Changes in lending market may save Clarke
COMMENT "Like retailers, building societies' margins are under pressure from consumers who are willing to shop around in a way not shown in the 1980s."
Friday 05 May 1995
The Chancellor's dilemma, however, may be less acute than in the past. Lady Luck may be riding to his assistance in the unlikely shape of structural changes in the lending market.
In a speech last year setting out how interest rate changes affect spending and inflation, Mervyn King, the Bank's chief economist, pointed out that the "potency of monetary policy" was affected by lenders' policies. If they raised their lending rates by more than an increase in base rates, that potency was increased; if by less, it was diminished.
Judging by the past three months, monetary policy is down on its testosterone count, certainly as far as the housing market is concerned. The building societies did not pass the last increase in base rate to their borrowers. And Halifax , which normally sets the lead, has said that even if there is a rise after today's meeting it will not pass it on in full.
With transactions in the housing market currently so low, this apparent munificence is less surprising than it might seem. Like retailers', building societies' margins are under pressure from consumers who are willing to shop around in a way not shown in the 1980s.
There is probably more to come. A recent report by Merrill Lynch argued convincingly that margins between borrowing and lending would halve from their current 2 per cent. The only question is how quickly. New lenders like Direct Line could do to mortgage lending what they did to general insurance selling: take the market by storm bringing down prices - the margin - in the process.
If building societies seek to fend off the new entrants from establishing a position, it will drop quickly. If they wait for the incursion to become large-scale, the decline will be more gradual. Whatever the speed, it is clear that if this scenario holds good, the impact on the housing market of a further tightening in monetary policy will be less than in the past.
A taste of MAM's own medicine
If the stock market tom toms are to be believed, Mercury Asset Management will soon be getting a taste of its own medicine. Though majority-owned by Warburg, it has always been keen to emphasise its independence and for choice would have cut its ties altogether. It may finally get its chance. The only problem is that once fully independent, with its shares broadly held in the City, it becomes that much easier to acquire, and plenty out there want to acquire it. Out of the frying pan into the fire.
MAM's best course, insiders insist, would be to form a strategic alliance with a similar fund management business in the US or on the Continent. The two might even take cross-shareholdings in each other. This was not, however, a strategy that MAM found very convincing when it held the fate of London Weekend Television in its hands. Something similar was proposed by Greg Dyke, then chief executive of LWT, in the face of a hostile bid from Granada. He deserved a hearing. LWT, after all, could not have been accused of failing to deliver the goods to its shareholders; it was a well managed, high-growth company - not unlike MAM. Did he get it? When the time came, MAM sold him down the river in the way its fund managers had with so many other highly performing companies. If the same fate now awaits MAM, Mr Dyke would be forgiven a feeling of quiet satisfaction.
An unsatisfactory nuclear outcome
The sight of plucky little Scottish Nuclear fighting off the big bad English barons of Nuclear Electric warms the heart, but the campaign was probably doomed before it began. This is a government in such dissarray and so desperate for tax-cutting revenue that it will scrape the bottom of the barrel to find it.
Because of the haste to find a package that will be half-way presentable to the City in a year's time, Scottish Nuclear and Nuclear Electric are to be merged under a single holding company that advisers believe will be simpler to sell. This is a deeply unsatisfactory outcome, and not just because a brass plate on an office suite in Edinburgh fools no one.
Scottish Nuclear is not obviously a better and more efficient company than Nuclear Electric. Comparing like with like, which means eliminating the two advanced gas-cooled reactors of troublesome older designs in NE's portfolio, the Scottish company is actually level-pegging on price per kilowatt hour. Undoubtedly it is a tightly run ship, but it inherited its two power stations and has built nothing since. NE, by contrast, has the management breadth and depth required to build the £2.5bn power station at Sizewell in Suffolk.
Marginal superiority in efficiency is not really the issue, however. The argument for separation is the one put forward by the regulator, Professor Stephen Littlechild, of encouraging competition. Although Scottish Nuclear does not directly compete in the electricity pool in England and Wales it exports to the South and wants to step up sales, which it could do by building fossil stations.
One way of offsetting the loss of competition that merger would result in would be for the Government to ensure that the old Magnox stations, which are to stay in state hands, are operated as an entirely separate company from the new combine rather than leaving them, as presently envisaged, to be managed by Nuclear Electric. This, however, would only add to costs and in any case would be a highly complex thing to do.
A better solution would have been to keep Scottish Nuclear independent but in state ownership, leaving a decision on what to do about it until after the Nuclear Electric privatisation. We are dealing here, however, with a government so fixed on the short-term horizon of a general election that such common-sense thinking goes by the board. There may even be a case here for Professor Littlechild to do what he does best and put a spanner in the works. If he can find grounds to take the merger of the two nuclear companies to the Monopolies and Mergers Commission, he should do so.
In the end, however, the whole debate may prove a fuss about nothing. Everything has its price and it is certainly possible to sell the nuclear industry. But to do so in the time scale envisaged would be a tall order even for a government fired with the energy and commitment that marked the Thatcher administration in its early years. As it is this is a Government more interested in getting away to the opera than working nights.
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