Good news does not solve short-term problems

COMMENT

If the Bank of England didn't realise there was a high risk of yesterday's gilts auction going badly wrong, it should have done. For it had not one, but two causes; the parochial and the international.

The local factor was the market's slow awakening to the funding implications of the bigger than expected government borrowing requirement. Though the Bank of England claims that funding of this year's PSBR is still on track, this is plainly nonsense. The proposition could only be true if the official Treasury PSBR forecast turns out to be accurate. In fact it is likely to be pounds 5-8bn too low. The schedule of auctions, will, as a consequence, not be enough. To fill the gap, all the remaining gilts auctions this financial year will have to be as big as the one that flopped yesterday, at pounds 3bn. It is also possible an additional auction will have to be squeezed into the schedule.

The gilts markets yesterday delivered a short, sharp shock to the Chancellor - a warning that the Budget must take no risks with tax cuts. Investors will not pay for public profligacy, was the clear message.

Some of this concern is no doubt overdone. The PSBR is on a downward trend and will be lower, as a proportion of GDP, than most other countries' budget deficits even if the Treasury target is overshot. And the concern about over-supply of gilts needs to be balanced by recognition that demand is set to rise. Reform of the gilts markets should attract international investors and there are also regulatory reasons why domestic pension funds need to buy more gilts.

But even if oversupply fears prove ill founded, international factors are more than enough to undermine the gilts market right now. Bond prices have fallen around the world during the past week because of a change in view about prospects for inflation and short-term interest rates. In Britain and elsewhere, this summer's optimism about interest rate cuts is being reversed.

The slow fuse for this flip in sentiment has been the series of statistics showing that growth in the US is picking up. Mr Greenspan was right - again. America has experienced a pause, not a recession. The experience on this side of the Atlantic could well turn out to be the same. Long- term that might be good news for the Chancellor in electoral terms but it does not ease his short-term funding difficulties.

Costain spotlight turns on Sir Christopher

Assuming Peter Costain can swallow the indignity of his demotion from chief executive to non-executive deputy chairman, yesterday's board changes are a sensible attempt to try and solve the beleaguered construction company's problems. Alan Lovell, who takes over the top job, has only been with the group since 1993, when he joined as finance director, so he comes with the twin benefits of not being part of the old discredited regime but having already got his feet under the table. He at least knows what he is letting himself in for.

This column has regularly called on Mr Costain to accept responsibility for his eponymous company's dramatic fall from grace by falling on his sword - but we have never doubted that he had a role to play in any rescue of the business. Outside the City, where his name is mud, Peter Costain still carries considerable clout in the industry, especially overseas ,where Costain has increasingly had to go looking for work.

Institutional investors who have long called for changes at the top, stung by the 98 per cent fall in the value of their investment since 1987, now have both a head on a plate and the prospect of recovering some of the money they chucked away in a series of desperate cash-calls.

Two of those, at the equivalent of over pounds 15 a share in 1991 and pounds 3 a share two years ago, took pounds 160m from shareholders. The shares fell another 9p to 69p yesterday as the market added a further pounds 10m interim loss to the more than pounds 400m of red ink the company has notched up over the past five years.

Now that Mr Costain has effectively become an ambassador for the company, touting for business in the parts of the world where they are still building the roads and oil rigs which Costain knows best, investors might justifiably turn their attention to Sir Christopher Benson, whose contribution as chairman has hardly been an unqualified triumph.

Realism needed in understanding risks

Tricky business, banking supervision. The lesson drawn by the Bank of England from the Barings collapse was the need for a sharper understanding of the business being supervised, and for regular on-site inspections of banks, both in their domestic headquarters and in overseas offices. Good stuff, but it didn't stop the Daiwa debacle.

Since the 1991 Salomon bond trading scandal, New York's regulatory system has been adorned with every bell and whistle imaginable. The Japanese Ministry of Finance carried out inspections at Daiwa's New York office in 1989 and 1994 and spotted nothing untoward. In addition the Americans now regulate foreign bank subsidiaries quite explicitly. Judging by the ease with which Toshihide Iguchi carried out his exploits, however, even these new, improved efforts have grave limitations.

Matters are not helped by the international division of responsibilities between host and parent country supervisors. In the US itself, responsibility for examining Daiwa has been jointly shared since 1991 by the New York Fed and the New York State Banking Department. This splitting of supervision is asking for trouble. But remedying it is easier said than done. The Daiwa Bank case highlights a more general fact of supervision today - that it is in danger of feeding and pursuing expectations well beyond the reach of what can realistically be achieved in a dramatically changed international financial environment. While the Daiwa case, like Barings, may have been simply one of incompetent and negligent management control, modern banking presents a huge array of quite different and possibly intractable supervisory problems.

As Rudi Bogni, chief executive of Swiss Bank Corporation's London operations points out in the launch issue of Prospect magazine, a "knowledge gap" has built up not just among supervisors, but among managers too. The explosive development of complex financial techniques and instruments in a fast moving, global market, has left many bank executives incapable of properly managing their business. Mr Bogni has decided to go back to university to sharpen up his rocket science, but that is not an option for the regulators. The fact is that banking today bears little relation to its forerunners 20, or even 10 years ago. It is questionable, therefore, whether the seal of approval that central banks confer on those under their tutelage, with all it implies for depositor safety and protection, is still appropriate. This is not a message of defeatism for regulation, rather a reminder of the need for a realistic awareness of risk.

PROMOTED VIDEO
Voices
voicesBryony Beynon: This is something every woman can relate to
Arts and Entertainment
film

News
Mock the tweet: Ukip leader Nigel Farage and comedian Frankie Boyle
peopleIt was a polite exchange of words, as you can imagine
Arts and Entertainment
Steven, Ella Jade and Sarah in the boardroom
tv
Life and Style
fashion
Life and Style
Britons buy more than 30 million handsets each year, keeping them for an average of 18 months
tech
Arts and Entertainment
Benedict Cumberbatch is reported to be in final negotiations to play Doctor Strange for Marvel although the casting has not yet been confirmed
film
News
people
Arts and Entertainment
Alloysious Massaquoi, 'G' Hastings and Kayus Bankole of Young Fathers are the surprise winners of this year's Mercury Music Prize
musicThe surprise winners of the Mercury Prize – and a very brief acceptance speech
Arts and Entertainment
TV Presenters Ant McPartlin and Dec Donnelly. Winners of the 'Entertainment Programme' award for 'Ant and Dec's Saturday Night Takeaway'
musicAnt and Dec confirmed as hosts of next year's Brit Awards
Arts and Entertainment
Orson Welles made Citizen Kane at 25, and battled with Hollywood film studios thereafter
film
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
fashion

World Beard and Moustache Championships held last week

News
video
Arts and Entertainment
Copycat culture: the Chateau Zhang Laffitte in China, top, and the building which inspired it, in Paris, bottom
architectureReplicas of Western landmarks are springing up in unlikely places
Sport
Rolando Aarons watches as his effort finds the corner of the Manchester City goal to give Newcastle the lead
footballManchester City 0 Newcastle 2: Holders crash out on home turf
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Finance Assistant - Part time - 9 month FTC

£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

Marketing Manager

£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

Market Risk Manager - Investment Banking - Mandarin Speaker

£45,000 - £65,000: Saxton Leigh: Our client is a well-known APAC Corporate and...

Compensation and Benefits Manager - Brentwood - Circa £60,000

£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

Day In a Page

Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities
‘A bit of a shock...’ Cambridge economist with Glasgow roots becomes Zambia’s acting President

‘A bit of a shock...’ Economist with Glasgow roots becomes Zambia’s acting President

Guy Scott's predecessor, Michael Sata, died in a London hospital this week after a lengthy illness
Fall of the Berlin Wall: History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War

Fall of the Berlin Wall

History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War
How to turn your mobile phone into easy money

Turn your mobile phone into easy money

There are 90 million unused mobiles in the UK, which would be worth £7bn if we cashed them in, says David Crookes
Independent writers remember their Saturday jobs:

Independent writers remember their Saturday jobs

"I have never regarded anything I have done in "the media" as a proper job"
Lyricist Richard Thomas shares his 11-step recipe for creating a hit West End musical

11-step recipe for creating a West End hit

Richard Thomas, the lyricist behind the Jerry Springer and Anna Nicole Smith operas, explains how Bob Dylan, 'Breaking Bad' and even Noam Chomsky inspired his songbook for the new musical 'Made in Dagenham'
Tonke Dragt's The Letter for the King has finally been translated into English ... 50 years on

Buried treasure: The Letter for the King

The coming-of-age tale about a boy and his mission to save a mythical kingdom has sold a million copies since it was written by an eccentric Dutchwoman in 1962. Yet until last year, no one had read it in English
Can instilling a sense of entrepreneurship in pupils have a positive effect on their learning?

The school that means business

Richard Garner heads to Lancashire, where developing the 'dragons' of the future is also helping one community academy to achieve its educational goals
10 best tablets

The world in your pocket: 10 best tablets

They’re thin, they’re light, you can use them for work on the move or keeping entertained
Lutz Pfannenstiel: The goalkeeper who gave up Bayern Munich for the Crazy Gang, Bradford and a whirlwind trawl across continents

Lutz Pfannenstiel interview

The goalkeeper who gave up Bayern Munich for the Crazy Gang, Bradford and a whirlwind trawl across continents
Pete Jenson: Popular Jürgen Klopp can reignite Borussia Dortmund’s season with visit to Bayern Munich

Pete Jenson's a Different League

Popular Klopp can reignite Dortmund’s season with visit to Bayern
John Cantlie video proves that Isis expects victory in Kobani

Cantlie video proves that Isis expects victory in Kobani

The use of the British hostage demonstrates once again the militants' skill and originality in conducting a propaganda war, says Patrick Cockburn
The killer instinct: The man who helps students spot potential murderers

The killer instinct

Phil Chalmers travels the US warning students how to spot possible future murderers, but can his contentious methods really stop the bloodshed?
Clothing the gap: A new exhibition celebrates women who stood apart from the fashion herd

Clothing the gap

A new exhibition celebrates women who stood apart from the fashion herd
Fall of the Berlin Wall: Goodbye to all that - the lost world beyond the Iron Curtain

The Fall of the Berlin Wall

Goodbye to all that - the lost world beyond the Iron Curtain