Final push for a global settlement begins

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The Independent Online
Lloyd's has at last begun the final push. Much of the talk to date has been pretty theoretical; now the cold, hard figures are on the table, and the real bargaining can get under way. Lloyd's never tires of emphasising that these bills are only estimates of how much it will cost every one of the 34,000 names so they can hive off all their liabilities from old policies into the special re-insurance company, Equitas. The final bills will go out in late May.

But Lloyd's none the less claims that for the vast majority of names, little change should be expected. Time is very short, as the wodge of documents and letters accompanying the indicative Equitas bills makes plain. The cash must be paid up in July, or the whole, daring enterprise to keep Lloyd's from toppling over the brink will fail.

Lloyd's management, headed by Ron Sandler, the chief executive, has been in overdrive making the case to names up and down the country for accepting the settlement, and describes the plan for ending the nightmare as the least worst of all alternatives.

The seriousness with which Lloyd's has gone about this job has impressed many of the sceptics, and there are plenty of those in the twisted and scarred world of the insurance market. Such is the mistrust, and in some areas, downright hatred, that getting any sort of consensus for survival is a remarkable achievement. None the less, there are signs of one emerging. The chances of pulling off a global settlement of Lloyd's problems are probably now better than 50-50.

However, Lloyd's urgently needs to find up to pounds 500m more money to improve the odds. It could come from brokers or auditors or from a reduction in the very tough reserving requirements for Equitas. Every unnecessary extra pound going into Equitas is in effect taken out the pockets of the names the settlement is meant to benefit.

One of these possibilities, or a combination, would reduce the cost to names of putting the nightmare behind them. For the key group of names that must be won over - the hardest hit who also make up the bulk of the fiercest litigants - the choice between accepting the offer or saying to hell with it remains too close a call for comfort. Some have already been awarded handsome sums by the courts which the offer cannot fund anything like in full.

Lloyd's is hinting privately that more money will be forthcoming; that the final bills for the 9,000 facing the maximum losses should be significantly lower. To be confident of success, it will need to deliver - and it is in the DTI's interest to ensure it does, because the loss of a market as prestigious as Lloyd's would be a severe blow to London.

Some good economic news ... and some bad

Bad news on the British economy - interest rates fell again yesterday. Those who rely on their savings for current income can be forgiven for exasperation over the way mortgage rates receive all the attention in the headlines. Investors in variable interest rate savings have lost up to a fifth of their income over the last year or so and for many older people that can lead to a painful cut in living standards.

Luckily, the news is not all bad this time round. In recent weeks there have been clear signs that savings institutions have been prepared to take some of the fall in base rates on the chin by cutting their own margins, which have been as high as two percentage points.

Nationwide cut its lending rates and increased its savings rates last month, Bradford & Bingley cut mortgage rates and held savings steady and several other building societies have followed. They can afford to do this because the high margins of the past few years have left them with healthy reserves.

Some look on this largesse as a way of giving the benefits of mutuality directly to borrowers and depositors. Without dividends to pay to shareholders, societies can afford to cut their profits by giving a better deal directly to their owners, the customers. But even those that are becoming banks are cutting their margins.

Nevertheless, this may not be enough to prevent the latest fall in base rates leading to some modest further fall in savings rates, even even though banks and building societies are likely to absorb some of the reduction. National Savings may be affected, too.

So what should savers do? One reaction would be to grab the highest fixed- rate offers around to lock in today's savings rates. Another would be to accept more risk, perhaps by switching to a five-year corporate bond PEP paying 7.5 per cent or more.

But there are signs in the markets that the fall in the shortest term savings rates could be quite brief, and will probably not be sustained for long - certainly not beyond the election.

Longer term rates for three- to five-year money in the swaps market are already edging up again, in the opposite direction to base rates. Professional investors are focusing on what may happen well beyond the election.

There is no sign yet that longer term savings rates, which are influenced by these money market rates, are moving upwards. But they should certainly be much more stable than base rates and short term savings such as 90 day deposits. There is no need to panic.

Too far, too hard for US market

At risk of sounding like Michael Fish, the investor who asked whether this was the beginning of a stock market hurricane should be advised to relax. These regular little panics in New York are, however, telling us something: the US market has been pushed too far and too hard and is vulnerable to correction whenever there is any unwelcome news.

The shock over the employment figures in the US was actually rather positive for the economy, in the sense that it was caused by a realisation that growth may be running faster than the consensus believed possible.

That is bad news only in the sense that the markets are now looking towards eventual higher interest rates to cool the expansion. It is a commonplace that investors have felt more comfortable with sluggish growth, low inflation and stable policy than with the prospect of a boom that might be followed by bust. They can no longer be sure that this scenario will last.

The yield curve on bonds has already been moving steadily upwards. The markets have now seen apparent confirmation that the Federal Reserve may have been wrongly identifying a pause in the growth cycle as an early warning of recession.

The last time that happened was in 1986 when the Fed had to go heavily into reverse, after mistakenly stoking up a rip roaring boom. But though there may be a change of perception about growth prospects and there is a growing risk of quite a sharp downward correction in the markets, it is hard to see this as the beginning of a long bear market.