AS SHERLOCK Holmes told Watson, it is sometimes the fact the dog does not bark in the night that is the big clue. This week the European Central Bank (ECB) did not cut interest rates as the markets had expected.
Instead, Mario Draghi, ECB president, solemnly lectured everyone that Europe was not falling into the black hole of deflation that swallowed the Japanese economy in the 1990s, so there was absolutely no need to ease monetary policy. “We have to dispense with this idea of deflation,” he declared.
Clearly Draghi lives in some other Europe from the rest of us. Core inflation in the eurozone has dropped to a glacial 0.6 per cent, once tax rises are stripped out. Broad “M3” money supply is actually contracting, a sure sign of bad things to come. And the cost of hedging against inflation (so-called “inflation swaps”) has plummeted to a record low.
Deflation exacerbates the debt burden, private and public, making recovery harder. Continuing tight money also strengthens the euro, another problem for Europe’s exporters. Yesterday’s positive job numbers in America (even if below expectations) add to Europe’s woes. With US unemployment now at its lowest since 2008, the chances are increasing that the Federal Reserve will taper monthly bond purchases.
Why is Mario Draghi so cautious? One explanation lies in the German Constitutional Court, which yesterday referred a complaint regarding the legality of the ECB’s earlier attempts to ease monetary policy (through bond purchases) to the European Court of Justice. The German judges said that scheme “exceeds the ECB’s monetary policy mandate and… violates the prohibition of monetary financing of the budget”.
To date, Draghi has been the good guy, taking risks to support the euro sovereign bond market in the face of hostile German opposition. This week, it seems, Draghi has decided to play for time in the hope the eurozone economy starts to recover of its own accord, and lets the ECB off the hook. But central banks are for giving leadership, not sitting on the fence.
Cable caught in the float price minefield
AS THE TV ad says, the weather does lots of things and so does the Royal Mail. And like the weather in Cornwall, the storm over the privatisation of the Royal Mail just refuses to die down.
New figures released under a Freedom of Information request show that 15 out of the 21 banks who pitched to handle the flotation had actually valued the company above the £3.3 billion eventually approved by Vince Cable. Result: the taxpayer received around £1bn less than it might have, had the initial offering been priced higher.
Cable is getting all the blame but spare a thought for Goldman Sachs and UBS, the lead banks in the flotation. They staked their professional reputation on the opinion that 330p a share was the maximum institutional investors would pay without starting to drop out. Yesterday, Royal Mail shares were trading at 589p, valuing the company at nearly £6bn.
It is tempting to bash Goldman Sachs, but pricing initial offerings is a minefield. According to data compiled by Your Money, in nearly 300 UK flotations in the past five years, first day investors have lost an average of 8 per cent. If you bought shares in Peter Wood’s Esure last March at 290p, you lost money. Yesterday they were down at about 269p.