A bankrupt idea that will leave us worse off

To cut or to hold; Halifax gamble
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The Independent Online

The government's determination to take the politics out of merger decisions is to be welcomed. Its drive to make the operation of cartels a criminal offence punishable by imprisonment is also a handy weapon in the armoury of the competition authorities, even if it takes the UK away from a European approach and towards the model adopted by the US. But its overhaul of the insolvency laws looks suspiciously like a piece of gesture politics which has more to do with spin than substance and may even end up doing more harm than good.

The government's determination to take the politics out of merger decisions is to be welcomed. Its drive to make the operation of cartels a criminal offence punishable by imprisonment is also a handy weapon in the armoury of the competition authorities, even if it takes the UK away from a European approach and towards the model adopted by the US. But its overhaul of the insolvency laws looks suspiciously like a piece of gesture politics which has more to do with spin than substance and may even end up doing more harm than good.

Patricia Hewitt, the new Secretary of State for Trade and Industry, says her reform of the bankruptcy rules is all part of the drive to ensure that "UK firms get to the future first". This fatuous phrase is fast becoming her favourite sound bite and the policy which flows from it exhibits the same woolly thinking. Small wonder then that it was left to the luckless Melanie Johnson (or rather her officials) to explain what this "radical package of pro-enterprise reforms" actually meant in practice. The headline-grabbing measure is the plan to distinguish between "good" bankrupts and "bad" ones. The former will be allowed to discharge their bankruptcy in 12 months, the latter could have the badge of shame attached to them for 15 years. This is designed to give entrepreneurs the incentive to try again if at first they do not succeed.

Apart from the legal minefield of separating the sheep from the wolves, the proposal will make bankruptcy an attractive option, which is surely not the object of the exercise. If Ms Hewitt wanted a solution which avoids the stigma of bankruptcy while keeping entrepreneurs in business then her officials could have told her about an existing scheme, the Individual Voluntary Arrangement. This imposes a much stricter discipline on entrepreneurs who would otherwise be bankrupts and prevents them from skipping free from their creditors within a year.

Superficially, the decision to abolish Crown preference, which puts the taxman at the top of the creditors list when a business goes bust, also looks sensible. Many of the unsecured creditors sitting behind the Revenue tend to be small businesses who then also fall to the domino effect. But again, this measure could have the unintended consequence of putting pressure on cash flows because the taxman is liable to pursue the money he is owed more quickly and aggressively.

Again, the Government claims that the shift away from administrative receivership will remove the whip hand from the banks. But the reading of yesterday's White Paper by the insolvency practitioners themselves is that banks will gain more power, not less, to pull the plug on businesses which might otherwise survive.

There is a busy legislative session looming and the insolvency proposals are but part of a much more ambitious Enterprise Bill. The best hope is that this section is dropped or rethought to save the overall package.

To cut or to hold

If the Met Office is correct, then the weather will start to break tomorrow at about the same time as the Bank of England announces its lunchtime decision on interest rates. The choice is either to cut or to hold. The soaring temperatures of the last week seem to have induced a peculiar strain of midsummer madness in some quarters, with the dreaded "r" word suddenly on many people's lips and the clamour mounting for a quarter-point reduction in the cost of borrowing. But with a change in the weather, will cooler heads also prevail on the Monetary Policy Committee come Thursday?

For once, the MPC finds itself facing a genuine dilemma. Yesterday's survey from the Nationwide, warning that house prices are rising at an unsustainable pace, screams out for higher interest rates, not lower ones. Purchasing by plastic and the underlying growth in high street sales are already flashing enough warning signs to the MPC that it scarcely needs another reason to tread cautiously. To cut in these circumstances would be to fuel the property boom with cheap loans, encouraging people to borrow against the value of their homes and then embark on a spending binge. The result: a classic inflationary spiral to match the Lawson boom of the late 1980s which, as we all know, ended in a very painful bust.

On the other hand, manufacturing is quite clearly in the doldrums with output in the first five months of the year down by 3 per cent and industry as a whole teetering on the edge of recession. Add in the uncertain international outlook, the lack of any discernible bounce in the US economy and the danger of the service sector becoming infected by the same malaise gripping manufacturing, and there are cogent arguments for a cut in rates.

But what would be the effect of that? Consumer confidence is hardly in need of a fillip and a reduction in rates would do little to bolster exporters in the short term given that their main handicap is the strong pound. While it is certainly true that growth in the economy overall has become more sluggish and will have to improve at a fair lick to meet the Chancellor's mid-point forecast of 2.5 per cent this year, the lag effect from the earlier interest rate reductions is yet to be felt. As is the impact of increased government expenditure in the public sector, which in itself will tend to be inflationary.

Given the genuine uncertainty of the economic picture, this month's decision on interest rates promises to be a much closer call than last month's. But unless the MPC has collectively succumbed to the same heat exhaustion that has laid the Queen Mum low, it will keep rates on hold tomorrow.

Halifax gamble

Halifax's valedictory set of results had the City purring yesterday. The landgrab that has seen it steal mortgage business from its rivals is so far paying off. Although profits are down, James Crosy, Halifax's chief executive, is winning new business at a faster rate than margins are falling and Halifax now accounts for one in four of all new mortgages sold.

This is a handsome dowry to take into the marriage with Bank of Scotland when it is completed next month. In reversing the exodus of customers, Halifax brings to HBOS a whopping customer base ripe for cross-selling and Mr Crosby says, a brand that's gaining street cred. But he goes all vague when tackled on whether every customer of the combined bank will be offered the best savings and mortgage rates available. Given that the cost savings from the merger will be negligible, Mr Crosby does not have much of a margin to play with.

Then are the usual worries about credit quality. Halifax was boasting about the quality of its home loans yesterday, but BoS, with its extensive small business franchise, is geared to the fortunes of the UK economy more widely and the outlook here remains uncertain.

Moreover, with Halifax smashing its own sales targets, Mr Crosby has set himself some pretty tough hurdles to beat, especially given that HBOS has been pitched as a deal to deliver revenue growth, a claim the City has doubted. After Equitable and BoS, Mr Crosby says further deals are off the cards for the time being. How long remains to be seen.

m.harrison@independent.co.uk

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