.

        Additional reporting by Mark Wembridge

        Berlin insists on eurozone austerity

        Posted on 30 April 2012 by

        Wolfgang Schauble holds a press conference after the G20 meeting of Finance Ministers and Central Bank Governor at the finance ministry in Paris

        Wolfgang Schauble at a press conference after the G20 meeting of fnance ministers and central bank governors

        The eurozone must stick to its austerity-led recovery plan, Germany’s finance minister insisted on Monday, signalling Berlin’s limited appetite for the
        more growth-oriented policies advocated by some other European leaders.

        Wolfgang Schäuble said the only way to achieve the economic growth that was needed in the region was to continue to rein in budget deficits and pay down debt, praising the tough new Spanish budget – which contains €27bn in new taxes and spending cuts – as an example.

          “The first precondition in order to have sustainable growth everywhere in Europe is fiscal consolidation,” Mr Schäuble said at a press conference with his Spanish counterpart, Luis de Guindos. “If now we talk about growth, it shouldn’t be understood as a change of direction. That would be a mistake.”

          Mr Schäuble’s remarks, following similar comments from Angela Merkel, Germany’s chancellor, come despite the recent political upheaval in France, Greece and the Netherlands, where strong polling from eurosceptic populists has forced political leaders to confront growing voter anger towards austerity measures.

          The push for new growth policies – prompted in part by expectations of a victory in Sunday’s French presidential election by socialist François Hollande, who has made such policies a cornerstone of his campaign – has prompted EU officials to dust off similar proposals that have been stymied in the past.

          “A number of actors are trying to adjust to the change in tone in the debate,” said one senior EU diplomat involved in the discussions.

          EU officials said the plan gaining the most traction is new funding for the European Investment Bank, the EU agency which invests alongside private financing in infrastructure and other European development projects.

          Olli Rehn, the EU’s top economic official, this month proposed €10bn in new capital for the EIB, which would raise the bank’s lending capacity by €60bn – a move that has since been backed by both Ms Merkel and Mr Hollande. Mr Schäuble said the EIB had “good experience” of attracting capital through co-financing projects.

          Such a move is unlikely to have near-term benefits, however, and other EU officials have been pushing for measures with more immediate impact.

          Because of worse-than-expected economic contraction in some countries, some officials have urged a loosening of the tough new budget rules that have forced Belgium, Spain and the Netherlands to slash billions of euros in spending, despite deepening recessions in all three.

          International Monetary Fund officials back such loosening and officials said there was some support for such a move within the European Commission. But there has been strong resistance from the European Central Bank, and it would likely be opposed by Berlin, as well.

          Advocates of delaying tough deficit-reduction targets could be aided by new economic projections due from the European Commission later this month. The figures are expected to show sharp downward revisions in economic growth in several eurozone countries.

          Banks lead falls after Spanish downgrades

          Posted on 30 April 2012 by

          Share prices across Europe fell yesterday, reversing gains last week, after Spain slid into recession.

          “This is a rolling crisis that goes up and down. Markets were generally up last week and they are down this week,” Karen Olney, strategist at UBS, said.

            The FTSE Eurofirst 300 index inched down 0.8 per cent to 1,043.28.

            In Madrid, the Ibex 35 tumbled 1.9 per cent to 7,011 after the government released first-quarter data revealing the Spanish economy contracted 0.3 per cent from the previous quarter.

            Banks led the decline as Standard & Poor’s downgraded 11 of Spain’s largest banks.

            Banco Santander
            , Europe’s largest bank by market capitalisation, shed 2.5 per cent to end at €4.72, while shares in BBVA
            fell 2.2 per cent to €5.11.

            In Paris, the CAC 40 slipped 1.6 per cent to 3,212.80 with tech companies leading the decline.

            STMicroelectronics
            , the parent company of ST-Ericsson, fell 5 per cent to €4.29 after Moody’s changed its outlook for the company to negative, affirming its Baa1 rating.

            In Frankfurt, the Xetra Dax fell 0.6 per cent to 6,761.19 despite gains for Adidas
            .

            The German sports goods group’s shares climbed to a record after it raised its profit forecast on strong performance in China.

            The shares jumped nearly 5.3 per cent to close at an all-time high of €63, as the company announced better than expected first-quarter results, with revenues up 17 per cent to €3.8bn.

            Retailer Metro
            ’s shares also rose 2.6 per cent to €24.38.

            However, shares in BASF
            , the world’s biggest chemical maker, fell sharply, down 4.7 per cent to €62.19.

            ABB
            dropped after ING cut its price target for the company’s share price from SFr20 to SFr19. The Swiss electrical engineering group fell 3.8 per cent to SFr16.54.

            Telenor
            was among Europe’s biggest gainers as shares rose 5.2 per cent to NKr105.2 after the Norwegian telecoms company said it had written down the rest of its NKr3.9bn business in India.

            This is the second writedown Telenor has made since India’s Supreme Court revoked its mobile licence in India.

            Aviva investors square up for fresh battle

            Posted on 30 April 2012 by

            Institutional investors are still spoiling for a fight even after they succeeded in forcing Aviva’s remuneration committee to back down and put its pay structure under review.

            Aviva’s efforts to avoid a showdown with its investors comes just days after 31.5 per cent of Barclays’ shareholders refused to back the bank’s pay plans. That was despite Barclays’ attempt the week before to head off its most irate investors. Also on Friday, nearly 43 per cent of NYSE Euronext’s shareholders refused to back its remuneration report in the latest sign of rising international shareholder discontent over company pay schemes. This followed soon after 55 per cent of Citigroup’s shareholders failed to back its pay plans.

              One UK investor objected to Barclays and Aviva attempts to slip big payments to executives into schemes without explanation or adequate performance hurdles. Barclays gave a £5.75m tax equalisation payment to chief executive Bob Diamond. Aviva, it emerges, is paying about £2.5m to Trevor Matthews, newly appointed head of its UK business, and all he has to do is stay put for three years.

              “Companies and remuneration committees need to raise their game. They need to alert, consult and explain to investors exactly what they are doing,” says one investor.

              Another says: “Both issues demonstrated how poorly some remuneration committees are working.”

              In most cases, investors say votes on the remuneration report should not be taken in isolation. The remuneration vote, still advisory in the US and UK – though British politicians are looking to change that – is used to deliver strong messages about poor performance, failing management and strategy.

              “The advisory vote is more useful and pragmatic than a binding vote. It is a much more sensitive safety valve than voting the chief executive out,” says a veteran from one of the UK’s biggest investment groups.

              And as economic gloom deepens, pressure to align pay to performance will increase, say shareholders.

              So which companies will hit the headlines next? “Keep an eye on how shares have been performing for a number of years. If performance is poor then there is trouble ahead,” says one UK shareholder.

              Trinity Mirror and the pay of Sly Bailey, its chief executive, are already in investors’ sights.

              Haven status lifts pound to annual high

              Posted on 30 April 2012 by

              The pound hit a fresh annual high against the euro and the dollar, rising above $1.63 for the first time since August as the UK currency benefited from haven demand in Europe.

              Sterling rose above €1.23 against the single currency, gaining 0.1 per cent to reach an annual high of €1.2311, its strongest level against the euro since June 2010.

                The pound’s strength surprised markets last week, as the demand for a relative haven in Europe outweighed figures showing the UK had slid back into recession after the first quarter.

                Sterling rose to annual highs against the single currency on three out of five trading days last week. Speculators moved to net long sterling positions last week for the first time since August, data from the US Commodity Futures Trading Commission showed.

                “With tensions in the euro-area unrelenting, it seems fair to conclude that the recent pattern in trade for euro/sterling is unlikely to change,” said Neil Mellor, foreign exchange analyst at BNY Mellon.

                But the pound pared gains later in the session to fall 0.2 per cent against the euro to €1.2264 and 0.3 per cent against the dollar to $1.6227, as the US currency clawed back its losses against other leading currencies.

                The euro fell 0.1 per cent to $1.3220 while the Australian, New Zealand and Canadian dollars and the Swiss franc dipped against the US dollar as risk appetite waned after Standard & Poor’s, the rating agency, downgraded a string of Spanish banks.

                The Australian dollar weakened ahead of a decision by the Reserve Bank of Australia on Tuesday on whether to cut interest rates, with market participants expecting a cut of at least 25 basis points to 4 per cent.

                The Aussie dipped 0.4 per cent to $1.0412. The currency had reached a one-month high against the dollar last week, after gaining strength as markets decided the prospect of a rate cut had been fully priced in.

                “A decision to ease by just 25 basis points could see some further relief gains in the currency,” noted analysts at Credit Suisse.

                Scepticism greets Spain’s plans for banks

                Posted on 30 April 2012 by

                The Spanish government’s reappraisal of plans to establish a state-organised vehicle to hive off troubled bank assets has been met with scepticism from analysts as Madrid faced a fresh credit rating downgrade of its lenders.

                Standard & Poor’s, the US rating agency which last week cut Spain’s sovereign credit rating, on Monday downgraded 11 of the country’s largest banks, placing Madrid’s struggle with how it will clean up the sector under further scrutiny as economists argue an additional €100bn could be required.

                  Mariano Rajoy’s government, after floating and then scrapping the idea of a so-called “bad bank” when first elected, has begun again to discuss the possibility of placing problematic property loans into one or more specialised asset management companies, officials have said.

                  While no further details have emerged of the structure of such a troubled asset fund, officials have been at pains to stress that the term “bad bank” is a misnomer, as no state money would be used like in other examples seen in Europe.

                  Analysts, however, have been quick to point out that any scheme that did not use additional capital, either from the Spanish state or from international sources, would struggle to achieve its goal of clearing vast inventories of bad property assets from bank balance sheets.

                  This is because, while Ireland’s NAMA used state money to take assets from banks at a discount, a Spanish equivalent which did not use state money would struggle to enforce the writedowns required – as to do so would risk forcing the weakest lenders into needing vast amounts of additional capital.

                  “If the idea is to avoid the ignominy of an IMF bailout, then without an alternative funding source this is pure fantasy,” said James Ferguson of Westhouse Securities. “The proposal seems to illustrate just how absent of ideas the Spanish authorities have become.”

                  Gary Jenkins of Swordfish Research noted that funding any bad bank-style entity, and valuing the assets transferred to it from lenders, would be challenging.

                  Madrid remains insistent that no international bailout of its banks will be needed, and that banks would only be allowed to place bad assets into a separate state vehicle if they had already set aside provisions for them, and had their values independently verified.

                  While aggressive writedowns of assets would be unlikely, a possible benefit of the scheme, officials say, is that banks would be relieved of the pressure of selling the homes they have repossessed and could instead refocus on lending to small and medium businesses.

                  The reappraisal of a bad asset scheme for banks follows a warning from the International Monetary Fund last week over the risks that some Spanish banks still posed to the country’s financial stability, with the fund singling out Bankia, the largest lender to receive state aid, as the biggest problem in the sector.

                  The IMF also recommended that some form of separate state-backed vehicle should be created to split away bad assets and allow banks to begin lending again into a credit-starved economy.

                  Syrian sanctions finding unintended targets

                  Posted on 30 April 2012 by

                  At Salman al-Dimashki’s computer shop in the centre of the Syrian capital, Chinese-made desktop machines are piled high outside the door.

                  Asked if the machines were to replace western goods he could no longer obtain, Mr Dimashki said he had no problem getting hold of laptops made by western companies in spite of international sanctions on Syria.

                    “We get our way,” he said in his cramped upstairs office. “Syrian people – nobody stops them.”

                    Mr Dimashki’s claim chimes with anecdotal evidence that Syrians have been able to get around some of the punitive financial action against them through means ranging from creative importing practices to sourcing more goods from non-hostile countries such as China.

                    It is part of a murky broader picture suggesting that while some sanctions are hurting the regime of Bashar al-Assad, the president, and its alleged associates, they are also hurting ordinary Syrians without spurring opposition to the government.

                    David Butter, a Middle East economic expert, said: “If it’s a scrap for limited resources, the regime is still in a position to get the first rights, whether fuel or cash or food. It [the sanctions regime] hurts them but to really cripple them is going to take a long time.”

                    The sanctions, introduced in stages by the US, Japan, the European Union and some Arab states over the past year of Syria’s uprising, include an oil export embargo, curbs on international financial transactions and travel bans on individuals linked to the Assad regime.

                    While the impact of the measures is hard to disentangle from the wider effect of the crisis on the economy, many Syrians and outside observers hold sanctions at least partly responsible for the Syrian pound’s decline in value by a third and for inflation that has seen the cost of some basic goods double.

                    It was “the people, to the first degree” who are suffering from the measures, said a man surveying the cigarette section of the duty-free shop in Damascus airport, where brands such as Marlboro, Gitanes and Lucky Strike have vanished from the shelves. “This has been going on for a year and there is no solution yet.”

                    The most significant sanctions are on the oil industry, estimated by the International Monetary Fund to have accounted for almost a fifth of gross domestic product in 2010. Analysts estimate that they helped contribute to a contraction of 2-10 per cent to Syria’s economy last year.

                    Measures against individuals have also had an impact. Issam Anbouba, an agroindustrialist from the city of Homs, said he had launched a legal challenge against EU sanctions on the grounds he was not close to the Assad regime. “They ruined our banking relationships, they forced me to resign from several companies where I was on the board and they labelled me as anti-people,” he said.

                    An industrial equipment importer, who is not under sanction, said he lost more than €2m of confirmed deals when the oil embargo came into force last year. Small orders for spare parts costing a few thousand euros now took two or three weeks of paperwork rather than two days.

                    “I know the European mentality is that ‘we can drive the business community to a point of frustration where it will erupt against the government’,” he said. “But at the end of the day we are paying the price: the government is not.”

                    For all Syria’s grim economic indicators and suggestions by western officials of dwindling foreign exchange reserves, there are also signals that do not appear to suggest imminent collapse. The pound has settled over the past fortnight at about 70 to the dollar on the black market (the official rate remains about Sy£57 to the dollar).

                    Syrians appear to be finding ways around the sanctions with the help of porous borders and old allies. Iranian state television aired a report at the weekend of what it said was a Syrian trade expo in Tehran, where 300 Syrian businesses displayed wares ranging from door handles to medical equipment.

                    In a Damascus clothes store, an assistant wistfully caressed the last of his stock of $95 German dark wool jackets, which had been replaced with a lower-quality and 40 per cent cheaper Chinese-made alternative. Sanctions were doing a good job of making Syrians feel isolated and deprived, he suggested, but not yet of turning them into revolutionaries.

                    “Nobody is coming here from the outside,” he added. “Now we are working only for the Syrian people.”

                    French winner faces tough budget action

                    Posted on 30 April 2012 by

                    Francois Hollande

                    Francois Hollande

                    While François Hollande, the French socialist presidential hopeful, has gained much attention with his calls for Europe to favour growth over austerity, the priority for whoever wins the election on Sunday is to balance the budget – a feat not accomplished in France for more than three decades.

                    President Nicolas Sarkozy, frustrated by what he clearly sees as Mr Hollande’s grandstanding on his call for a European growth pact, puts it bluntly. “The only way for France to recover control over its destiny is to repay its debts,” he reiterated at the weekend.

                      With public debt at more than 89 per cent of gross domestic product and still rising, and unforgiving financial markets looking on, Sunday’s winner will not be able to avoid tough action to meet the target accepted by both candidates of reducing the budget deficit to 3 per cent of GDP next year.

                      In Mr Hollande’s case – should he win – that could mean some difficult decisions on promises he has made to hire 60,000 teachers, 5,000 police officers and expand youth employment by 150,000 “jobs of the future”.

                      “I don’t think he will be able to implement half of what he says,” says Guillaume Menuet, economist at Citigroup Global Markets. “Like the Labour government in the UK in 1997, he will have to prove his fiscal credentials – especially to Germany if he is going to persuade Berlin to join the growth pact bandwagon.”

                      Mr Hollande has repeatedly stressed that he will do whatever it takes to hit next year’s deficit goal – and reach his additional target of eliminating the deficit in 2017, a year later than planned by Mr Sarkozy.

                      He says he will commission the Cour des Comptes, the national audit office where he once worked, to prepare a report by the end of June on the state of the public finances. “If we are in a more difficult situation [than expected], I will take the necessary action,” he said last week.

                      In its annual report in February, the Cour des Comptes said the country required a bigger effort, especially to cut public spending, which accounts for a whopping 56 per cent of GDP in France, despite rigorous savings programmes already put in place by Mr Sarkozy.

                      The pressure may not be immediate: the budget deficit in 2011 was 5.2 per cent, well below the 5.7 per cent target and this year’s figure of 4.4 per cent looks within reach. But with growth sluggish at best, hitting 3 per cent in 2013 is likely to require additional savings.

                      “Next year is the big one,” says Mr Menuet. “It will be impossible for the big eurozone countries not to hit the 3 per cent target. I don’t think they could get away with it.”

                      Both Mr Sarkozy and Mr Hollande have based their 2013 plans on 1.7 per cent growth projections, regarded by independent economists as over-optimistic.

                      Even if growth holds up to the levels estimated by the two candidates, there are still question marks over their budget plans.

                      Mr Sarkozy’s government has set out total savings of €115bn to balance the budget by 2016, made up of €75bn in spending cuts and €40bn in increased taxes. But the Montaigne institute, a think-tank that has done its own reckoning of the candidates’ proposals, says the president has overestimated his planned savings plan by 20 per cent.

                      Mr Hollande’s plans are for savings of €100bn over the period, split roughly 50-50 between tax increases (including targeting high earners, big companies and banks) and spending cuts. But his growth forecasts for the years beyond 2014 are marginally more optimistic than Mr Sarkozy’s and he has supplied no detail on where cuts will fall beyond saying spending will not grow by more than a nominal 1 per cent a year.

                      Both Mr Sarkozy and Mr Hollande have been coy about the stringent conditions ahead during the election campaign, avoiding using the terms “austerity” or “rigour”. “In French they have bad connotations,” says Michel Sapin, Mr Hollande’s policy chief. But whatever it is called, French voters are set for more of it in the coming months, regardless of who they choose on Sunday.