Ratings agencies are short of credit
Credit ratings agencies have been working hard to regain investors’ confidence since their reputation was shattered by the financial crisis. They were on the case with warnings about the damage that Brexit and Scottish independence would do to the UK and Scotland. Yet when it comes to the seismic events shaking Spain, they have looked complacent and out of touch.
Only two days before Catalonia, much to Madrid’s disgust, held its referendum on independence, S&P Global noted that “tensions” could erupt, but gave Spain as a whole a “positive” outlook, thanks to its healthy economic growth. It eventually put Catalonia on “negative” watch last week, warning that its fractious relationship with the Spanish central government might damage its ability to service its debt. That downgrade came on Wednesday, three days after the poll and an overwhelming vote in favour of secession.
Madrid has insisted that independence will not happen, but aptly demonstrating how unstable the situation is, Sabadell, which owns TSB in Britain, and Caixa Bank have already declared that they are moving their headquarters out of Catalonia.
But it’s not just Spain. In another puzzling set of judgments, Moody’s has just given a clean bill of health to the European Investment Bank and the European Bank for Reconstruction and Development. Both, it notes, have solid capital and strong support from their shareholders.
They might do at the moment, but what will happen when the UK — a major shareholder in both — withdraws? The EBRD is not an EU body, yet it is closely aligned, so the future role of Britain within it is unclear. What Britain’s commitment to the EIB will be over the next few years is anyone’s guess as the haggling continues over the exit bill.
Navigating Europe’s political upheavals has wrong-footed many in recent months, but ratings agencies need to get a grip, otherwise investors may wonder what their point is.
Banks in court
Fans of historic dramas were denied the retelling in court this summer of Royal Bank of Scotland’s near-collapse a decade ago, because at the last minute the bank settled a case brought by shareholders out of court. Still, if they had already bought their popcorn, it need not go to waste. Next up is Lloyds’ defence against a group of its own investors over its acquisition of HBOS in 2008.
The group argues that Lloyds did not properly disclose HBOS’s parlous state at the time of the deal. The case is due to kick off on October 18. As befits a good story with plenty of plot twists, Lloyds will find itself in a tricky position. On one had, it is arguing that the deal was a good one and that its disclosures were entirely above board. However, it is also preparing for another courtroom showdown: it is being sued by Eric Daniels, its former chief executive, and Truett Tate, the ex-head of wholesale banking, over about £1 million in unpaid bonuses. The bonuses were linked to the integration of HBOS.
So in two cases due to run concurrently, Lloyds will be arguing that buying HBOS was a great idea, while also defending itself for holding back bonuses over problems with the way the acquisition was bedded down. Granted, buying and integrating are two different things, but it will require some clear articulation to keep its arguments separate.
Lloyds isn’t the only bank in a corner. Barclays is being prosecuted along with former executives over its Middle Eastern fundraising in 2008. That could lead to a big fine for the bank, and a considerably more painful sanction of prison time for the individuals, if they are found guilty of fraud.
That case is not due to come to court until April 2019. In the meantime, Barclays is due to defend itself against Amanda Staveley, the financier, in a court battle getting under way in January. Ms Staveley alleges that her firm was not paid properly for its advisory role in the fundraising.
These court actions are a reminder that the financial crisis was a messy and complex affair. Still, that’s the kind of scenario where banks usually come out on top.
Brexit priorities
Theresa May will meet business leaders today to discuss Brexit. She has had worse encounters in the past week, but this will not be a fun one.
The message from business has been loud and clear for months: Britain needs to know by the end of the year what a transitional deal would look like. Otherwise, for highly regulated industries especially, they will not be able to put off restructuring plans to guarantee continued access to the European Union after March 2019.
That crunch moment is 11 weeks away and the UK does not know even if there will be a period of two years or so to implement Brexit, let alone what the terms of engagement during a transition would be.
The prime minister has deliberately not rushed to prioritise the cause of business compared with other issues that Brexit has thrown up, including citizens’ rights and the courts. In contrast, Labour has been sounding increasingly company-friendly, raising the possibility of staying in the customs union and the single market.
The corporate world does not like risk. Despite Labour’s overtures to them, most company bosses are unlikely to back a general election that could lead to a Labour victory in order to get softer Brexit.
But they know that Mrs May now needs friends and will see this as the moment to extract a commitment to push business up the agenda in the negotiations.
