Afternoon:
10°c
The latest issue of National Savings Certificates was described in a press release yesterday as “a great deal for customers, but a kick in the teeth for competitors”.
Something of an extreme comment but one which does point to an unusual problem for businesses in the state sector — National Savings and Investments is in effect under strict orders not to be too successful. Government does not want to be accused of competing unfairly or not with the rest of the private savings sector. So National Savings operates under two constraints. First, it has to make sure that it only provides funds for Government when it is sure it can attract the money at a lower cost than if the Government were to sell the equivalent amount of gilts in the market in the normal way. Second, it has to pitch its offers and set caps on the amount of any issue which an individual can hold, so that it does not seriously undercut alternative homes for savings in building societies and elsewhere. It is therefore expected to punch its weight but with both hands tied behind its back.
Arguably this all worked — or at least had a degree of logic — in the pre-credit crunch world but one wonders how sustainable it is now. The shocks of recent months taught people not to have total confidence in the everlasting nature of banks, even though they now all have their deposits protected by government guarantee. At the height of the crisis money poured into NS & I at an unprecedented rate, because it was seen — and still is seen — to be a safe haven in an uncertain world. There is still a huge demand for such certainty and logically the organisation ought to be able to capitalise on this in order to attract as much money as it likes. Competitors might not like it but it is their own fault that they are at a disadvantage, so why should we have sympathy? Banks and, to a lesser extent, building societies brought their woes down upon themselves. If a bit more competition forces them to work harder at restoring trust with the public that would be no bad thing.
There is a further argument for lifting the shackles. Government wants the nation to save more and it needs itself to borrow more as part of its efforts to get us out of the current mess and to reduce the level of debt in the economy. It would be wholly rational therefore to see National Savings as a key element in solving both problems. Let people save by buying NS & I instruments and lift the artificial constraints so they could do so in vastly higher volumes. It would not of itself solve the Government's debt problems but it would help. In the circumstances in which the nation finds itself it makes little sense to have such a powerful tool and then deliberately not use it.
The third element in this mix is rather more subtle. Most people in this country don't realise it but they are paying twice for the rescue of the banks. They paid first when taxpayers' money was used for the bailout. They are paying again through the rock-bottom interest rates which provide no reward for saving. What they may not realise is that rates are at these levels in order to provide the banks with free money which they can then lend on at much higher interest rates and therefore make excessively high and easy profits. The aim is to make them so profitable that they can re-capitalise themselves out of their earnings.
Some might think this policy morally dubious, particularly as savers are heavily skewed towards the elderly who rely on reasonable interest being paid to supplement their pensions. Others have perhaps are no longer shocked by anything which happens in the financial world. But given the circumstances Government should surely unfetter National Savings so that there is at least one safe place where those who have chosen not to be completely feckless can earn a reasonable return.
Property — but without gearing
Stefan Allesch-Taylor first made life interesting this time last year when he was an adviser to Sir Peter Burt and Sir George Mathewson when they sought briefly to offer themselves as a management team for HBOS as an alternative to its being taken over by Lloyds TSB.
They must all three be rather glad they failed.
Today he is back in the news with an interesting idea for a new property company which he hopes soon to float on the stock exchange. Called Index Linked Properties it is unique because it will be entirely ungeared but allegedly will still deliver a yield of 5.5% to its investors.
Currently institutional investors are falling back in love with property but retain an aversion to debt. This vehicle proposes to give them what they want.
Time will tell whether it works but reports over the weekend said that it had already lined up its first deal — a sale and leaseback with Tesco. That could be the key to the yield. Given that the banks are not lending , there could be a lot of similar good-quality assets around which companies would like to turn into cash. So, although an ungeared property company is counter-intuitive, it may just be a business whose time has come.
