David Prosser: The biggest loser from the LSE's Canadian débâcle: Free trade
Is this a backlash to the most dominant economic trend of recent years – the move towards globalisation and trade liberalisation?
Friday 01 July 2011
Outlook For every winner, there must be a loser. In the story of the London Stock Exchange's aborted merger with Canada's TMX, the principals are not difficult to identify. In the loser's corner stands an embattled Xavier Rolet, whose failure to pull off this deal could cost the LSE its independence (and thus lose him his job). The winner, meanwhile, is Dwight Duncan, the finance minister of Ontario, who made his opposition to the merger of TMX and the LSE clear from the moment the deal was announced. Mr Duncan has got his way, even though he was powerless to intervene.
It is now clear the LSE played its cards pretty ineptly. Although the deal was portrayed as a merger, it was always very obvious who would be the senior partner. That left many Canadians feeling uncomfortable about the deal even before a rival proposal emerged. Worse, Maple's arrival on the scene appeared to catch the LSE by surprise and its subsequent efforts to explain away its opponent's more valuable bid as not properly funded were not convincing. The sweetener announced last week was too little, too late and smacked of desperation.
All that said, the embarrassment of the LSE over this episode is a parochial concern relative to the weighty questions it prompts about free trade and protectionism. This is the second major international transaction involving a Canadian company that has been derailed this year. The collapse of the LSE's merger with TMX follows the reverse suffered by BHP Billiton in its pursuit of the Potash Corporation. The former deal was scuppered by private shareholders, while the latter was killed off by the government, but in both cases, it was Canadian concern about losing control of domestic assets that motivated opponents of the transactions.
Nor is Canada alone in acting on such anxieties. Australia, for example, has just vetoed a merger between its stock exchange and the bourse in Singapore.
Are we seeing a backlash to what has been the dominant economic trend of recent years – the move towards globalisation and trade liberalisation? If so, the danger is of a spiral, in which countries aggrieved by the actions of the likes of Canada and Australia resurrect their own trade barriers.
Many of the world's leading economies, particularly in the West, are enduring a loss of confidence as they try to bounce back from the worst financial crisis since the Great Depression. In that context, the temptation to put up the shutters is understandable.
It is still a mistake, however. All the evidence is that free trade and economic growth go hand in hand: look, for example, at the growth rates achieved by China and – to a lesser extent – India as they have opened their economies to the world over the past two decades.
Is it fair to expect Mr Duncan – who described Maple Group as "Canadian patriots" – to see the bigger picture as he juggles the demands of domestic politics? Maybe not, but in the long run, Canadians will be losers too if the world succumbs to protectionism.
Why employers really dumped final salary
Can we just nail one myth in the row over public-sector pensions? Contrary to what you will have heard almost everywhere during the debate about yesterday's strikes, the private sector has not closed down defined benefit pension schemes because of their expense. The overriding factor for the majority of companies has been the unpredictability and volatility of the cost of guaranteed pensions, for which they have recently been required to account much more openly.
Final-salary pension scheme costs are volatile because they provide benefits by investing in assets with volatile returns. In a good year for the pension fund, the company may be able to report that its scheme has a surplus of assets put aside compared with its liabilities. In a bad year, the scheme's funding deficit may look horrendous, putting huge pressure on the sponsoring employer to increase contributions or to make special payments.
In the private sector, employers have understandably become very uncomfortable with the risk that a pension funding problem might blow up in their faces at any moment. But in the public sector, with some notable exceptions, this is not how schemes operate. Rather, they are pay-as-you-go operations, with the contributions made by today's workers financing the pensions of those who have not retired. And in the absence of a pension fund, volatility simply ceases to be an issue.
Does this negate the case for public-sector reform? Not necessarily, in an age of improving mortality rates. But the idea that guaranteed pensions are too expensive for the public sector because they were too expensive for the private sector is based on a misunderstanding of what has happened in the latter over the past decade.
More action, less talk on ETFs please
In warning of his concerns about exchange-traded funds yesterday, the Bank of England's Paul Fisher is just the latest in a series of luminaries to flag up such dangers.
The problem is that what began as a straightforward, low-cost vehicle for tracking the performance of an asset has, with the introduction of "synthetic ETFs" – where the manager does not buy the assets in question but a derivatives contract instead – become much more risky. Suddenly, counter-party risk has entered the equation.
The question now is what we propose to do about ETFs, to which, by the way, retail investors have a growing exposure. In the US, the Securities and Exchange Commission has already introduced more stringent regulation of these vehicles. In Europe, however, they continue to sit within the regulatory framework that governs collective investments, which is less demanding.
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