Outlook: Wallace hangs on as C&W searches for way to stop the rot

Inflation Report; Brazilian divorce

Cable & Wireless shows every sign of turning into a corporate débâcle of Marconi-like proportions. Graham Wallace, the chief executive and master architect of this flawed design, was still hanging on in there last night, but after yesterday's near 40 per cent plunge in the share price, it is hard to see how he can survive much longer. Perhaps the only reason he hasn't gone already is that there is no one obvious to replace him.

For the record, the chairman elect, David Nash, insists that shareholders' interests would not be served by shooting the chief executive. The board has decided on its strategy, and Mr Wallace is the man to implement it, he insists. Mr Nash for one has every confidence in his abilities to do so. The City does not. With the share price at its present depressed level, the company is worth less than the value of its £2.2bn cash mountain.

If you think that must make it good value, you haven't yet read yesterday's shocker of a financial statement. Where to start with the litany of bad news? That there is a further, massive asset impairment charge and goodwill write-down is the least of it. The company also admits that it will cost another £800m to get C&W Global, the group's international telecommunications network, to cash flow positive. This is not achieved by growing revenues, mind, but by shedding costs, revenues and capital expenditure commitments in equal measure. A much shrunken business emerges the other side, if it emerges at all.

On top of that there is a near £400m pension fund deficit requiring an immediate cash injection of £47m. And if that were not bad enough, it turns out that the company has also horribly underestimated its property and other lease commitments. This potential liability inexplicably leaps from a previously reported £897m to an astonishing £2.2bn, of which only £450m is provided for in yesterday's numbers.

Of course, a liability on this scale would only materialise if the company closed all its operations down, but it does help explain why the surgery at Global is no bigger than it is. It may cost more to close these businesses down than to keep them running at a loss. That cash mountain looks more of an illusion by the day.

Mr Wallace blames his predicament on the collapse of the telecoms market, but he also bears a heavy responsibility for key strategic and operational errors. After an outstanding start, during which he achieved some excellent top of the market prices for C&W assets, Mr Wallace lost the plot by ploughing the money back into Global.

The idea seemed logical enough – that in the internet age C&W would carve itself a cutting edge role as a provider of value added communications solutions to international business. The reality is that C&W has found itself in one of the most viciously competitive commodity markets ever to have graced the planet. Mr Wallace's two big acquisitions, Digital Island and Exodus, are now almost wholly worthless. Many of their data centres will be closed under yesterday's restructuring plans.

Mr Wallace should have listened to his shareholders. C&W has long looked like the sort of company that would be worth more dead than alive. The billions realised from asset disposals should have been paid back to shareholders, as many of them argued all along. It's too late now.

Inflation Report

So now we know why the Bank of England's Monetary Policy Committee left interest rates on hold last week. The latest Halifax house price index, which showed house prices rising year on year by more than 30 per cent in October, plainly didn't help, but the real explanation lies with the rising rate of general inflation, which according to yesterday's Bank of England Inflation Report, is set to remain above target for most of the next year.

House prices affect the retail price index in two ways. The index contains an allowance for housing depreciation, which increases as house prices rise. However, this is a comparatively small component of the index. The bigger impact is indirect and less measurable. Rising house prices have helped keep consumer demand strong. Furthermore, equity withrawal, now running at nearly 6 per cent of disposal income, has been supporting growth in consumption, which is plainly inflationary.

What makes the situation more worrying still is that this rise in inflationary pressure is occurring at a time of relative strength in the currency. A strong pound should help to keep prices low by reducing the cost of imports. Only one problem. While the price of goods is static or falling, the cost of services continues to rise steeply.

Again, the phenomenon can be linked directly to the overheated housing market. Rarely has the gulf between buoyant consumer demand on the one hand and exceptionally depressed business confidence on the other been greater.

Put another way, consumer demand remains incredibly high, but the excess in supply remains as big as ever. Normally the Bank of England would need to address only one of two things – either the risk of heightened inflation or the risk of plunging growth. In the present situation it finds itself having to address both at the same time.

It should therefore come as no surprise that the MPC has decided that the best policy is to do nothing. To cut interest rates further would only exacerbate what is plainly already an unsustainable boom in the housing market while in all probability doing nothing to raise business confidence.

To raise interest rates looks equally dangerous, since it would put the kibosh on the only bit of the economy still doing well, the housing market. There is no reason to believe the policy dilemma will ease this side of Christmas, so forget previous expectations of a rate cut next month. This may be as low as UK interest rates get.

Brazilian divorce

OK, you're dumped. No I'm not. It's you who's dumped. Did the Anglo-Dutch steel maker Corus ditch its Brazilian bride first, or was it the other way round? On yesterday's evidence, it would seem that Corus broke off the engagement first and CSN's claims to the contrary are, like those of other jilted fianceés, merely an exercise in saving face.

Why did it take Brian Moffat, the normally unsentimental chairman of Corus, so long? Maybe it is because star-struck lovers are often too spellbound to see what is plain to everyone else around them. It is hardly ever a good idea to buy your supplier, especially when it is located in an economy as unstable as that of Brazil. That is what the takeover of CSN and its iron ore mines would have amounted to.

Vertical integration went out of vogue a long time ago and it is doubly difficult to see how Corus would have managed the two halves of the business successfully when they are so far apart. The City has been warning Corus against buying CSN almost from the day their betrothal was announced in July. But Corus pressed on, insisting that even the election of Lula and his left-wing Workers Party in Brazil would not come between Sir Brian and his conquest.

Finally, he seems to have come to his senses. Not a moment too soon by the look of it. The scrapping of the Brazilian deal was yesterday's good news. The bad news is what is happening to Corus' core carbon steels business. In the two months since the interims, the market has lurched downwards and now the company's losses are gong to be at least £100m higher than even the pessimists had forecast.

Sir Brian thought 10,000 job cuts and the closure of Llanwern would be enough to bring the group's UK steel making capacity into line with demand. But he reckoned without even more cheap imports from the soon to be enlarged European Union. From plotting a global alliance which would have catapulted the company into the world's top five, Corus is back to keeping the furnaces alight at home. And quite a challenge it looks, too.

jeremy.warner@independent.co.uk