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Bank of England governor Mark Carney needs another job title: The Nation’s Grown-Up.
In the space of two hours on Tuesday morning, he got the banks ready for Brexit, chased-up legal protection for derivative contracts, stepped in to help London’s clearing houses and tried to end an increasingly bad-tempered dispute at the London Stock Exchange. Well, he at least did more than bickering politicians and directors have managed. And, for that, bankers and LSE shareholders should be grateful.
Mr Carney has now ensured all seven of the UK’s large lenders can withstand exiting the EU without a deal, 16 months ahead of that possibility — by making the latest BoE stress tests recognise how bad the worst case could be. Instead of engaging in juvenile debates about talking up the economy, he has shored up the banks in case it turns down. No one wants a 33 per cent fall in house prices and 9 per cent unemployment, but nor does anyone want a bank less than 100 per cent solvent.
In demanding that lenders hold an extra £6bn in capital in case other risks coincide with Brexit — not unlikely given levels of indebtedness — Mr Carney also shows a degree of sagacity lacking elsewhere. Admittedly, this is the BoE’s job. Still, it had taken Brexit minister David Davis twice as long to deny the need for any business impact report and then release a version with market-sensitive information removed.
Mr Carney has also recognised that £26tn of cross-border derivative contracts and 6m insurance policies must not be invalidated by legal uncertainty over regulation. So he has taken responsibility for spelling out to UK and EU lawmakers the secondary legislation they must pass, and when. He has even given them a four-point checklist. Such a risk to cross-border transactions does not appear to have occurred to chlorinated chicken trade minister Liam Fox.
Mr Carney even found time to note that London clearing houses for derivative trades will need to be recognised by EU authorities post-Brexit, if key European markets — such as that for interest rate swaps — are not to seize up. Thus far, foreign secretary Boris Johnson’s concern for European liquidity seems largely to have concerned prosecco.
But Mr Carney’s remarks on the LSE succession may have a more immediate impact in the City. In an almost exasperatedly paternal tone, he opined on attempts by the activist Children’s Investment Fund to reverse the departure of the LSE chief executive and instead oust the chairman. He professed himself “mystified” by a row over an “agreed succession plan”, but gently suggested that “everything comes to an end”. One observer likened it to the days when decisions could be influenced by a raising of the BoE governor’s eyebrow — but suggested that this was as blatant as a “raising of the hairpiece”.
Mr Carney is not yet old enough for a hairpiece. But there are times when he seems like the only adult in the room.
Thames Water dries up
What was it that first attracted you to the water company paying billions in dividends? Don’t ask members of the University Superannuation Scheme — they might not find it amusing.
Thames Water, which achieved notoriety by paying £1.2bn in dividends to its former private equity owners between 2006 and 2015 — while they raised its net debt from £3.2bn to £11.1bn and polluted waterways — has since attracted new long-term investors: Canadian pension fund Omers, BT pension managers Hermes and the USS. But Thames has just told them it is cutting its dividend from £100m last year to zero for now, to find the money for much-needed improvements. Improvements that were not made while that £1.2bn — and a lot of sewage — was flowing out.
One “dividend” will still be paid, though: £26m to the holding company to service the still-growing debt.
However, for the pension fund managers, the news will not come as a toxic shock. Like Thames Water’s engineers, they knew what they were getting in to. There was no dividend payment two years ago, either.
Nowadays, the investment case for Thames is fixing the infrastructure — at a cost of £1bn a year — to secure an income stream later on. If anything, then, the question is when will the water company’s dividends become attractive again? Missing two years’ payouts in 50 will make little difference to pension investors. But missing more, as the company is forced to invest and cut debt, might mean they small a rat.
Unilever’s delay in unifying its dual listing and headquarters may prove politically expedient, but expensive. Bidders for it spreads business now know a spin-off is a less viable alternative to a sale, because the group admitted this in April. It told analysts: “Exiting via spin becomes very much more complex through the dual-headed structure than it is in a unitary structure”. Oops. Butter side down.