In the City
Advice to summiteers
Nicholas Davenport In the debasing of the English language Which goes on in the financial vocabulary— incidentally, why must we speak so vulgarly When shopping of 'fifty pee': the French don't talk of fifty f's?—the latest cliché is son of' so and so. We have just had 'Son of 6', meaning the new 4-1 per cent pay deal, and now we have 'Son of Rambouillet', meaning President Ford's new summit at Puerto Rico at the end of this month. A more miserable bastard of an old summit flirtation it would be difficult to imagine. If the Prime Minister goes to Puerto Rico he will be taking with him Sir Derek Mitchell, the head of Overseas Finance at the Treasury; so I hope he will steer the conference round to the problem of stabilising the floating currencies (including sterling) whose erratic behaviour, causing violent cnanges in interest rates, is now beginning to upset the recovery of world trade. 'In the Past,' said President Ford, 'world leaders have met to deal with crises, but today's Problems require that leaders meet to avoid them: A foolish remark! The financial leaders have been meeting in summit after summit and failing continually to avoid the crises happening. Basically the economic crises of our time have been due to the breakdown of the world's monetary system and to the universal inflation which floating currencies have allowed. The recent stand-by credit of $5300 million which Mr Healey was able to raise is a welcome sign that the industrial powers with floating currencies have begun to recognise that they must work more closely together. Our daily press has been allowing, even encouraging, people to think that the sinking Pound is just a domestic affair, that because the Japanese or Continental worker can turn out twice as many motor cars as the British worker in the same time British morale has collapsed and the pound has become like confetti. If this thought has really woken up Mr Jack Jones and his TUC colleagues, and has stirred them into the new pay restraint deal destined to bring down our rate 0. f Inflation (as even admiring foreign bankers have admitted) this is all to the good. It Takes a strong case for buying a pound Which looks cheap on the basis of Its Purchasing power parity. But, sterling having been a reserve currency, there are still some ,44000 million of 'reserve' holdings in foreign ands which are itching to reduce the size of their commitment. And there are plenty of Private holders of sterling who do not like
the look of Mr Jack Jones's face, although it is my belief that his face has greatly changed, apart from its hungry egalitarian look. The point that I wish to make is, first, that the status of sterling as a currency widely used in world trade is gradually improving (the City has not yet realised this fact); secondly, that this should be recognised at Puerto Rico so that steps can be taken to strengthen the 'reserve' position of sterling; thirdly, that it is not the weakness of sterling but the weakness of the commercial bank loans to the Third World which is endangering the international payments system.
First, the status of sterling internationally is gradually improving in spite of the bad trade figures for May. What caused the heavier bill for imports was stocking-up after the fall in the exchange rate. Exports were up 3.4 per cent to a record £2014 million. Exports in volume have been rising at more than the 10 per cent annual rate which Mr Healey forecast in his budget speech. As for imports, North Sea oil is going to cut our net imports of fuel by about £1000 million this year and by much more in the years ahead. The final payments deficit for 1976, as Mr Lever said, could well be around £1000 million. So in the world trade accounts sterling is going to be an improving currency, that is, if the lords of the National Oil Corporation do not go mad and start trying to finance 51 per cent of the old and new concessions in the North Sea.
Now let us look at the commercial dollar debts of the developing world. There are outstanding over $160,000 million of loans to the developing nations and at the recent meeting in Nairobi of the fourth United Nations Conference on Trade and Development a moratorium was actually proposed on the debts of the LDCs (the non-oil Less Developed Countries). According to Mr Christopher Fildes in The Investor's Chronicle these non-oil LDCs took 41 per cent of the $8334 million Euro-currency lending last year. Since then the US banks have lent them a further $4156 million. The leading 'New York banks are most involved. The top twenty have now lent over $20,000 million to the non-oil developing countries. A default could bring some of these banks crashing down, for they have already lost billions in loans to the US real estate trust companies. This year Chase Manhattan has written off $25 million of foreign loans.
One of the countries worst hit is Zaire, which has already been slowing down on its international payments. As a result the market held up its finance of a new copper mine in Zaire, causing Charter Consolidated and its partners to write off 8200 million already spent. Argentina, Brazil, India and North Korea are other countries in payments difficulties. The Puerto Rico summit will obviously have to consider the re-scheduling of the loan repayments of some of these non-oil developing countries whose combined payments deficit in 1975 was over $35,000 million. One proposal is that the debts due over the next five years should be re-scheduled over ten to fifteen years. Another is to raise funds for financing buffer stocks of the commodities and metals which the developing countries produce. Mr Kissinger has even suggested that an international resources bank should be organised and run as an arm of the World Bank.
While the precarious nature of the huge dollar indebtedness of the developing world may occupy most of the time at the summit conference at Puerto Rico I hope the opportunity will be taken to stabilise the reserve position of sterling.. Part of these £4000 million 'reserve' holdings might well be funded through the IMF. It would merely require the transformation of the Treasury bills which the 'reserve' holders possess into longer-term bonds of the IMF.
It is comforting to know that sterling is not now the major problem of the world's monetary and payments system. The major problem is the colossal dollar debts incurred by the Third World through the prodigality of the international American banks. A rise in the rate of interest could make these debts insupportable, for the exports of the debtor countries could not rise fast enough to meet the increasing burden of the interest charge. The way out for Puerto Rico summiteers is to support sterling and bring down the rate of interest.
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