Markets spring a leak at our end of the boat

Despite the worst financial crisis for 30 years, the index still less than 4% away from the peak reached in June, when it had seemed the financial summer was endless.

At first sight, this looks very odd.

After all, the Footsie is generally viewed as a snapshot of UK Plc and a proxy for British shares generally. It is, of course, nothing of the kind. The index is the sum of the hundred largest quoted companies by market value, regardless of how much impact they have on the UK economy.

The commodities boom has caused a scramble for mining companies, and a combination of location and tax rules has drawn them to London. From a lone Rio Tinto a decade ago, there are seven of them in the Footsie, accounting for almost a quarter of its value.

Now they seem bent on taking each other over, their prices have shot up, with the inevitable impact on the index.

This effect has neatly offset the slump in the share prices of the banks, but while the miners affect the economy only through the price of their metals, the banks are at its heart. They have less to lend because their losses erode the reserves they must have to back their loans. As a result, some good projects won't get the finance they need. Mortgage lenders are reluctant to raise their headline rates, but they are scrapping special offers, bumping up arrangement fees and cutting back the proportion of the purchase price they are prepared to lend.

The result is increasing pain at the other end of the FTSE index. Today marks one of those seismic upheavals in the constituents, with no fewer than seven shares destined for the comparative anonymity of the FTSE 250 index, the biggest single changing of the guard since the height of the dotcom boom at the start of the century.

In March 2000, nine companies were ejected, replaced by the electronic wonders like Psion, Freeserve and Baltimore Technologies. The consolation for today's demoted seven is that four of those throwouts (Allied Domecq, Hanson, PowerGen and Thames Water) have since been taken over at handsome premiums, and a fifth, Scottish & Newcastle, may follow, while the other four subsequently returned to the index.

Today's changes are rather less bizarre, although replacing a pubs group with a water company, or Dixons with Thomas Cook, may be a sign of the way we live now, and it may take rather longer for the rejects to bounce back.

They will now join, or re-join, an index which is clearly in a bear market, down almost 20% from its peak. Many constituents are already finding life hard, and as money gets scarcer both for them and their customers, the market is understandably fearful.

As the chart above suggests, the price of money is not being set by the Bank of England, but by the nervousness of lenders to commit even three months ahead, and to names which would have been seen as good without question six months ago.

Before long, even the miners may rediscover that it doesn't matter which end of the boat is leaking, the result is the same..

RATE CUT THAT FAILED TO TURN THE TIDE THE chart here shows why the world's central banks had to organise an international rescue yesterday. In normal times, a cut in Bank Rate would mean a corresponding cut in Libor, the rate at which commercial banks lend to each other, almost automatically.

These are not normal times, and last week's cut had no impact on inter-bank rates which were already miles above their usual small premium to Bank Rate.

A similar effect, of elevated Libor rates, can be seen in the dollar and euro markets, and it took concerted action spanning the Atlantic to produce the impact that lower bank rates on their own are supposed to have. The question now is whether the West's central banks still carry enough clout, and can marshal sufficient resources, to calm nerves in the money market. When Per Jacobssen ran the International Monetary Fund, in the days when it was rather more than a self-serving boondoggle, he used to say that with $. million, he could make the markets do anything. The price has gone up since then..