Greenspan puts pressure on
MPC
November 07, 2002
Business Editor's Commentary by Patience Wheatcroft
timesonline.co.uk
HAS Alan Greenspan had an attack of irrational
nervousness or are prospects for the US economy
looking really grim? Last night's largely unexpected
half-point cut in borrowing costs by the US Fed triggered
jitters among traders. If the venerable Greenspan felt it
necessary to cut rates to their lowest level in four
decades, there must be reason to be fearful.
By slashing rates throughout 2001, the Fed helped the
American economy to pull out of recession. However,
the recovery has not been the rapid V-shaped bounce
for which policymakers had hoped. Instead, the return to
growth in the US has been slow and uneven. And in
recent months, all the signs have been that recovery
has run out of steam.
It is not only the renewed weakness in stock markets
and the signs of a tailing-off in industry orders that have
been worrying policymakers. Of deep concern have
been early signs that the ebullient US consumer may
be starting to lose his nerve. Unemployment is rising in
America, and consumer confidence is sliding. In the US
- as in Britain - recession is inevitable if consumer
demand does not stay strong.
New figures on US personal bankruptcies underline the
scale of the problems for the American consumer.
Encouraged by low borrowing rates, American
homeowners have been remortgaging to the hilt and
using the proceeds to finance retail spending. This
surge in mortgage lending has left many US
consumers in deeper debt than ever, and has triggered
a substantial rise in the number of US homeowners
seeking bankruptcy protection.
Does talk of consumers remortgaging to fund a
spending spree sound familiar? It should, for equity
withdrawal, as it is politely known, has become
something of a way of life in Britain. Mortgage banks
continue to insist that the level of consumer debt is
perfectly manageable, since the cost, in relation to
earnings, is still below previous heights. However,
although pumping up consumer demand with ultra-low
rates may help the economy in the short term, in the
longer term it could trigger a painful financial
readjustment if rising unemployment affects the ability
of homeowners to repay their debts. That is the crunch
that the bankruptcy figures imply is now beginning to be
felt in the US.
Voting yesterday to hold UK rates, many members of
The Times's Shadow Monetary Policy Committee
expressed worries about burgeoning levels of
household debt here in Britain. The quandary for our
rate-setters, shadow and real, is that although they
need to maintain consumer spending at a reasonable
level, they do not want to continue to fuel the house
price boom that is eventually bound to burst.
What does last night's Fed decision mean for the Bank
of England and the European Central Bank? Both
institutions deliver their rate verdicts today, and the
overwhelming feeling in the markets is that the
Greenspan cut significantly increases the pressure to
act. It is true that there are domestic reasons for a cut in
eurozone rates, although it is far from obvious that Wim
Duisenberg will deliver what is needed. But the case for
lower borrowing costs is less clear in Britain.
A quarter-point cut, surely the most the MPC would
consider, would do little for manufacturers, most of
whom now seem to have accepted that a minor change
in the level of interest rates is not going to make the
difference between them being able to compete in a
global market or not. They are far more concerned
about increases in potential employment costs,
including the increase in national insurance
contributions which will bite next April. But the MPC has
only one weapon with which to try to regulate the
economy.
No such thing as a free PPP
IT IS A comparison guaranteed to make the Chancellor
of the Exchequer fume, but once again there are
comparisons being made between the public accounts
and Enron. This time it was the intrepid Lord Saatchi
who dared to make the link.
When the issue of the Private Finance Initiative was
raised in the Lords last night, the Tory peer leapt in to
suggest that the Government could be overlooking as
much as £200 billion in drawing up its figures. The
confusion comes because of the way in which PFI, and
the related Public Private Partnership deals, are
accounted for by Government. This is an arcane issue
that is not yet the stuff of dinner party debate, but it has
inspired some interesting differences of opinion
between statisticians. Politicians, too, are increasingly
concerned that PFI and PPP offer the Government a
route by which it is taking on obligations without
accounting for them. According to Lord Saatchi, the last
Red Book showed that PFI contracts committed the
Government to liabilities of £100 billion and, since that
was published, he calculates that about another £100
billion has been pledged.
Admittedly, this is money going out over a long period.
However, assume that half the expenditure should be
treated as capital, then it might have a net present value
of, say, £50 billion. Add to that the commitments under
PPP, say £40 billion on Network Rail and who knows
how much more on London Underground, and the
Chancellor could be looking at a nasty breach of his
proclaimed golden rule. The figures have to be
approximate since the Government last night, for
instance, refused to tell the Lords what are the bidding
costs for London Underground that will be carried by the
taxpayer.
The Treasury maintains that not taking account of any of
these figures is perfectly in line with international
government accounting standards and the Office for
National Statistics agrees. Lord Saatchi, however,
pointed out in the Lords that Enron, too, proclaimed that
its accounts conformed with the necessary standards.
Investment in infrastructure is undeniably necessary,
but PFI does not bring it free of charge. There is a
brighter side, however. Some PFI contractors have
managed to refinance schemes on hugely
advantageous terms. The National Audit Office was so
incensed when the contractors at Fazakerley Prison
gained £10.7 million on refinancing, lifting their returns
to 39 per cent, that it determined there should be no
repeat. So today it has produced recommendations that
should see the public sector reaping 50 per cent of any
such refinancing gains. There should be plenty of
scope for profit there.
Pitt fall proves bonus for Tweedie
HARVEY PITT's sudden departure is an unexpected
bonus for Sir David Tweedie on the day he launched his
proposals to charge share options as a business
expense. In Britain, where the rules of the International
Accounting Standards Board will run from 2005, the
long-heralded proposals are likely to receive a fair wind
and the protests of finance directors and the dot-com
sector should be brushed aside.
The way options are to be valued may also soften
domestic criticism. Unlike Sir David's original ideas for
the UK standards board, which would have charged the
full value when an option was earned, valuations will be
made when options are granted, so that generous
discounts can be made for the risk that they may not be
earned.
The approach was changed because the IASB is
dedicated to global convergence of standards and the
aborted 1994 American model is the one taken up
elsewhere. But getting America to sign up is still the big
prize, simply because share options are much more a
way of life over there, to the extent that ignoring payment
by option seriously distorted investment during the
boom.
Heavyweights such as Alan Greenspan and Warren
Buffett are firmly in favour of reform but California is
violently opposed, Congress has been split and the
White House has been cool. Until yesterday, so was the
Securities and Exchange Commission, whose hands
were far from clean when the American standards
setters were bullied into retreat eight years ago.
Sir David's proposals are in part a stalking horse for his
battered American counterparts, who have just signed a
convergence agreement with him. But this chain is likely
to hold only if it has strong backing from the SEC,
currently its weakest link. Mr Pitt fell because he was
distrusted over accountancy, having been attorney for
the big firms in previous battles with the SEC. Those
suspicions were supported when he passed over the
top reforming candidate to head America's new
post-Enron audit regulator and instead chose a
seemingly safe pair of hands. Mr Pitt slipped through
them and America's accounting reformers are
celebrating.
LLOYD'S OF LONDON has a new chairman and will
notice the difference. Although Lord Levene of
Portsoken won yesterday's election for the post with a
resounding majority (no one else stood) he is the first
chairman from outside the insurance market. When as
Lord Mayor of London he moved into the Mansion
House, flunkeys were horrified by his insistence that
things did not have to be done the way they always had
been. Lloyd's has been changing but Levene will speed
up the process.
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