21 AUGUST 1982, Page 17

In the City

London's strength

Tony Rudd

The strain of the world's developing financial crisis is showing up wherever there is a latent weakness in the system. It is a time for living in earthquake-proof buildings and for operating in Centres Which are inherently stable. In the interna- tional league table of where best to sit out the present economic storm, London ap- pears to be near the top if not in the actual number one position. `Come to the Square Mile for a quiet life and a safe haven', might be London's present motto.

To begin with, sterling is not a bad cur- rency to hold these days. Admittedly it doesn't enjoy the present phenomenal strength of the dollar, but that could be transient. So far as the European currencies are concerned, sterling stands out well. It is oil-backed and•although oil is no longer the Precious commodity that it appeared to be a few years ago, it will come into its own again and in the meantime provides a very nice cushion for a balance of payments which would otherwise be eroded by the ris- ing tide of imports into the UK. As it is, both the current and the capital account are In agreeable surpluses. Sterling is also being handled with care and some skill by those responsible for the fiscal health of the coun- try, a matter which is inseparable from the stability of any currency these days. Sir Geoffrey Howe and his policies are toge her comfortable reinsurances for those ,./ith

balances here. Admittedly, industrial shares in this country are not exactly a safe haven for money, funk or otherwise, but then who needs to choose them? The gilt-edge market offers an agreeably high return with every expectation of capital appreciation over the next year or two.

But perhaps equally important to all these comfortable factors is the stability of Britain's financial institutions themselves. The recent season of clearing bank results has indeed shown that the level of bad and doubtful debts is disagreeably high for those who had hoped for record profits, but the figures also demonstrated that the level of difficulty is well within the capacity of these organisations to cope with. They may not like it but there is absolutely no ques- tion whatsoever of them being really embar- rassed by the situation either now or in pro- spect. Even if the worst happened and there was a virtual collapse of much of industry in the Midlands and the North, the banks would still come through it all, if not unscathed, certainly with plenty of leeway of safety to spare.

And looking more widely at the London financial scene, even the areas of more speculative activity are in fairly good shape. There is nothing like the heavy over- borrowing of 1972 and 1973 to precipitate another secondary banking crisis. This time, quite apart from the fact that there are not all that many secondary banks still in existence, the Bank of England's super- visory organisation has everything well under its control and anyway the propensity for market operators to over-borrow has not been there in the first place. Perhaps that is one of the benefits the UK did derive from the very disagreeable financial crisis of 1974-75, namely that it wiped out the desire of that generation of market operators ever to speculate on that scale again.

Lucky London one might say, and for once this might be justified because when this relative stability is compared with the situation in other leading financial centres, it certainly does present a contrast.

Nowhere is that more obvious than in the case of Wall Street, which is being racked by worries concerning the financial viability of some of the weaker brethren. In fact the worry is probably exaggerated. There is no way that a banking crisis of the kind that af- flicted America during the depression of the Thirties will happen again in the US. That is, first, because of the existence of the Federal Deposit Insurance Corporation (the FDIC) which compulsorily insures all bank deposits up to $100,000 against default and, secondly, because the Federal Reserve Sys- tem is pledged, like all central banks, to acting out the role of `lender of last resort'.

But despite these fundamental reassurances, the markets in America are nervous in a way that they are not in this country. Perhaps it is because the recession in the oil industry has finally got to the banking community, which is so much bound up with the finance not only of pro- duction but also of development and ex- ploration. Or maybe it is simply the effect of the recession going on for longer than had been expected; this, combined with historically astronomical levels of interest rates, is putting an enormous strain on the whole financial community.

One thing is certain and that is that if in- terest rates go up again in America, there will be a huge crop of failures, which in turn could endanger some banks which look, at the moment, to be solid and beyond reproach. This is why Mr Paul Volcker of the Fed is now apparently set on easing money and credit irrespective of what the money supply figures show. The time has come for the central bank to put its role as lender of last resort above that of guardian of the real value of the dollar. If it is a choice between more bankruptcies and more inflation, then at this point it has to be the latter. Which is why, in the medium term, the dollar could lose some of its pre- sent strength. But in all this, it is interesting to note that a goodly part of the reason why there is so much more gloom and doom on Wall Street than there is in London, is that London's financial institutions are better equipped to handle the impact of recession than are those of New York. The latter is probably the best place in which to profit from a rising bull market, but London is the place in which to take cover during a bear market.