FINANCE AND INVESTMENT
By CUSTOS
SOONER than even the most pessimistic observers had predicted Great Britain has been forced by the sheer pressure of events to suspend the fuller convertibility of the pound assumed with such an outward show of confidence on July 15. Last week I described the " run on sterling " which was already heralding a dramatic climax. It is now clear that the cost of convertibility has been much heavier than the Treasury and Bank of England experts had bargained for and that, in fact, a slice of the American loan which we could ill afford has been siphoned away by foreign countries. The position is now more straightforward but no less disconcerting than it was. Imports from dollar countries will have to be drastically cut, every possible help will have to be obtained from sterling sources of supply and, atome later stage, it will clearly be necessary to seek further dollar loffis to avoid cutting down imports of basic raw materials.
In a sense that is a potentially inflationary situation, but I cannot imagine that even Mr. Dalton, for all his antipathy to deflation, will fail to introduce some counter-inflationary measures. How else can he hope to get the inflation poison out of the body economic and restore some reality to the financial affairs of the country? My guess is that some of thee measures will be unpopular with owners of capital and be scarcely'-such as to kindle enthusiasm in the hearts of speculative investors. Caution, with the emphasis on safety-first stocks (accompanied by a partial liquidity) must still be the watchword.
ARGENTINE RAILWAY PROBLEM
In no section of the market has the suspension of sterling's con- vertibility into dollars created greater uncertainty than in Argentine railway stocks. When, last week, the proposed £150,000,000 purchase deal duly obtained the approval of the High Court, thus putting the legal seal on the sanction given to the various schemes of arrangement by British stockholders, it looked as if all was plain sailing and the scheme would go through according to schedule. Now that Britain's currency and trade arrangements with Argentina have been thrown into 'the melting-pot doubts are being expressed as to whether there may not be some last-minute hitch on the Argentine side. Briefly, the cause of the new uncertainty is that Argentina is among those suppliers of this country which are in surplus on trading account. In consequence, the sale of Argentina's meat, maize, linseed and other products to Great Britain will from now on result in the accumulation of substantial inconvertible sterling balances unless some new monetary arrangement is made or Britain is able to step up its exports to Argentina considerably. The other side of the picture is that Argentina is in deficit with the United States, which implies that her whole trading position will become unbalanced if she is unable to convert surplus sterling earnings into dollars. Looking at this position many people in the City have become nervous, on the view that Senor Miranda, the very astute financial lieutenant of General Peron, may now seek to make the ratification of the railway deal a pawn in a new bargain- ing game. I hesitate to say that these fears will prove unjustified, but there is certainly no good reason in equity why Argentina should hesitate to honour her side of the railway bargain.
SURPLUS STERLING EARNINGS During the past six months she has had ample opportunity of amassing the £3o,000,000 of sterling on top of the £120,000,000 already to her credit in blocked balances in London required to finance the railway purchase. During the first half of 1947 her surplus on trading account with this country has amounted to close on £So,000,000. Unless this surplus has been converted into dollars she should therefore have no trouble in providing the full amount required. The strength of the position, from our standpoint, still resides in the fact that if Argentina should fail to ratify, the £12o,000,000 of accumulated balances will be indefinitely frozen. During the past week Argentine railway stocks, including even the senior debentures, have been a nervous market and have been offered at substantial discounts below the proposed take-over prices. Although there may be further fluctuations, my advice to holders is to see things through. While there may be some delay on the Argentine side which may hold up the payments on the various classes of stocks for some weeks or months that, in my view, is the worst that is likely to happen. Quoted at about 8 per cent. discount below take-over prices, after making full allowance for purchase expenses, the senior debentures look attractive for those who do not mind shouldering what appears to be a small risk.
Previous page
