A no-brainer decision awaits on interest rates

Battle for Liffe; Diageo/Seagram
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The Independent Online

Another cut in interest rates looked pretty much assured last night after publication of a CBI survey that showed business confidence at its lowest level since the Russian debt crisis of 1998 and pessimism over export orders worse than at any time since the recession of 1980. We already know from recently published minutes and speeches that there is a clear majority on the Monetary Policy Committee for further rate cuts. So the only question for the MPC when it meets again on 8 November would seem to be whether it's the full half point demanded by the CBI yesterday, or just another quarter.

For some on the MPC, the dilemma is still acute. Business confidence is slumping, but consumers seem as oblivious to its consequences as ever. Even post the events of 11 September, they are spending away merrily. There is some evidence of a cooling in the housing market, but not much. Outside London and the South-East, the property market is still moving forward at a fair old trot. And Britain, don't forget, will have the highest rate of growth in the G7 this year. Business confidence is obviously hugely important but it comes and goes like a Cheshire cat – invisible one moment but back there smiling the next. In 1998, for instance, business confidence recovered as quickly as it had slumped.

Even so, the balance of evidence this time around seems much more on the side of the doves than the hawks. Everyone is concentrating on what's happening in the US, where the Anthrax scare looks likely further to exaggerate the economic pain, but the position seems almost as perilous in Europe. If Germany plunges into recession, then things really will start to look grim for Britain. There may be little the eurozone authorities can do to stop it. Short-term interest rates are already near to being as low as they can go without becoming completely impotent, while the scope for tax cuts and enhanced public spending in Germany looks equally limited.

In any case, the present business downturn looks to be a much more serious one than that of 1998, which was as much about a sudden panic in the financial markets as anything else. This one has been on a very long fuse indeed, and although stock markets are already beginning to look towards a recovery at some stage next year, there's a lot more pain to come in the real economy before things start to get better. There may not be a fully fledged British recession, as defined by two quarters of declining GDP, but for many it's going to feel like one none the less.

Battle for Liffe

For the London Stock Exchange and its chief executive, Clara Furse, Liffe is very much a make or break deal. If they succeed in acquiring London's futures and options exchange, then the opportunity exists to create a real powerhouse for derivative and security trading surpassing anything else in Europe. If they fail, and Liffe ends up instead as part of either Euronext or Deutsche Börse, then the LSE's days as an independent national exchange are almost certainly numbered. In the long term, it would probably be too small to stand alone.

At the same time, however, Ms Furse cannot be seen to overpay. The LSE is these days just another publicly quoted company, and although the majority of LSE shares is still owned by the market's users, it has to obey the usual rules of shareholder value as much as any. And, unfortunately for the LSE, there is a strong case for arguing that shareholder value, at least in the short term, might be better served by failure than success, for it is nearly always more value enhancing to be taken over than to do the acquiring.

Liffe insists that the outcome of its three-way auction will be decided without reference to national preferences. The Bank of England likewise insists it has an entirely neutral stance. This seems a little hard to believe given that the Bank regards its role as partly that of looking after and enhancing the wider interests of the City as a financial centre.

With Liffe acquired by Deutsche Börse or Euronext, and the Stock Exchange heading the same way soon after, control and decision making would gravitate to Frankfurt and Paris. The trading platforms, which these days are just glorified computer systems, would follow and large parts of the City's destiny would end up being determined by others. Whichever way you look at it, that hardly seems likely to be in the best interests of Britain plc. So the Bank's position may not be quite as neutral as it publicly claims.

Of the two Continental rivals for Liffe's hand, Deutsche ought to be ruled out on competition grounds, since it already owns Liffe's leading European competitor. That leaves Euronext and the possibility of a European carve up of two of the City's most important trading platforms. Euronext would take Liffe while Deutsche Börse would then step in to take the LSE.

Over the last 10 years, the LSE has been something of a national embarrassment, and it has often seemed quite incapable of getting anything right. It would be entirely in character if it allowed the prize to slip through its fingers. But just recently there have been unmistakable signs of life (no pun intended). The LSE deserves to succeed with Liffe and it is important for the City's long-term health that it does.


IT'S MUCH more fun wheeler dealing than running a business and round at Diageo they've been doing it for years. As Grand Metropolitan, the company never stopped still long enough for anyone to find out what was really going on and things seem to have continued in that vein ever since. But even by Diageo's standards, the frenzy of action over the past few days takes some beating.

On Tuesday, the US Federal Trade Commission finally approved the $10bn sale of its Pillsbury food business to General Mills. At the same time the FTC blocked Diageo's $8bn joint bid with Pernod Ricard to buy the Seagram drinks business. With the Burger King IPO on the back burner until market conditions recover, the setback in the Seagram deal leaves Diageo still only part way towards its goal of concentrating exclusively on premium branded drinks. To get the deal through the FTC, there will have to be yet more horse-trading. Malibu, the Essex girl's tipple, and previously one of Diageo's "core" brands, is favourite to get the boot.

Is all this portfolio shuffling really worth it? Trading in one set of brands produces plenty of gainful employment for the lawyers and investment bankers but does it really create any value for shareholders? Diageo reckons giving up Malibu's £50m profits well worth it for the prize of the Seagram's portfolio, which generates much more. The deal will also boost Diageo's US market share from about 20 per cent to 30 per cent and confirm Britain as the home of the global number one in spirits. But when the deal-making stops, the tougher job will be to ensure that Diageo's painstakingly constructed portfolio of drinks produces a perfectly mixed cocktail and not a thumping great hangover.