Jeremy Warner's Outlook: Barclays looking a little accident-prone

Fed's dilemma: pulling on elastic; UK airports: a Ferrovial mess at BAA

Friday 31 August 2007 00:00

Oh dear, it's Barclays again. There was a good explanation last night for why Barclays needed, for a second time in just over a week, to borrow heavily from the Bank of England's standing facility. The reasons seem to be more down to technical factors (see story on page 48) than liquidity problems, but it scarcely removes the embarrassment. Barclays seems to be becoming distinctly accident-prone. Among the big high street banks, it has received far more than its fair share of knocks in the present credit crunch.

Nor has it yet entirely managed to dispel fears that it may end up suffering rather deeper losses. The consequent damage to the share price has for the time being all but sunk the Barclays bid for ABN Amro. It will take a very dramatic recovery indeed to again bring it within spitting distance of the alternative from a Royal Bank of Scotland-led consortium. More by chance than design this may mean that RBS's Sir Fred Goodwin ends up paying a lot more than he would have needed to, but this scarcely makes up for the disappointment at Barclays.

The secrecy that surrounds use of the Bank's standing facility has turned out to be a quite damaging characteristic of an otherwise vital part of the interbank payments system. The refusal to name Barclays and the technical reasons why it was forced to borrow unnecessarily unsettled currency markets yesterday as well as causing speculation to run riot over who the guilty party might be.

The last time it happened, rival bankers freely named Barclays as the miscreant. This time they were under strict instructions from the Bank of England not to comment, but when did that ever stop the free flow of gossip in the City? By tea-time everyone knew. The Bank insists it cannot name the parties involved because that would stigmatise them.

Furthermore, if they thought they were going to be stigmatised in this way, they wouldn't use the facility and the payments system would break down. Yet in the end the truth will always out. Part of the problem in the crisis is a lack of transparency. A little glasnost from the Bank would provide some welcome relief.

Fed's dilemma: pulling on elastic

Monetary policy is sometimes likened to pulling on a heavy weight with a piece of elastic. At first, the object doesn't move at all, so you pull harder, until eventually it comes hurtling back at a quite undesirable and dangerous speed, squidging everything before it. The trick is, of course, to pull just hard enough to move the weight, but not so hard that it shifts in an uncontrolled fashion.

Central bankers rarely get it exactly right. Cut interest rates too far and for too long in response to a downturn, and you risk creating the sort of credit and housing boom that lies at the heart of the present mischief in debt markets. Raise them too much too swiftly in response, and the danger is that the economy will be plunged into recession. It's already too late to do anything about the first leg of this process.

With the benefit of hindsight, the US Federal Reserve quite plainly cut interest rates too far, and then kept them too low for too long. The question is whether Ben Bernanke, the Federal Reserve chairman, is now making the same mistake in reverse by holding rates too high for too long.

As with the weight and the piece of elastic, the US economy seemed for long to resist all the interest-rate therapy that was being thrown at it. Each successive rise in interest rates seemed to have no effect in slowing growth and reducing inflationary pressures. It also plainly had no effect on the easy-money conditions of credit markets, where the mistaken belief that the risk of default could be securitised and sold led bankers to kiss goodbye to established prudential standards of lending.

These credit risks are now being re-priced and reassessed. All of a sudden the Fed finds that the elastic has kicked in and the weight is hurtling back at breakneck speed. Mr Bernanke doesn't want to be seen to be rescuing financiers from the consequences of their own folly, but the US economy is now slowing with such speed that he may begin to believe he has no choice. Unfortunately for him, the first gentle tug on the piece of elastic is unlikely to have much effect. He may already have left it too late. Tricky stuff, monetary policy.

UK airports: a Ferrovial mess at BAA

BAA has been a public relations disaster since the Spanish construction group Ferrovial acquired Britain's biggest airport operator in a highly leveraged takeover bid a year ago. Are the two things connected, or are there deeper-seated problems with Britain's airports which cannot reasonably be pinned on Ferrovial's door?

Heathrow, the company's flagship airport, has long been a simmering cauldron of customer discontent. When the Spanish moved in, most of the airlines who use it welcomed them with open arms. However badly they did, everyone figured, they couldn't be any worse than the previous lot.

On a strategic level, these expectations have not been disappointed. Ferrovial has made the case for expansion of Heathrow, including the need for a third runway, more aggressively than BAA did as a publicly quoted company, when the company acted as a conduit for Government policy, which was instead to expand London's airport capacity at Stansted. The demand, however, is at Heathrow, which is bursting at the seams.

In day-to-day operations, there is little sign of Ferrovial improving this situation. To the contrary, things seem to have got very much worse since it took management control. There is now talk of job cuts, which you might imagine would make an already parlous state of affairs grimmer still. Ferrovial has reacted to its almost universally negative press in time-honoured fashion by axing managers and communications staff, and promoting fresh blood. In the latest such move yesterday, Stephen Baxter, divisional managing director for Scotland, was promoted to the position of group chief operating officer.

These changes might over time improve matters a bit, yet they don't address the underlying nature of the problem, and if it is true that operational failings have been greatly exacerbated by incompetent micro-management from Madrid, Ferrovial's headquarters, then they are unlikely to do any good at all. With a mountain of debt to service and pay down, the obvious incentive for Ferrovial is to cut costs, ignore customer service and skimp on investment. This was always the danger when the authorities waved through a bid founded on debt and it may now be the reality.

Virtually no attempt has been made by BAA to have the year-long restriction on hand baggage lifted, despite the fact that no other developed country in the world now operates the one-bag-per-passenger rule. For BAA, an effective monopoly where the passenger has few alternatives but to use its services, the rule – introduced for security reasons – is a boon which both reduces costs and adds to revenues. For passengers and full-service airlines attempting to secure their custom, it is a curse.

In other respects too, BAA's response to the heightened security alerts of the past year has proved lamentably inadequate. The suspicion is that cost control has played a major part in these shortcomings. Insufficiently robust regulation to ensure adequate standards of customer service has also no doubt been a contributory factor.

The enforced break-up of BAA – now under consideration by the Competition Commission – so as to ensure greater competition between airports, has become a matter of some urgency. It may too have become a matter of urgency for Ferrovial, where excessive debt may prompt a pre-emptive firesale of Gatwick and possibly a number of other British airports.

Ferrovial has not so far proved a good custodian of Britain's airports, which arguably should never have been privatised in the first place, and certainly not in the form they were with a single monopoly-owner acting as both owner and manager of the assets. Much more vigorous regulatory control of standards and investment may help to salvage something from the wreckage.

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