George Kerevan: Government taking risks with RBS role as Aunt Sally

MOODY’S downgrade of RBS plc has provoked headlines. But what exactly does the new A2 credit rating mean in plain English?

According to the agency, A2 is still a “positive” investment grade rating with “low credit risk”. It is a whole rung above above a sheepish Baa, or moderate credit risk. Never mind a whole category away from a “speculative” rating associated with junk bonds. RBS now shares the same rating as the Clydesdale. A certified low credit risk is hardly anything to frighten the horses, even if erring on the conservative side.

However A2 does “suggest a susceptibility to impairment over the long term”. Which is logically the case following the Vickers Report on banking and the government’s decision to make shareholders and creditors of banks explicitly liable for any future losses in their (ring-fenced) investment division.

Nevertheless, the RBS share price fell yesterday. I suspect that had less to do with Moody’s technical reappraisal and more to do with an article in the Financial Times yesterday, which suggested that the government was worried it might have to pump more capital into RBS. Or at least that somebody in the government had hinted that (as yet vague) new EU rules on bank capital ratios might require more taxpayer’s aid for RBS, which is 83 per cent state owned.

RBS was quick to point out that it has already written off 50 per cent of its exposure to Greek debt, and that the remaining £1 billion on its books looks trifling compared to the bank’s core tier one reserves of £50bn. So what gives? My guess is that Treasury spin doctors were intensifying their war of nerves with the European Banking Authority (EBA), which they think is bent on imposing onerous reserve rules on all EU banks, not just the ones in the eurozone who are in hock to Athens.

Admittedly, German banks – with their heavy exposure to Greek debt - are in desperate need of re-capitalisation. It is the failure of Berlin to countenance this expensive reform that is the true cause of the current crisis of the euro. And conceivably the Treasury is correct in thinking that the high tier one capital ratio needed to cover German bank exposure could also force RBS (not to mention Barclays and Lloyds) into seeking fresh capital as well. In the case of RBS, from the public purse.

But using RBS as an Aunt Sally to covertly attack the EBA is a dangerous game. First, because it needlessly undermines RBS, which has already put its balance sheet in order. And second, because properly re-capitalising errant German and French banks is central to resolving the euro crisis.

Spirit of manufacturing still flying in Scotland

Remember factories? Thanks to Spirit AeroSystems at Prestwick, I’ve just had the opportunity to see round a Scottish factory with no less than 1,000 workers busily bashing metal to make leading edge wing assemblies for Boeing and Airbus.

Admittedly, these days, the metal is moulded by computer-operated machines. The Spirit guys and gals in the hard hats programme these computers and – the important bit – self-certify the quality of finished product. At Boeing, in the States, they still keep extra (and expensively bureaucratic) inspectors to do this checking.

Spirit’s Ayrshire facility makes parts for the double-decker Airbus 380 and Boeing’s new 787 Dreamliner. You have to respect a firm that makes bits for two rival airliner manufacturers. Spirit is now making approaches to Chinese plane makers. Why is Spirit doing well in a downturn? Because individual airliners fly for a generation, so building them is normally unaffected by the economic cycle. US-owned Spirit is a linear descendent of the old Scottish Aviation company established at Prestwick by Scotland’s answer to Steve Jobs, the late David McIntyre. Another Scottish Aviation offshoot is BAE Systems Regional Aircraft division, based next door to Spirit.

Yesterday’s reaffirmation by the Competition Commission that Spanish-owned BAA must sell either Glasgow or Edinburgh airport reminded me of McIntyre’s farsighted project to create a single central Scotland airport at Grangemouth. This sensible notion was destroyed when Glasgow Corporation decided to go it alone. Fortunately, McIntyre’s vision of a significant aviation manufacturing industry in Scotland could still take off.