Letter: Manifesto for recovery: Gatt, housing market, monetary policy

Sir: I write to applaud the Independent's manifesto for national recovery and to commend its principal economic measures to the Government. However, I believe that two important issues are inadequately addressed.

The first concerns profitable, but cash-strapped, companies with excessive debt on their balance sheets. In a majority of cases, their access to replacement capital market finance (equity issues, in particular) has been shut off at precisely the moment that it is most needed. As a result, many firms have been forced to take hasty cost-cutting measures in order to conserve liquidity. These often have devastating economic effects.

The paucity of equity issues this year is directly attributable to the Government's misguided funding policy. Its voracious appetite for funds has killed the sterling market for risk capital. The policy of fully funding the Government's budget deficit should be overturned in the Chancellor's Mansion House speech on Thursday.

Second, as it stands, the package of measures could have dire and unintended consequences on the building societies and all their existing borrowers. The violent twist in the yield curve will encourage huge quantities of building society deposits to migrate towards government securities. Saddled with their large portfolio of non-performing loans, the societies would be forced to withhold the benefits of lower interest rates for themselves (or face ruin). As in America, the small private-sector borrower may be left paying the price for others' folly.

I fear that the revival of the housing market will ultimately require that the Government assumes responsibility for some of the existing stock of mortgage debt. This is the only way that building societies can cope with the implied loss of deposits and yet still afford to pass on the reduction in interest rates.

Yours faithfully,

PETER WARBURTON

Dunstable, Bedfordshire

23 October