UK’S am­biva­lent at­ti­tude to Qatar threat­ens to scup­per Aramco IPO

The Sunday Telegraph - Money & Business - - Business - JEREMY WARNER

Is the prospect of bag­ging the $1 tril­lion plus Saudi Aramco stock mar­ket flota­tion slip­ping away from Lon­don? In most re­gards, Lon­don wins out over its main rival for the IPO – the New York Stock Ex­change – hands down, so much so that were it not for the col­lapse of the merger with Deutsche Bo­erse the de­ci­sion in its favour would ef­fec­tively al­ready have been made.

There were obvious at­trac­tions to the Saudis in the planned cre­ation of a Euro­pean su­per-bo­erse, but it was not to be, not so much be­cause of Brexit, but be­cause al­le­ga­tions of in­sider deal­ing against Deutsche Bo­erse’s boss, Carsten Kengeter, ren­dered him un­ac­cept­able as the com­bined com­pany’s chief ex­ec­u­tive. This in turn up­set the del­i­cate po­lit­i­cal bal­ance of the deal, mak­ing it anath­ema to the Ger­man high com­mand. The Euro­pean Com­mis­sion then quickly with­drew its ap­proval. So much for an in­de­pen­dent EC.

Be that as it may, the break­down of the merger has al­lowed Don­ald Trump, who has taken it upon him­self per­son­ally to lobby on New York’s be­half for the Aramco IPO, a sec­ond bite at the cherry.

En­ter the mess that is the geopol­i­tics of the Mid­dle East. Saudi Arabia’s crown prince, the youth­ful Mo­ham­mad Bin Sal­man, sees the Aramco flota­tion as cen­tral to plans for mod­ernising the king­dom. As Turkey un­der Re­cep Er­do­gan ca­reens off into back­ward look­ing au­toc­racy, MBS is de­ter­mined to take Saudi in the other, lib­er­al­is­ing di­rec­tion. In a sense he has no choice; it’s bet­ter to lead than be pushed, but he none­the­less treads a brave road that may end badly.

The pos­si­bil­ity of con­ser­va­tive counter-rev­o­lu­tion, or things oth­er­wise get­ting out of hand, is ever present. Yet what­ever MBS’S pre­ten­sions, it is well to re­mem­ber that this is the Mid­dle East, and far more is at stake in the Aramco flota­tion than mere money rais­ing. The Trump card, as it were, is for the US to be far more vo­cal in sup­port of Saudi’s regional am­bi­tions than the UK Govern­ment has so far felt able to. Trump has al­ready ef­fec­tively aban­doned his pre­de­ces­sor’s rap­proche­ment with Iran, and in an­other plus for New York’s chances of win­ning the IPO, he’s whole­heart­edly backed Saudi in its de­ter­mi­na­tion to crush the up­starts of Qatar, awk­ward tribal ri­vals seen, with their bother­some Al Jazeera me­dia in­ter­ests, to have risen far be­yond their sta­tion. Bri­tain buys a lot of gas from Qatar, which has in­vested sub­stan­tially in the UK. We are also gen­er­ally more sym­pa­thetic to the im­pos­si­ble po­si­tion it finds it­self in.

Win­ning the Aramco float is re­garded as cru­cial to the City’s post-brexit fu­ture as a global fi­nan­cial cen­tre, as well as giv­ing UK in­ter­ests a big po­ten­tial stake in Saudi’s mod­ernising fu­ture. Reg­u­la­tors have al­ready re­laxed the rules on premium listings to ac­com­mo­date the Aramco mon­ster; how much fur­ther is the UK pre­pared to pros­trate it­self to see off the New York threat, or will New York’s pen­chant for se­ques­ter­ing lit­i­ga­tion in the end prove too much of a de­ter­rent for the Saudis, and gift the float to Lon­don re­gard­less? We may not have to wait long to find out.

North­ern Rock’s £8.5bn wind­fall

In lit­tle more than two weeks’ time we’ll be mark­ing the 10th an­niver­sary of the run on North­ern Rock. For Bri­tons at least, few im­ages bet­ter evoke the panic of the fi­nan­cial cri­sis than the frus­trated queues of de­pos­i­tors that formed out­side its branches, des­per­ate to get their money out while they still could.

In the event, no de­pos­i­tor lost a penny, but share­hold­ers were wiped out in the sub­se­quent na­tion­al­i­sa­tion, which shame­fully took place with­out com­pen­sa­tion.

It was, how­ever, a dif­fer­ent story for tax­pay­ers. Far from los­ing their shirts in tak­ing on the Rock’s li­a­bil­i­ties, as widely pre­dicted at the time by me­dia pun­dits, the Govern­ment will ac­tu­ally end up mak­ing huge prof­its – around £8.5bn ac­cord­ing to the lat­est Trea­sury es­ti­mates – and that’s on top of all the money earned over the past decade from in­ter­est and fees. Few pub­lic sec­tor busi­nesses have ever paid off so hand­somely. It should there­fore hardly sur­prise that to this day, the Rock’s pre­vi­ous share­hold­ers con­tinue to ac­cuse the Govern­ment of theft. The Trea­sury jus­ti­fies its prof­its as com­pen­sa­tion for the “risk” it as­sumed in tak­ing on the Rock’s li­a­bil­i­ties, but was there ever any such risk and was it ever re­ally nec­es­sary to na­tion­alise the Rock in the first place?

With the ben­e­fit of hind­sight, the an­swer to both ques­tions is no. The Rock was never in­sol­vent, ei­ther in prac­tice or tech­ni­cally; what it in­stead suf­fered was a sud­den loss of con­fi­dence and a con­se­quent liq­uid­ity cri­sis. Yet fun­da­men­tally, the mort­gage book was sound, as demon­strated in the sub­se­quent re­ces­sion when it suf­fered very few de­faults. North­ern Rock can rea­son­ably be ac­cused of run­ning an un­safe fund­ing model, but that was at least in part the re­sult of govern­ment pol­icy. Liq­uid­ity re­quire­ments were aban­doned in the late 1990s in a de­lib­er­ate at­tempt to en­cour­age smaller lenders such as the Rock to use ap­par­ently lim­it­less whole­sale fund­ing to ex­pand their loan books.

What is more, the hard­line po­si­tion the Bank of Eng­land adopted in the early stages of the cri­sis on so-called “moral haz­ard” – Mervyn King, then gover­nor, al­ways hated pro­vid­ing banks with lender of last re­sort fa­cil­i­ties be­cause he be­lieved it re­warded reck­less lend­ing – only helped ex­ac­er­bate the cri­sis. The mes­sage that whole­sale mar­kets took was that the cen­tral bank couldn’t be re­lied on to pro­vide sup­port – even though that is its statu­tory duty – and they there­fore voted with their feet. As Charles Good­hart, the econ­o­mist, has ob­served, King’s ar­gu­ment was a bit like re­fus­ing to send out the fire brigade be­cause this might de­ter oth­ers from tak­ing ad­e­quate fire pre­cau­tions.

In any case, to help mit­i­gate the wider bank­ing panic and deal with its af­ter­math, cen­tral banks have since cre­ated the big­gest moral haz­ard in his­tory; tril­lions of dol­lars of quan­ti­ta­tive eas­ing have puffed up as­set prices to crazy lev­els which take no ac­count of the risks. Thus are gov­ern­ments and their agents so of­ten com­plicit in the very crises they com­plain of.

‘Win­ning the Aramco float is seen as cru­cial to the City’s post-brexit fu­ture’

Crown prince Mo­ham­mad Bin Sal­man has a big de­ci­sion to make with re­gards to the Saudi Aramco float

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