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Cityam 2012-07-06

Cityam 2012-07-06

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Sir Mervyn King will print£50bn more
CENTRAL banks desperately tried topush the world economy out of itsdownward spiral yesterday, with theBank of England turning on the print-ing presses yet again, and theEuropean Central Bank (ECB) and thePeople’s Bank of China (PBoC) cuttinginterest rates further.Denmark’s central bank even cut onekey interest rate to minus 0.2 per cent.But markets were unconvinced,falling across much of the globe, andeconomists doubted whether the loos-ening would have a significant impacton economic growth. The Bank of England announcedanother £50bn of quantitative eas-ing (QE) to try to combat “continu-ing tight credit conditions” and“the increased drag from theheightened tensions within theEurozone,” taking the total printedso far to £375bn.In a very downbeat note,the Monetary Policy Committee (MPC) warnedthat “UK output has barely grown for a yearand a half and is esti-mated to have fallen in both of the past two quarters,” and isunlikely to start growing soon becauseof slowing growth in key export mar-kets and falling business confidence. The extra QE comes after governor SirMervyn King announced an emergency lending scheme with the Treasury togive cheap loans to firms and house-holds, in another last-ditch push to getcredit flowing.But analysts warned so much money had been printed already that the extra£50bn will be less and less effective.“It may well be that further easing will be required,said BNP Paribas’David Tinsley.“But this could come throughthe ‘funding for lending’scheme if it is being effec-tive, rather than gilt pur-chases, where with yieldsalready so low diminishingmarginal returns may be set-ting in.”ECB boss MarioDraghi cut the base rate by 25 basis points (bp)to 0.75 per cent,as he expectsthe economy to start con-tractingagain.“Indicatorspoint to arenewed weakening of economicgrowth and heightened uncertainty,”he said. “The risks surrounding the eco-nomic outlook relate to a renewedincrease in the tensions in severalEurozone financial markets and theirpotential spillover to the euro area realeconomy.” The ECB also cut the rate on itsdeposit facility by 25bp to zero.Both central banks hope inflation hasdropped back far enough to allow thelooser policies to take effect without breeching the rules the Bank of England has a terrible recent record of predicting inflation, yet seems confi-dent that falling commodities prices,low pay growth and slack in the econo-my will keep inflation falling towardsthe two per cent target.Meanwhile China’s central bank cutinterest rates for the second time in amatter of weeks, chopping the bench-mark one-year lending rate by 31 basispoints to six per cent and loosening banks’ lending constraints.But markets were unimpressed by theefforts to stop the slowdown. The Euro Stoxx 50 fell 1.19 per cent,the French CAC40 dropped 1.17 percent; the FTSE 100 was barely changed,rising just 0.14 per cent. Japan’s Nikkeifell 0.27 per cent and Hong King’s HangSeng rose 0.5 per cent.
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BUSINESS WITH PERSONALITY
LONDON
2012
…days to go
See The Forum, Page 18
21
www.cityam.com
FREE
ISSUE 1,668 FRIDAY 6 JULY 2012
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GROUNDHOG DAY
 ATCENTRAL BANKS
BY TIM WALLACE
Yet another round of rate cuts and money printing from policymakers
LASERS AND LIGHT SHOW
 AS SHARD IS OPENED
CROWDS gathered acrossLondon last night to get apeek of a lit-up shard, tocelebrate the officialinauguration of Europe’stallest building.The developer behind theShard described the toweras a compass “pointingtowards a new financialera” as he opened the1,016ft-tallskyscraper.Irvine Sellar, whose firmSellar Property Group built the skyscraper inpartnership with thestate of Qatar, said the building served “as anelegant and powerfulsymbol of hope andprosperity”.It was opened by theDuke of York Prince Andrew, London mayorBoris Johnson and theprime minister of Qatar, Sheikh Hamad bid Jassim bin Jabor AlThani.
BY KASMIRA JEFFORD
THE QUESTIONS MP
S
MUSTASK PAULTUCKER
   L   A   U   R   A   L   E   A   N   /   C   I   T   Y   A   M
 
allister.heath@cityam.comFollow me on Twitter: @allisterheath
ROGER BOOTLE and his CapitalEconomics team won the world’ssecond biggest economics prize yesterday, giving a guide to an ailingEurozone nation considering exit.He and his team pocketed£250,000, after coming top of a fieldof 422 submissions, including onefrom an eleven-year-old schoolboy from the Netherlands.Bootle described his scheme as,“detailed and thorough, but notnovel,” and gave a run through of the main elements of the plan. The most important element wasthe devaluation effected by foreignexchange markets, expected to makethe initially-at-parity new currency at least 30 per cent cheaper – andthus restore competitiveness. The difficult sticking point wasseen to be the question of debtdenomination.European lenders would be deeply resistant to a switch to a nationaldebt in the new currency, but in eurosthe post-devaluationdebt burden would be effectively insurmountable.
Bootle’s teamwins £250,000for Grexit plan
BY BEN SOUTHWOOD
 Aviva trashes Moss as itsells off weak businesses
INSURANCE giant Aviva yesterday unveiled radical plans to dispose of aquarter of its business units in adamning indictment of the strategy pursued by former chief executive Andrew Moss. Aviva said it will sell or close down16 underperforming divisions,including its South Korean businessand several of its Italian partner-ships. Although it declined to nameall of the underperforming units, Aviva confirmed after the marketsclosed that it will sell a third of itsstake in Delta Lloyd, currently val-ued at
 €
290m (£231m). Analysts say the firm’s American business is also likely to be on themarket.“Shareholders find our businessdifficult to understand and feel wehave expanded the internationalscope of our business too far,” execu-tive chairman John McFarlaneexplained in a lengthy mea culpa on behalf of the firm.“We have had £1.3bn of below-the-line restructuring charges over thepast five years and yet are perceivedto be bureaucratic and inefficient.”Instead he will seek to produce aleaner group, cutting middle-man-agement positions as part of a driveto reduce costs by £400m.In a sly reference to Moss’ pledge to
Metro losses widen in first full year
Metro Bank, which launched in 2010 withthe aim of providing a customer-friendlybanking expeirence, increased its lossesby 40 per cent to £33.1m for the last year.The bank has spent about £2m on each ofits 12 branches – double the cost of atypical bank branch – to woo customerswith the promise of better service.
Cameron eyes £13bn Olympics gain
David Cameron yesterday claimed theOlympics would provide a £13bn boost tothe country over four years, amid wideruncertainty about the true impact thegames will have on the UK economy. Theprime minister said on Thursday that theOlympics should not be seen as “somesort of expensive luxury in tough times”,but rather as a chance to “sell Britain tothe world”.
Cupid points arrow at US dating
Cupid, the Edinburgh-based online datingcompany, plans to expand its presence inthe US, where it hopes to target nichemarkets such as Christians, ethnicminorities and older single people. TheAim-quoted firm is to invest an initial £1min setting up an office on US West Coast.
Regulator warned Barclays
Directors of Barclays were warned fivemonths ago by a regulator to address thebank’s aggressive culture. Andrew Bailey,the highest-ranking bank supervisor,attended a board meeting in February tosay that the company’s sometimesbuccaneering culture was unacceptable.
Oligarchs pay for wrecking oil deal
The Kremlin has taken revenge on theoligarchs who wrecked BP’s Arcticalliance with Russian oil group Rosneft,potentially leading to nationalisations.
France Telecom boss in suicides probe
Didier Lombard, the former boss of FranceTelecom, is under investigation forworkplace harassment as authoritiesscrutinise a wave of suicides while he wasat the helm of the company. Yesterday hewas bailed following claims managementpractices during his tenure underminedemployees’ “physical and mental health”.
Grammar test for 11-year-olds
All 11 year-olds will be face a grammar testfrom next year under government plans toraise literacy levels in primary schools.
 Yahoo targets Hulu chief executive
Yahoo is considering Jason Kilar, the chiefof video streaming website Hulu, for itspermanent chief executive position.Interim boss Ross Levinsohn and anumber of other unnamed candidatesremain in the running for the job.
Germany’s Merck is set back on drug
Germany firm Merck suffered another set-back for its cancer drug Erbitux, which in atrial failed to significantly increase the timeadvanced gastric cancer patients live with-out their condition worsening.
LAW firms Freshfields andLinklaters will fail to set the City onfire this morning as they releasetheir full-year results, with bothfirms’ performances subdued inrelation to their competitors.Revenues at Linklaters nudgedup by 0.6 per cent year on year to£1.2bn, while pre-tax profits rose by 1.2 per cent to £520.8m.Managing partner Simon Daviessaid the firm “continued to face volatile and challenging conditionsamid wider economic strains,”adding that practice areasincluding litigation, competitionand regulation and organic growthin developing markets such as Asiahad helped Linklaters’ revenues toremain stable.Meanwhile Freshfields’ turnoverfor 2011-12 was flat at £1.14bn, while profits per equity partnerdipped by one per cent to £1.3m –though that translated to a fourper cent rise once currency fluctuations are stripped out.Managing partner Ted Burke saidthe firm had seen “a good year,especially when you consider theimpact of the sovereign debt criseson transactional activity”.Earlier this week fellow magiccircle firm Allen & Overy reporteda six per cent rise in turnover, while revenues at Clifford Chance grew by seven per cent.
Linklaters andFreshfields hitby weak market
Chairman John McFarlane is driving cost cuts worth £400m
2
NEWS
BY ELIZABETH FOURNIERBY JAMES WATERSON
To contact the newsdesk email news@cityam.com
I
 VAN PAVLOV, the psychologist whofamously trained his dogs torespond to stimuli, would have been proud. Whenever theeconomy grinds to a halt, regardless of reason, well-conditioned policymakersfrom Beijing to Frankfurt alwaysrespond in the same way: they cutinterest rates and wheel out theprinting presses. It is the new orthodoxy: ever easier money is theanswer to every economic problem. True to form, most people in the City  backed yesterday’s news of £50bn inextra quantitative easing (QE). There are some dissenters, of course.Only borrowers benefit from lowerrates: Ros Altmann of Saga points outthat annuity rates are down by 23 percent since July 2008 and that QE hashit over 1m pensioners via annuity and drawdown income falls.Economists such as Simon Ward (see
EDITOR’SLETTER
ALLISTER HEATH
Why QE is not the answer to Britain’s economic problems
FRIDAY 6 JULY 2012
page 19), Andrew Sentance, theInstitute of Economic Affairs’ shadow monetary policy committee, various Austrian-leaning analysts and someothers all opposed this latest round of QE. But they were drowned out by thepro-QE voices. The tragedy is that the supposedomnipotence of monetary policy is infact a misunderstanding of the work of economists such as MiltonFriedman. He rightly identified thatthe bursting of the bubble in 1929only became a depression when themoney supply was allowed to collapse by the Federal Reserve. Because theresuddenly wasn’t enough money leftin the economy, demand slumpedand prices were forced down – but because the adjustment wasn’t imme-diate, especially with wages, it causedmass unemployment. Many firms andindividuals went bust as the real value of debt shot up.Central bankers have since pledgednot to allow such deflationary episodes caused by monetary contrac-tion to happen again, and quite right-ly so. The point of QE is that it cancreate extra money. The Bank of England was therefore right toengage in its original round shortly after the banking implosion. But sub-sequent interventions have beenincreasingly desperate and useless. The money supply is already increas-Friedman ended up advocating thatthe money supply should follow a very simple, unvarying rule to pre- vent governments from trying tomanipulate the economy. Other econ-omists of the Austrian persuasion believe in even more radical mone-tary policy rules. The crucial commonground is that manipulating money and interest rates can only work forshort periods of time – and then only  when it fools people into thinkingthat there is more real demand fortheir services than actually exists.Britain needs a real growth strategy –and that means incentivising compa-nies to invest and hire and to producemore. That is a job for a reforminggovernment, not an over-stretchedBank of England.ing, albeit slowly, in the UK, not col-lapsing. In real terms, the broad,adjusted measure rose by 1.3 per cent(not annualised) in the six months toMay – the largest increases since April2009. Given that the rate at whichmoney is being passed around theeconomy is also going up, the case formore QE is non-existent.Monetary policy errors can destroy the economy –but that doesn’t meanclever monetary policy can create a boom. Bad monetary policy is disas-trous – but good monetary policy isneutral. It doesn’t mess things up. Itallows the private sector to do itsthing. QE is not like alchemy. It can’tcure an economy which is sufferingfrom real ailments, such as excessivedebt, bad skills, too much regulation, bad incentives and the like. Theseproblems require real medicine, not a bit more money printing.grow Aviva into a global giantMcFarlane added: “I do not intend tomake aspirational promises that wemay be unable to keep.” Analyst Barrie Cornes of PanmureGordon said the measures were “logi-cal and sensible” and “could well proveto be the turning point for long suffer-ing shareholders”.But Kevin Ryan of Investec pointedout that “selling businesses in the cur-rent environment will be challeng-ing”. Aviva currently owns 58 individual businesses, with the top 15 –whichinclude units in emerging marketsand the UK Life Protection arm –pro-ducing a £650m operating profit aftertax on £3bn of capital.By contrast the 16 units earmarkedfor disposal consume £6bn of capital but produce post-tax operating profitsof just £300m.Meanwhile the search continues tofind a full-time successor to Moss, whoquit in May after investors rejected hispay deal. An appointment is expectedin early 2013. Aviva’s shares closed up1.1 per cent at 284.6p.
RogerBootle
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The new jobs website for London professionals
CITYAMCAREERS.com
 WHAT THE OTHER PAPERS SAY THIS MORNING
Aviva PLC
5 Jul29 Jun2 Jul3 Jul4 Jul
270275280285290295
p
285.30
5 Jul
 
 THE TAKEOVER Panel yesterday proposed a series of rule changesaimed at protecting pension fundsin bid situations. The proposals, which are open forconsultation until the end of September, would force a potential bidder for a company to publiclstate what it would do with thepension scheme if it wins control. The new rules would also extendthe same rights to pensioners asemployees of the firm to be notifiedof a bidder’s plans. The changes alsoaim to make it easier for schemetrustees to complain if they feel atakeover could hurt their members.
Takeover Paneleyes pensions
BY KATIE HOPE
      G      E      T      T      Y
PARLIAMENT will hold its own investi-gation into rigging of the Libor inter-est rate after Labour MPs failed toforce a public inquiry into the scandal yesterday.Following a bruising debate between chancellor George Osborneand Ed Balls, his opposite number, thegovernment pushed through amotion that will set up a parliamen-tary inquiry led by Conservative MP Andrew Tyrie.It is expected to report back inDecember and its findings will beused to influence the forthcomingBanking Bill.Labour had spent much of this week demanding a judge-led probe –simi-lar to the ongoing Leveson Inquiry into media ethics. But MPs voted 330to 226 in favour of a swift parliamen-tary investigation instead.“People will ask why we are not hav-ing the full independent publicinquiry that this country needs,” EdBalls said after the vote, before givinghis backing to Tyrie’s committee.
BY JAMES WATERSON
 Tyrie welcomed Balls’ support: “I willdo whatever the House asks me to do, but I believe it is only worth trying tochair this committee if it has the fullsupport of all the major parties.” The government will now seek toagree the membership and remit of the investigation before parliamentrises for the summer recess at the endof this month.Beforehand the debate centred onthe personal enmity between Ballsand Osborne, exacerbated by the chan-cellor’s claim that ministers in the pre- vious government had “questions toanswer” over Libor-fixing.Osborne struggled as he was repeat-edly asked to provide evidence to back-up the claim, which was reported in yesterday’s Spectator. “The reason why  we advocate an open, public inquiry, judge-led, is to get precisely to the bot-tom of all these things,” Balls replied.*Meanwhile, it emerged yesterday that the Serious Fraud Office is toreceive a funding boost following therecord-breaking fines issued toBarclays, enabling it to pursue aninvestigation into Libor-fixing.MAJOR global banks face taking a hitfrom tighter regulation as a result of the Libor scandal, ratings agency Fitch warned yesterday, as well asreputation damage if any follow Barclays into the firing line. The grim announcement cameafter Moody’s and Standard andPoor’s both put Barclays’ rating onnegative outlook thanks to thereputation damage caused by the bank’s Libor manipulation, therecord £290m fine levied by theFinancial Services Authority (FSA),and the turmoil at the top of the bank as the chairman, chief executiveand chief operating officer have allhanded in their resignations.In particular, there is concern overthe future of Barclays’ powerfulinvestment banking arm.Moody’s fear “the shareholder andpolitical pressures on Barclays couldlead to broader pressure on the bank to shift its business model away frominvestment banking” – previously amajor driver of profits in the group.S&P said it was concerned aboutpoor business practices and “near-term strategic uncertainty caused by the change in management.”
FRIDAY 6 JULY 2012
3
NEWS
cityam.com
         ”
Let him [Balls] explain what Labour’s involvement was,who were the ministers, who had the conversation, whowere the senior figures.
         ”
George Osborne
I have never seen the Labour party and theshadow chancellor so rattled about theirtime in office.
George Osborne
The cheap andpartisan and desperate way in whichyou and your aides have conducted yourselves inrecent days does you no good, it demeans the officeyou hold and most important it makes it harder toachieve the lasting consensus we need.
         ”
Ed BallsEd Balls
Parliament tohold inquiryinto Libor rate
Ed Balls accused George Osborne of launching a “smear” campaign against Labour.
Osborne and Balls battle it out
At no point, at any time when I was an adviser or aminister in the City, was any point put to me by theFinancial Services Authority, the Treasury, the Bank of Englandor anyone in this house that there was any reason todoubt the integrity of the Libor market.
         ”
Credit rating agenciesturn up heat on Barclays
BY TIM WALLACE

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