The old order changeth
Jock Bruce-Gardyne
Itake as my texts this week two quotations. Firstly, from Sr Ernane Galveas, Brazil's Finance Minister: US in- terest rates are 'causing more havoc than the entire oil crisis'. Second, from our own Sir Gordon Borrie, of the Office of Fair Trading:, the City (he told the Daily Telegraph on Monday) has started doing 'a whole number of things that are going to create more competition for the benefit of users and investors... '.
Sir Gordon Borrie and Sr Galveas do not have anything noticeably in common, ex- cept that both were directing our attention to important and potentially far-reaching changes that began to make their presence felt in the financial markets this week. Sir Gordon was celebrating the launching of the first stage of the City's 'Big Bang' rocket: the first move to 'dual capacity' (albeit confined to trading in overseas securities), and a cut in commissions on large gilt-edged transactions. Sr Galveas by contrast, was releasing a well-timed howl of pain at the latest increase in the US Federal Reserve Board's discount rate.
Let us consider the second first. For almost two years now the Fed has been visibly engaged in holding back on US in- terest rates. Various explanations have been offered for that change of course after four years of vigorous (and successful) ration- ing by price: that US inflation had been licked; that nobody wanted to see the burgeoning recovery halted in its tracks by dearer money; or, more crudely, that if the Fed wanted to hang on to its treasured in- dependence it had better not imperil Mr Reagan's prospects of re-election. But the primary consideration in Mr Volcker's mind was clearly none of these. It was Sr Galveas and others like him. What would it profit the Fed, it was argued, if it allowed another upward spiral of US interest rates to avert domestic inflation and the only result was mass default by sovereign bor- rowers in Latin America, leading to the need for a wholesale bale-out for the US banking system?
Does the half-point on the discount rate signal that the Fed has changed its mind again? It always seemed the least bit pro- blematical whether it would in practice be able to hold the line if the Wall Street bond markets took the bit between their teeth. And last week's move was specifically blamed on the advance in market rates. Be that as it may, it inevitably presaged a stor- my meeting of the IMF interim committee, which happened to be drawing the central bankers and finance ministers of North and South to Washington on Wednesday.
Yet it is at least open to question whether dearer US money is bound to lead to the sort of 'catastrophe' Sr Galveas foresees. For, if one thing is clear from the last- minute provision of funds to enable the Argentinians to 'pay' the interest on their loans before the US banks had to declare them 'non-performing', it is that the com- mercial banks will go to almost any lengths to escape that fate. Hitherto the line has been firmly taken that debtor countries must agree a course of treatment with the IMF before they could be given cash to give back to the donors (what they did with the course of treatment once accepted was another matter, as Sr Galveas's own ex- perience reveals). Argentina strung the IMF along, and the banks obliged regardless.
Everyone agrees that that must not be seen to set a precedent. But of course it does. And if in practice the banks will in the end always make arrangements to pay themselves the interest due from their sovereign clients, then the US rate of in- terest to which these circular arrangements happen to be attached becomes of secondary importance. So perhaps the Fed has lost too much sleep about it. Whether the central banks of western Europe can contrive to 'decouple' their rates from what the Fed gets up to is something else again something that must be worrying Mr Nigel Lawson just a bit, I'd guess. Particularly after this week's news of what is happening to prices at the factory gate, and to domestic bank lending to you and me.
Sir Gordon Borrie, for his part, does not go so far as to claim that bliss was it to be alive at the dawn of the new era in the City: indeed he admits to 'some reservations', as I think he might, For the new game is a game for the professionals, rather than the widows and the orphans. And in a sense
nonal Association of Pension Funds, has come in right on cue, with a stern warning
its ts members to leave the forthcoming Reuters share offer well alone, followed by another to Mr Thornton, the new boss of Mirror Group Newspapers, not to think of copying Reuters' fancy voting structure.
Now if the National Association of pen- sion Funds were a trade union there would be all sorts of rude comments about dic- tating to the membership without benefit of secret ballot; and if it were a retail consor- tium refusing to handle the Reuter Or (potentially) the Mirror mechandise Sir Gordon himself would soon be hustling 's towards the restrictive practices court. As
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instead it makes a stand against disenfran- chising shareholders, it is counted on angels' side. In practice I suspect that it will be about as successful in calling the membership out on strike as Mr Arthur Scargill. Nevertheless one wonders whether, it is necessarily best left to the masters 0, the institutions to lay down the rules for those who seek a stock market quote. Sir Gordon also told the Daily Telegraph that he reckoned the Monopolies Commis- sion's veto on the bid by GKN for AE had cleared the air by showing that it was ri°1 good enough for a bidder to base his upon the international market Plaee, monopoly in our own backyard was not, , be ignored, and would not be. It is a vlew that has been promptly challenged, bY phcation, by European Ferries. Two Ye.ar, s ago EuroFerries bid for British Sealink, and was ordered by the MNIC,E,(3f go away on the selfsame grounds domestic monopoly. Now BR, acting one t structions, is offering Sealink to the high„ bidder, but Morgan Grenfell declines and grounds the books to Euroferries on t„d grounds that they are in baulk a". therefore not entitled to receive inform tion about a future competitor. Truth to tell, the cross-Channel sea-lanes are no currently remarkable for open cairn:Pet-U-1°114; as anyone who tries to ship a car to SP up will soon discover. And now we are Li; against another instance of what aught long called the 'Lonrho syndrome': how 1,°"; can the Monopolies Commission hold if would-be bid at bay for? What hapPerl,s, EuroFerries decides to bid for Sea-lida without benefit of books? Maybe the ment on the GKN/AE bid has not resolk e all the uncertainties for very long. Or_ It has been quite a busy week for Sir GLas son Borrie, one way and another. He Sir also taken my favourite entrepreneur, .;es John Sainsbury, to task for promoting,s,a,ap of his mineral waters with the slogan all water is recycled'. Not so, says Sir Gortil. some of it comes straight of th.e ";he Perhaps he ought to have a word vathWere National Water Council. For theY simultaneously spreading the word arOr_ A that if we didn't want to succumb to. poisoning we had better flush the cisti)%r,lle before we touch a drop. Personally is long believed that water from any source liable to damage one's health.
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