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