Afternoon:
10°c
We all have our opinions about the value of opinion polls, but I was nevertheless struck by one this week that showed the Conservatives in line for a majority in the House of Commons of only two.
There are, of course, several others that put them on course for a larger majority, which may well be more accurate. The point, however, is that though there is a widespread assumption that David Cameron will be the next Prime Minister, he may not have a working majority.
It is perfectly feasible that there will be a swing towards the Government as the election approaches, partly because the incumbent almost always gets a boost from the “devil you know” factor, and partly because the current bounce in the economy should continue for a few months.
Both of these may persuade enough people to switch back to the Government to make the race a very close-run thing indeed — and particularly when the Liberal Democrats, the Scottish Nationalists and Ukip are also factored into the mix.
Sterling and the government bond markets are currently both quite stable — very stable when one considers the dire state of the public finances and the massive amount of debt that is going to have to be funded.
This relative calm is put down to the fact that the election is close, and once it is out of the way whoever is in power will immediately lay out a path and timetable to put things back on an even keel.
But what if it is a hung Parliament? What if the election is so tight that neither Labour nor Conservatives have an absolute majority and the leader of the larger party has to try to govern as a minority or to share power in a coalition with the Liberal Democrats.
Such an outcome must surely inevitably lead to delay in forming a government, even more delay in deciding what is the appropriate way to tackle the deficit, and considerable uncertainty as to whether suitably tough proposals will actually get through the House of Commons.
If, assuming they are the largest party, the Conservatives try to force through some of the robust ideas that are currently being talked about, then it is hard to see them being successful. If they are in league with the LibDems — which admittedly requires a leap in the imagination — then Vince Cable and his team would expect to be listened to, and the result might be a quite different style of package. Not worse, necessarily, but different.
But can we expect the markets to hang around while all this horse trading is going on in Westminster?
Things are stable now because practitioners are convinced that firm action is coming soon. If the result of the election is inconclusive, then the markets might well see that as a sign of further delay and decide to run for cover. Sterling would slide and the gilts market would crash, and the Government's credit position would become even more fragile.
Such a situation could quickly get quite scary but here is one not entirely frivolous solution. We need all parties to say in advance that their first act on getting into power will be to call in the International Monetary Fund. Not only would that bring stability and maintain confidence but the politicians could also blame it for all the horrible things they then had to do.
Warning behind Yell deal success
If they gave prizes for the deal of the week, my vote would go to Yell, the advertising directories people, if only because of the sheer complexity of what it had to do.
Yell was floated on the stock market in those happy days before the credit crunch, having been in the hands of private-equity houses which had in turn bought it from its original owner British Telecom. A key part of private equity's value creation comes from loading the business with as much debt as it can support, and it came to market with a veritable mountain. Indeed, it was that which disabled it when the economy turned down.
What really comes home in the re-financing documents, however, is the sheer complexity of the debt arrangements. Yell is not a big company yet more than 300 banks were involved as lenders in the original syndication, and many of these moved the debt onto different entities within their organisations. As a result, those organising the refinancing had to negotiate with, and where possible secure the approval of, more than 1000 different entities.
But while it is one thing to congratulate Yell and its advisers for getting there, it also serves as a horrible warning of what is to come. Yell is just one among thousands of companies that are going to need refinancing before the credit crunch and associated deleverage have run their course.
The fashion for slicing and dicing and spreading finance around the globe suggests that even the simplest company is going to have horribly complex debt arrangements. If Yell is in any way typical — and it probably is — this is going to be a truly Herculean task that could take years to work through.
And the fees and costs are going to be astonishing.
