MONEY Not a plot, just a muddle

NICHOLAS DAVENPORT

On hearing of the surprise issue of £400 million of 9 per cent Treasury stock 1994 at 961 a City friend who reads this column

telephoned to ask with some bitterness whether Mr Schweitzer of the IMF is now

running the Treasury from inside. He had

read that the IMF attached great importance to the Government selling stock to the pub-

lic if it is to keep within the agreed limit

of £100 million a quarter for the DCE (domestic credit expansion). Did I think

that Mr Schweitzer had pressed the Treas- ury to issue a stock with a coupon-9 per cent—high enough to shock the public into taking the credit squeeze seriously? Or was there some anti-Keynesian at the Treasury determined to destroy the reputation of an economist who dared to envisage the euthanasia of the rentier? Whatever the correct answer may be it will shock every- one who remembers 21 per cent `Dalions' being issued at 100 to think that a British government had to pay the rentier fraternity £36 million a year for twenty-five years— £900 million gross or, say £560 million after deducting tax—to obtain a loan of £400 million. Was it necessary?

From an Exchequer point of view it was totally unnecessary. The Exchequer is going to be in surplus this financial year to the extent of nearly £1,000 million. The public sector is actually repaying £330 million of debt instead of borrowing, as it did last year. £315 million. The Treasury has simply created this extra debt because it likes to have a long-dated stock on 'tap' to stuff the private sector with. Its excuse is that it has exhausted its last long-dated lap' which was the £600 million of Treasury 6.4- per cent stock issued after devaluation in 1967.

The pressure behind it is undoubtedly the tight limit agreed with the IMF for the DCE.

The Treasury is terrified lest the non-bank- ing private sector should become a net seller of government stock. Its anxiety is revealed by the new instructions issued to the govern- ment broker. He must no longer announce to the market the price at which he is will- ing to sell 'tap' stock. In future the market will have to go to him and bid for quantity and price. He will not otherwise disclose his selling price.

This IMF-induced anxiety is also totally unnecessary. The non-banking private sector was already on the feed for government stock. If the old 'tap' has been exhausted it means that the Treasury has lately been able to place in private hands some hun- dreds of millions of long-dated stock. It does not matter what the date is as long as the government departments have stock to unload. Why upset market sentiment by issuing a large new loan with the frighten- ing coupon of 9 per cent? Surely, if the Treasury really wanted another 'tap' it would have been less distressing if it had issued a 7 per cent stock dated 2000 at a discount of around twenty.

What is disturbing about the 9 per cent loan is that it suggests that the Treasury does not want to become a net buyer of short-dated stock in the first qufner 1970 when the hard-pressed taxpayer kas to

sell stock to meet the Inland Revenue demands. In other words it suggests a tightening of the credit squeeze. How many bankruptcies among the smaller business firms does the Inland Revenue wish to create before the Chancellor tells the IMF squeeze-controllers that 'enough is enough'? The domestic motor trade, which affects thousands of small firms, is down by 20 per cent. The building trade, which affects even more, is erecting 25,000 fewer houses. Local shops are feeling the pinch. If the investment plans of the big corpora- tions are going to be cut as well as those of the small, because of the excessive costs of borrowing, there will be a minor reces- sion and the minor recession will become a major recession if the Federal Reserve and the President act together to deflate America and stop the growth of world trade.

Bear in mind that the surplus as well as the deficit countries are trying to cut their consumption. I have no doubt that Mr Jenkins is well aware of these dangerous possibilities and will relax the squeeze before it is too late. He has already had a warning signal from the index of industrial production which stagnated in the first half of the year and has got to revive in the second half to avoid real recession. So far he sees no cause for alarm and is satisfied with the switch to exports. But it is sad that the fantastic computerisation which enables an astronaut to brake his landing on the moon is not available at the Treasury to brake the landfall of recession.

It is this fearful uncertainty which has put the market in equity shares on the Stock Exchange into a state of jitters. The Financial Times index has now fallen 30 per cent from the top-522 to 365. Indeed, some of the leading shares have fallen over 40 per cent and their price-earnings ratios are now at a reasonable level. But suppose the credit squeeze is not relaxed in time to prevent a recession and suppose the revised price-earnings ratios have to be revised again—downwards!

There are some City people who believe that the issue of the new long-term lap' is a diabolical plot on the part of Mr Jenkins to kill the equity share boom once and for all. I rule this out because plots are only made by fanatics who know what they want and where they are going. There are some old-fashioned investors who believe that the slump in equity shares will go on until the 'reverse yield gap' has been eliminated, that is, the gap between the yield on gilt-edged stocks and the dividend yield on industrial equity shares, which in June was as wide as 5.03 per cent. But this is out of date. Different sorts of investors go into the different markets. What is im- portant is to study the gap between average industrial earnings and long-term gilt-edged yields.Nie this gap is in favour of in- dustrial earn tngs the non-institutional long- term investor will always prefer the equity share becaule4f its long-term growth-poten- IP., Under good management it is there to stay, which cannot be said of Mr Jenkins.