In the City
Sterling balances the key
Nicholas Davenport
AsIwrite, the Governor of the Bank of England, the mild-mannered Gordon Richard son, will be discussing with his fellow central bankers of the Bank for International Settle ments in Basle the technical means by which our huge 'sterling balances' might be funded or stabilised. What these central bankers say about their political chieis behind their closed doors is nobody's business because we have not got a Richard Crossman in the banking world. Their views will be reported to the Economic Policy Committee of the OECD in Paris on 22 November and then to the 'Group of Ten' on 26 November or later. After that the IMF will be informed and the heads of state briefed for the sterling rescue operation. The important thing is that the cri de coeur uttered by Mr Callaghan in his Panorama interview has been heard with sympathy by these heads of state and that a rescue operation has been agreed upon in principle, as Mr Healey reported after his Brussels meeting. Meanwhile the central bankers are expected to provide the UK with sufficient stand-by credits to tide Britain over the negotiations for the agreed 83,900 million loan.
These sterling balances are a boring subject but the highly intelligent readers of this journal naturally expect to be informed. The balances now total over £6,000 million of which £3,100 million are 'official', that is, held by central banks. They are debts we have incurred abroad when we have bought and consumed more than we have produced.
But they are by no means all the result of wicked spendthrift socialistic governments. They began in a big way with the last world war when our own Commonwealth coun tries and colonies exported goods to us which we could not pay for and were decent enough to hold the balances in sterling as a reserve currency. After the war Dalton sent Sir Wilfred Eady of the Treasury round the world to ask these countries to cut down their balances voluntarily, as we had saved their lives, but he never tried very hard and failed. My suspicion is that the City told him not to bother because these sterling balances would be very useful it we wanted to run a 'sterling area system' for international trade. Crisis finally came when we were forced to devalue the pound in November 1967 but trouble began earlier—in 1964—because central bankers did not like the look of a socialist government (and never have) and began to cut their balances down.
In 1968 the financial powers gave us a credit of 82,000 million to help us meet the expected withdrawals of sterling balances. As regards the sterling area countries, which held their official reserves in London, we undertook to protect them against loss by guaranteeing them a dollar rate. This was known as the Basle Facility and was negotiated largely by Mr Harold Lever, now Chancellor of the Duchy of Lancaster. It worked well for three years, that is, the sterling balances were actually increased, largely because Mr Jenkins as Chancellor restored the balance of payments to a surplus. But after we allowed the pound to float (which Mr Jenkins now regards as a bad thing) the dollar guarantees became costly and were restricted and finally abandoned. Then came the crisis of 1974 when the Arab countries quadrupled the price of oil. The sterling balances jumped from £6,000 million to £7,400 million and the proportion held by the oil exporters from £1,300 million to £3,800 million. This might have been good for countering world deflation but it was not so good for the UK for it enabled a now spendthrift socialist government to go on overspending and get hopelessly into debt. The deficit on our balance of payments in 1975 rose to £1,702 million.
The technical means for funding or stabilising the sterling balances are various but as the Financial Times sent Sam Brittan last week to the Continent to find out what the central bankers would prefer I can—on his authority--give their views and the most likely scheme. First, a conversion offer into fiveor ten-year bonds—this is not on. Second, a conversion into SDRs of the IMF —this is a pipe dream. Third, and most popular, a revival of the Basle facility, a currency guarantee in dollars for a period of years, the rate of interest being tied to the Euro-dollar or New York markets. This would require a massive international credit, for, even if the scheme were restricted to the 'official' balances, there would be some hefty switching from private to 'official' and the Treasury would need dollars for some sizeable withdrawals. Nevertheless, the German chief of state has expressed his desire to help Britain and the new President of the US could hardly mark his inauguration by giving a nasty negative response. There is even talk of the EEC fund managers agreeing that a package deal to save sterling would be good for Europe and the ultimate goal of European monetarY union.
A complication has, however, suddenly arisen which might delay the arrival of the fruitful apple-cart. Mr Healey gave a warning hint in a BBC interview that he might have to take 'painful measures' because the government deficit next year is going to be
higher than he forecast. We are now accustomed to hopelessly wrong forecasts from the Treasury but it is not so long ago that Mr Healey said that he expected to bring the borrowing requirement for 197677 down from £10,750 million to £9,000 million. If he has to put it up to £11,000 million for 1977-78 as predicted by the Financial Times) it will be due to our falter' ing recovery bringing in less revenue, both direct and indirect, our heavier than expected deficit on the balance of payments, and above all to the preposterous rise in the cost of borrowing with Bank rate up to 15 per cent. The more the Chancellor has to issue lap' stocks at yields of over 16 per cent to the non-bank public to stop the money supply rising over his foolishly self-imposed target of 12 per cent the more the interest charge , will rise. In fact, the borrowing requirement will never come down until the rate of interest is lowered. The debt interest charge per head of the population has risen from £25.4 in 1970 to £62.2 in 1976 and to an estimated £86 in 1977. This is ruination.
The surprise in the City last week was the announcement that the two £600 million lap' stocks issued after the Bank rate rise had been exhausted. Next day another tWd were floated—a £600 million 'short' (1982) at 98 per cent to yield 141 per cent and £600 million 'long' (1996) at 971 with a couP011 of 15f per cent to yield 16.66 per cent. It is incredible that the Chancellor will have sold about £5,000 million of stock this financial year to the non-bank public at an extra annual cost to the national interest bill of around £750 million gross In my view he could have financed his overspending at ,a much lower cost if he had boldly told l'ns party that he would cut slices off his expend!' ture each year until his budget was balanced and would borrow the deficit each year at 3 cheaper rate by cutting Bank rate to 3 normal level. It is really fantastic that in 3 year of rising unemployment we pay nut £750 million extra to moneylenders! When the chiefs of state come to consider how id help the UK out of its financial bog they should first consider how to bring down the rate of interest paid to moneylenders only in the UK but in the whole capital's! world. The 'third world' countries, as well as the UK, are sinking under the growal8 weight of expensive debt. No wonder Monday saw the biggest crash ever in the equity share markets.
Previous page
