May’s challenge for Carney
THE International Monetary Fund is doing its best at this year’s annual meetings here in Washington to rewrite a little history.
High-profile warnings in the Fund’s annual report on the UK economy, published in the heat of the referendum campaign, have been rolled back with the Fund’s top economists claiming they were ‘pretty balanced’ in setting out the soft landing view.
That is not how most of us remember it. Managing director Christine Lagarde likely will face tough questions today, when she has her opening press conference, on her memorable claim that Brexit will be ‘pretty bad, to very, very bad’ for the United Kingdom.
Analysts at the Fund continue to focus on the negative. Having failed so miserably to get the short-term impact right, the focus is now on the potentially negative fallout from the Brexit negotiations.
Top of the list of worries is the impact of Brexit on passporting arrangements, the right to operate across the European Union for British and Continental banks. The concern, however, is not that the City will lose out significantly to Frankfurt and Paris, but that banks will have to duplicate operations in Europe thus increasing the pressures on the sector (of which more below).
Another significant fear raised is that the uncertainty will lead to a prolonged period of monetary accommodation and low interest rates as the Bank of England fights against stability risks. This is fascinating in the light of Theresa May’s speech in Birmingham where she was disapproving of quantitative easing, the printing of money, on the grounds it hurts savers.
It is, of course, a respectable view, especially when one looks at the current plight of pension funds with soaring deficits, the returns to savers and the additional pressures it imposes on banks.
The Prime Minister’s comments also risk conflict between Downing Street and the Bank of England – an issue which we all thought was settled when the Bank gained is operational independence in 1997.
The truth is that QE is a grey area for policymakers. The Bank can only print money (buy bonds) with the permission of the Treasury. It was granted a licence to restart the proc- ess by George Osborne in his short lameduck period pre-May.
An important question for the new Chancellor, Philip Hammond, is whether he will risk slowing QE and a damaging dispute with Mark Carney at the Bank.
Lame ducks
FEW countries, with the exception of the United States, can draw much comfort from the IMF’s depressing view of the state of global banking.
It reiterates that non-performing or rotten loans are at the heart of Europe’s banking problems with €900bn still outstanding.
That is already known. Of more interest to equity markets is its deeply negative view of many of Europe’s banks, including Deutsche Bank which has wobbled badly in recent weeks. The immediate concern at Deutsche and for UK banks, notably Royal Bank of Scotland and Barclays, is that the US Justice Department is about to hurt them with large scale fines over misconduct. Certainly, in the case of Deutsche Bank, which has little in the way of a capital cushion, this is serious.
The Fund, however, raises more fundamental problems. It believes that Europe is hugely overbanked. The costs are too high, there are too many branches, and in the case of Italy, the deep problems of the smaller banks barely have been tackled.
Having forensically examined the accounts of 280 European banks, the IMF concludes that Europe would be better off if one-third of them were eliminated. This could be done by brutal mergers – which would take out cost – or closure.
More fundamentally, it doubts whether the old investment banking model, of which Deutsche Bank is an exemplar, is relevant any longer. RBS and Lloyds have removed themselves from this game.
Barclays, in contrast, regards it as a core activity. It is encouraged by its leadership in debt markets and a stellar client list. This is the positive legacy of Bob Diamond.
But if profits are insufficient to allow capital to be built and dividends to be paid, it all becomes pointless.
Target practice
HAS Dave Lewis of Tesco finally expunged the legacy of the grocer’s imperial ambitions, ranging from conquering the US’s West Coast, to concreting the country with superstores and making superlative profit margins?
Certainly the stock market chooses to think so.
Rather than worrying about a ballooning pension fund deficit of £5.9bn, investors are focusing on the turnaround.
Same-store sales are up, operating profits soared by 38pc (from an admittedly low base) and Tesco has set itself an achievable profit margin target for the future of 3.5pc to 4pc.
Targets are good, providing they do not incentivise management into cheating.
Tesco knows all about that.