Bershidsky on Europe: BoE Cuts Mortgage Funding

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
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Here's today's look at some of the top stories on markets and politics in Europe:

BoE cuts mortgage support to avoid housing bubble

The Bank of England announced changes to its Funding for Lending plan, which provides banks with cheap funds if they use them to make loans. Banks will no longer be able to use the resource for mortgages, while a 0.25 percent rate will be available for those seeking to lend to small businesses. U.K. real estate prices have risen 6.8 percent in the year to October, and the monetary authority is moving to dampen the growth before it produces a bubble. The BoE probably won't raise its policy interest rate anytime soon, though: It appears to be refocusing within the current, relatively lax policy framework. It makes sense to stimulate businesses that will create jobs, rather than fuel speculative price growth in a market that's building one-third fewer houses than before the financial crisis.

Barclays plans to use share allowances to beat bonus cap

Anthony Jenkins, Barclays chief executive, is likely to receive part of his fixed pay as shares next year, after the EU-wide bonus cap takes effect. According to the EU directive, bankers' bonuses will be limited to 100 percent of their fixed pay, or 200 percent with shareholder approval. Many banks are determined to circumvent the cap by using allowances, monthly payments that are fixed at the beginning of the year that technically don't count as bonuses. The big question is whether the allowances should be paid in cash or stock. Many bank shareholders are pushing for the latter option, because it ties the value of the increased fixed pay to performance. It makes little psychological sense, though, because it stimulates executives to seek ways to boost immediate stock performance rather than increase the bank's operational gains. In fact, the stock allowance scheme may cause more risky behavior than increased cash payments. It would have been better to lift the cap and leave bank shareholders' options more open.

S&P downgrades the Netherlands, upgrades Cyprus

The ratings agency Standard & Poor's took away the Netherlands' AAA credit rating, downgrading the country to AA+ because its economy is growing too slowly. S&P predicted only 0.5 percent gross domestic product growth in 2014 and just 1.6 percent by 2016. At the same time, S&P is more optimistic on southern Europe, changing Spain's rating outlook to "stable" from "negative" for the next six months and upgrading Cyprus from CCC+ to B-. In the rating agency's view, European nations' economic health is evening out thanks to structural reforms and euro-area support policies. The markets seem to share this belief, but it is harder to convince ordinary people, still having to deal with extremely high unemployment everywhere except Austria and Germany, that Europe is back under control. The risk of political instability is not properly factored in by investors and ratings agencies.

Alitalia fails to raise enough cash by deadline

Italy's near-bankrupt flag carrier raised less than 60 percent of the capital it needed ahead of a Nov. 27 deadline. Existing shareholders and banks pledged $235 million out of the required $407 million. Even with the $102 million promised by the state-controlled Italian postal service, the airline is short of the target it needs to hit by Dec. 10 so it can continue to operate. Alitalia's 25 percent shareholder Air France KLM opted out of the capital call, and its stake will be diluted if an investor can be found for the additional shares, which is far from certain. The Franco-Dutch carrier wants Alitalia's debt reduced before it takes any interest. Although the Italian government has shopped the company to other global airlines, such as Etihad and Aeroflot, there have been no takers. Alitalia, which carries 45 million passengers a year and works one of Europe's most attractive travel markets, has been so grossly mismanaged that it may have to go into insolvency before it can be resurrected.

H&M bans angora wool because of animal rights outcry

Sweden's retail giant Hennes & Mauritz has stopped production of items containing angora wool, caving in to calls from animal rights activists to discourage cruel harvesting practices in China. Last summer, People for the Ethical Treatment of Animals released a video that showed rabbits screaming as fur was being plucked from them. Since then, a few Scandinavian retailers have stopped selling angora. Only H&M, however, is big enough to change angora farming practices. The company has begun an inspection of its suppliers, and customers are allowed to return their angora items for a full refund. Western companies that use Chinese suppliers should generally pay more attention to the treatment of both people and animals that contributes to the low costs they enjoy in China. Nothing would have happened without PETA activists taking personal risks to obtain the videos, though the farming practices would have been easy for retailers to discover on their own.

(Leonid Bershidsky can be reached at

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