COMMENT: Rates weapon powerless to cure currency woes
"Currency intervention, we know from bitter experience, can achieve little when pitched against a market in full cry."
Friday 31 March 1995
What is not surprising is the justification it offered for the cut in rates. The Bundesbank insists the decision was taken on domestic grounds, not to help the Americans or Europeans out with their little spot of currency difficulty. We should believe them.
Before this last cut, German rates had fallen by 1.25 per cent since the beginning of last year while American rates had doubled. This is a big change in interest rate differentials by any count. And yet it did precious little to abate the rise and rise of the mark.
By that token, we should not expect this latest cut in rates to bring about any major reversal of the dollar's decline. After all, the Federal Reserve ducked its chance to do something on Tuesday. And there has been no shortage of signals from the American side that the next move in US rates could be down rather than up. Meanwhile, the Bundesbank's cut was generally greeted as marking the trough in the interest rate cycle in Germany.
All this leaves the cause of exchange-rate stabilisation looking distinctly sick. Currency intervention, we know from bitter experience, can achieve little when pitched against a market in full cry. The Bank of Japan has been the latest to learn that in its fruitless attempts to keep the yen in check. Interest-rate changes, even if they could be co-ordinated, seem just as impotent. As for schemes like a global tax on the currency markets, they will have to await a global government.
That does not mean governments are powerless to address the problem of exchange-rate instability. What it does mean is that causes of dollar weakness and mark and yen strength go well beyond the capacity of the monetary authorities to redress. When the US starts to tackle its yawning balance of payments deficit and Japan begins to adjust its surplus, then we will know they are getting serious. Until then, currency markets are likely to continue to overshoot the underlying realities.
Winners and losers at North West Water
North West Water's ingenious and supposedly pre-emptive set of measures for sharing the benefits of enhanced efficiency between customers and shareholders looks a bit too clever by half. As a public relations exercise it might have had some merit were it not for the fact that almost anything water companies do is greeted with a high degree of scepticism; bar cancelling dividends altogether and putting water back on the rates, customers are never going to be satisfied.
Nor was the City impressed by North West's apparent show of altruism. It is always possible that the whole thing is an accounting con, but assuming that what North West is doing is genuine, one of the cornerstone principles of utility privatisation is being breached. This is the principle that customers get their deal from the regulator at the time of the periodic review; anything else the company is able to deliver by way of enhanced efficiencies goes to shareholders.
Other water companies - notably Thames and Welsh - have been dogged in adhering to it. In the US, utility price control tends to be based on return on capital; the reason the British system of predetermined targets was thought an advance is that it gives managements an incentive to cut costs and improve productivity. Admittedly, North West is an exceptional case. It faced a disproportionately large capital spending programme at the time of privatisation and has been able to achieve above-average savings on that programme - some £400m in total. The £36m a year being shared between customers and shareholders is arrived at by calculating the notional saving in bank borrowing costs on the £400m.
Customers get a further benefit from the £180m discretionary investment programme North West has announced for the next five years. Since companies are not allowed to earn a rate of return on any spending over and above that agreed with the regulator, this again is something that must come straight out of bottom-line profits. Together with the rebate, shareholders are losing out to the tune of £270m - this, not under pressure from the Government-appointed regulator, Ian Byatt, but because, in its own words, the company wants to position itself as "socially responsible and to an extent self-regulating".
With the possible exception of Yorkshire, it seems unlikely others will follow North West's lead. Even if they could afford it, what do they gain? The public relations effect of the rebate is soon forgotten and the discretionary investment spending is barely noticed at all. Better perhaps to wait and see what Ian Byatt's successor or an incoming Labour government is going to do first. Just in case any of them were thinking of raiding the larder before then, Mr Byatt yesterday delivered one of his warning shots across the bows, cautioning against excessive dividends. Whether by means of self or outside regulation, it looks as if the days of milk and honey for investors in the water industry are over.
British Aerospace in fighting form
Judging by yesterday's dusting-off of British Aerospace's trombone rights issue, Dick Evans, chief executive, obviously thinks he will be cleared to bid again for VSEL. Let's assume GEC will also be allowed to bid, and that the battle will recommence where it left off. In that case, it is clear that the breathing space since the reference has tilted the playing field in BAe's favour.
Three months ago, BAe looked weak and desperate for cash. There are obviously benefits from becoming a prime naval contractor at a time when there are some juicy new orders around. But there was also a suspicion that the bid for cash-rich VSEL was as much a disguised rights issue as a serious industrial strategy.
Amazing what a few months can do. Around the turn of the year, investors began to see BAe as turning the corner, and they took an increasingly favourable view of the clean-up achieved by Mr Evans. The last stage of the proceeds of the Rover sale came through and the cash-consuming problems of the regional jet business were finally tackled by placing them with ATR, the Franco-Italian consortium.
Investors began to talk of BAe as a serious recovery stock whose share price was supported by more than the prospect of the long-rumoured full bid from GEC. From 420p in December, it has been the other side of 500p this month. BAe still lacks the financial muscle of GEC but, other things being equal, should get a better hearing this time round.
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