Global leaders - Chris Saul
Watch full interview here
Todd Benjamin: You are in a unique position, because of this client list you have, not only here in the UK, but through your associate firms in Europe you have some of the biggest companies in Europe. So, I want to start with the fault line in the global economy right now, which of course is the eurozone.
Chris Saul: We are seeing, as you say, a fault line at the moment. A lot of our clients have found the developing climate to be quite taxing for them, so, as we see, markets have been volatile, debt and equity markets slow, so the impact for them has been reduced deal flow. On the wider question of, where goes the Eurozone, I think we're at a very interesting stage; we've just had the Greek deal done, and the real issue is: is it problem solved? Where do we go next? What happens?
TB: Well, you've raised a lot of questions, so let's start with the Greek deal. There has just been a major restructuring which will save Greece, about €100 billion a year, but if you look at where the new bonds are trading, investors are saying that this is not sustainable, that they'll have to come back for yet another restructuring. Would you agree with the market's assessment on that?
CS: [see clip, right] I would, because as you've been saying, effectively there's been a 70 per cent haircut for the bondholders, and there's a built in further haircut in the nature of the instruments that they've taken, so it's more than 70 per cent in reality, and yet you've still got 120 per cent debt to GDP ratio within Greece. And therefore, to be honest, it seems hard to think that that has sorted it out for Greece, so I would agree with the market's assessment that at some stage there will need to be more therapy, if you like.
'I think the critical point is: can Greece really deliver growth for its citizens if it's in the euro, or is that just too expensive a currency, and do they need to go back to the drachma or another currency in order to stimulate exports? That's the big question.'
TB: Do you think then, that it was wise to take the action they did to bail out Greece? Are we just, in a sense, postponing the inevitable here, in terms of another default?
CS: It's a good question. I think there's a balance here between, if you like, further stabilising the euro ship, or facing up to something that may be inevitable. And I can absolutely understand why politicians and policy-makers say that what we need is a period of stability to allow Greece really to get things rather calmer, and if further attention is required in due course, then fine; but there is a knock-on feeling of greater stability in the euro zone that is, if you like, worth the investment in Greece for the moment.
TB: But, what we're doing here is just buying time, isn't it?
CS: Yes, we are, in reality, because I think the critical point is: can Greece really deliver growth for its citizens if it's in the euro, or is that just too expensive a currency and do they need to go back to the drachma or another currency in order to stimulate exports? That's the big question.
TB: In a sense the leaders of the EU have tried to put a Band-Aid on a very deep wound, but have yet to address the critical issues that are growth and competitiveness. And it's not only in Greece, it's in Italy, it's in Spain, it's in Portugal. So, how do you restore that growth and competitiveness when you don't have a devaluation tool, such as using your currency?
CS: The policy driver seems to be through the Long Term Refinancing Operation by the European Central Bank and the greater liquidity that's been pushed into the system, so $1 trillion of loans, effectively, to European banks. This has enabled them to buy sovereign debt in, for example, Italy and Spain. The notion must be that that provides a motor for reestablishment of those big economies, and gives them a chance to pause, rebuild growth, and I think that that is a sustainable model, to be honest. So, we've seen yields go down in Italy and Spain, so that the market would seem to say that what this is doing is putting more life into the system. I heard the Deutsche Bank economist at the end of last year, who said that it was only just more than 50-50 that we continue with a broader euro. So, only just less than 50-50 that actually, we might lose Spain and Italy. I suspect that that sentiment would have changed rather materially now, not only because of the lending that the ECB has made, but also, I think this is an important point, because the US has shown real signs of recovery, and its ability to pass some of that good feeling as well as economic beneficence into the euro area. And, more than sentiment, I think this might create the right kind of motor for growth in places like Spain and Italy.
Big party, huge hangover
TB: Looking at responses to the financial crisis: new regulatory requirements are that we have to set aside more capital and so forth; do you think that regulators have it right in terms of where that bar should be? Will it be enough to prevent another financial crisis? I realise this is a delicate area because you represent a lot of the banks, but you're also someone who has a, you know, a legal viewpoint as well.
'I think that a reappraisal of regulatory priorities and the correct level of capital was necessary and appropriate, because we had a big party, there was then a huge hangover, and we need to reboot the system.'
CS: Yes; to be honest, I think that inevitably and appropriately there was going to be a regulatory reset and that just in terms of assuring customers of banks and in fact, the taxpayer that banks were functioning efficiently... I think that a reappraisal of regulatory priorities and the correct level of capital was necessary and appropriate, because we had a big party, there was then a huge hangover, and we need to reboot the system. So, I think it's entirely appropriate that there needs to be a big reassessment. Have the regulators got it right? That's a hugely tough point. I think the most difficult thing, really, is bringing all of the regulatory strands together, and the challenges that our clients are finding at the moment is that they've got European regulation, UK regulation, US regulation, and so making all of those dovetail in a way that still allows them to deliver their business profitably and well, is, I think, quite a significant challenge, and we're right in the middle, you know, of that mix, because a lot is resolving itself. Sorry, not a complete answer, but I think directionally, wholly understandable, but it's this big challenge of bringing things together.
TB: And if you had to look forward, let's say two to four years from now, what do you think the end result will be, as we kind of, try and fit these strands together?
CS: Well, I think that it will be, you know, clearly a much more regulated environment, clearly an environment that is calling for more capital controls. I think what we will see is, and I think this is going to be good, you know, a clearer view of what banks are doing, allowing better regulation. And I think, for example, in the UK we've got the Vickers report, which is suggesting a split between retail banking and investment banking; that is clearly something that has been approved of by the Government. So, we're going to move in that direction. So, my hope is that, looking forward, say, four years, there will be greater clarity of the relevant buckets, the relevant different risk profiles of buckets within financial institutions, and how they interact, which will mean greater robustness of financial institutions, and that of course, in turn, is better for customers and investors.
View from the top
TB: At the end of May, the IBA is having its Group Members Leadership Summit, hosted by Slaughter and May this year, exploring several different themes. One of them is marriage, cohabitation, or staying single. What we're talking about here, of course, is mergers within the legal community. Your thoughts on that – the trends that will be happening?
CS: What we are going to see, what we are seeing, is greater consolidation in our industry. So, some firms are clearly taking the view that the challenges that they face, mean that they should combine, they should get married. And in making that decision, they've clearly decided that the potential benefits outweigh the disadvantages; such as conflicts. You can't act for both Unilever and Proctor & Gamble, so you may lose clients through conflicts, cultural dislocation, management distraction, potential splintering of people and losing of high earners. So, they are taking the view that the economies of scale of being bigger outweigh, if you like, the potential advantages. So, that's an argument for marriage. The argument for staying single, which as you'll understand, that's our preference, is that you don't take those risks, and what it enables you to continue doing in these difficult times, is delivering absolutely top quality advice, jurisdiction by jurisdiction, and giving clients flexibility to choose the best firm per jurisdiction. Because clients who are really smart want the best advice, know that the world is not flat, and that they know that they need certain people in certain jurisdictions.
TB: One of the other topics that's going to be discussed at the Group Members Leadership Summit is the impact of the new world order on the international legal services market. Your initial thoughts?
CS: [The] focus there is Asia: I think that people are saying so; the BRICs, you know, what does that mean? And that is a good question, and again, quite a lot of law firm consolidation these days is focused on Asia. So, the topic for debate is Asia, Brazil, Russia, India, how best do you service those economies and how best do you gain competitive edge in those economies. And that brings you back, if you like, to the model that you're pursuing; what's going to give you competitive advantage. And from our perspective we believe that our model is going to give us something that is not only different – not to be underestimated, you know, something that is clearly distinguishable in the marketplace is valuable – but that's clearly somewhat superficial. The more fundamental point is that it delivers genuine high (we would say higher) quality service to clients who are looking at Asia and Brazil and Russia.
TB: I don't ask this in a pejorative way, but if you're dealing with a firm in one of those countries, either because it's the model you've chosen, or by default, because you're not allowed to have your own firm there due to regulatory reasons within that country, how do you ensure you have the best partners on the ground?
CS: Number one, we know the firms very well, so in all of the jurisdictions around the world, we know the firms extremely well. So, take India, take Korea, take Singapore, take China: we know the five or six lawyers who we have particular experience of, and particular faith in. So, if a treasured client comes to me and says, Chris, we've got a particular deal that's going to involve India and Korea, I absolutely know who to pick the phone up to in India and in Korea. And also, one benefit of our structure is that we never take each other for granted. Each firm, in some sense, is a client of the other, so there's no sense that, you know, you're just doing it because another firm in the network's asked you. You know you've got to deliver, and we have to deliver for the firm in Korea, for the firm in India, and they have to deliver for us. So, it's a mixture of knowing exactly who to have on the team, so we work very hard on knowing these firms, so that we can say to our client, we need X, and then making sure that, you know, and we would then front the deal, and we would run the team, and we...and that works very well because we know each other.
TB: The common assumption is that the, you know, the economic landscape is shifting towards Asia, and that certainly has been true if you look at GDP growth from the last ten years, half of it's come from China and India. You only have three offices abroad, as I mentioned a moment ago; one in Brussels, obviously, because the EU is there, then one in Hong Kong, and one in Beijing – both focused, obviously, very much on China. And yet the assumption is that China will become, at some point, the hegemonic nation. Much was made about Japan in the 1980s that it would become eventually the number one country, and of course it's had two lost decades. You're investing a lot in that region; what makes you so confident that China will continue to grow reasonably well and be a fertile ground for firms like your own, and what could go wrong?
CS: What could go wrong? Well, let's start there; I think what could go wrong is this: We've seen growth's expectations slip to 7.5 per cent for this year in China; that had quite a ripple effect on the markets, and there is clearly some danger that that may, if you like, reverse snowball, and so that will be a trend, and people will lose faith somewhat. The other challenge that China is likely to face is succession; so, they have a new prime minister next year, and a new president, I think, is next year, isn't it, when President Hu retires? So, number one query: can they sustain economic growth? Number two: managing succession; number three: as a society, will it evolve, and will elements of society there say, we actually want more voting say. So, the challenges, I think, are not insignificant challenges, and leading analysts have some doubts about whether all of that is stable. My view, for what it's worth, is that there will be some, you know, there will be some protests, and there'll also be challenges along the way, and I think that there will need to be some changes in the parliamentary structure, but I think that they will manage to sustain growth.
TB: And Russia?
CS: Russia, I think will face some challenges over the coming years; obviously very dependent on particularly gas, oil and gas, and therefore quite a material need to diversify. Demographics are a real worry, I think, in Russia, you know, with male life expectancy now, I think 59. So, and if you look at the HSBC 2050 study, their projections are, that by 2050 the Russian GDP has not grown, has certainly not passed some of the European jurisdictions' GDP. So, I think some, you know, some reshaping in Russia is going to be called for.
TB: Because of the type of model you have, not having an office on the ground has not been a barrier for you, and you're confident you can get the local knowledge and expertise and lawyers who know how to navigate the complexity of those various environments that operate there. But in terms of the general proposition, where certain countries, you know, be it Korea or India, do not allow foreign lawyers to practise; your thoughts?
'If a treasured client comes to me and says, Chris, we've got a particular deal that's going to involve India and Korea, I absolutely know who to pick the phone up to in India and in Korea.'
CS: Absolutely, Korea, as you may know, is just beginning to admit law firms, actually, and so there will be an interim period where they are allowed to practise their own local law, and then they move to Korean law. India, I think it's further off. My thoughts are actually that this will go a lot like Japan, and what we saw in Japan was that that was liberalised and overseas firms are... have been allowed to practise. But what we have also seen is that ultimately they have not managed to match the prominence of the Japanese firms, and there are four very prominent Japanese firms. My expectation is that we'll see something similar in markets like Korea and India, so you will have incursions by global firms, but you will have a very strong local Bar as well.