ALEX BRUMMER: If a smart services deal could be achieved, the UK could cut its overall deficit by at least half

By ALEX BRUMMER, CITY EDITOR

Updated:

Mark Carney's Frobisher Hall speech contained all the warnings expected of global policymakers. There was caution about build-up of public debt, too much borrowing by companies and the impact of a global trade war on world growth.

The Bank of England governor noted that economic gurus have not been terribly good at anticipating slumps. The International Monetary Fund spotted just one-sixth of the 300 recessions in member countries since 1991.

That makes it an even less effective forecaster than fickle stock markets. Policymakers are still kicking themselves over the failure to anticipate the financial crisis of a decade ago and the subsequent recession.

Bank of England governor Mark Carney has  noted that economic gurus have not been terribly good at anticipating slumps

Bank of England governor Mark Carney has  noted that economic gurus have not been terribly good at anticipating slumps

What caught the imagination in Carney's speech was his attempt to lift his eyes beyond the horizon of stalemate Brexit politics and tumbling business confidence.

In his view Britain, as global services champion, would stand to benefit from a more open international trading system.

It is often forgotten that free trade, such as it is, largely has been built around goods. Services generally have been excluded from trade agreements and the barriers, often unseen, are now three times higher than for merchandise.

Indeed, it is something of a miracle the UK runs a hefty £90billion or so surplus in services largely thanks to the excellence of the City, creative industries and specialist areas such as architecture.

If lower barriers to trade in services could be achieved, largely through a flexible, more open system offering new opportunities for small and medium-sized businesses, then the UK could cut its overall deficit by at least half, according to Bank simulations.

Carney suggests the common global rules and regime established by the Financial Stability Board (FSB), established after the financial crisis, is an example of what can be achieved by bringing down barriers and harmonising regulations.

It is among the factors that boosted the UK economy post-crisis even though British banks were so hard-hit. 

Supranational bodies like the FSB offer a different way of doing things and could offer an alternative to trading blocs such as the EU, which are built on protecting key industries through regulation, rather than looking outwards.

The reason that EU free trade deals with countries such as Canada take so long to sort is because narrow objections, such as those of Walloon brewers, can hold agreements to ransom.

That is not what Britain needs.

Bail bonds

Understanding the stock market is hard enough. The bond markets, largely inhabited by professional traders, offer a wholly different level of complication.

At the time of the crisis it quickly became evident the 'perpetual' debt held by banks wasn't what was written on the tin at all.

Many of these bonds were organised in a way which led the coupons – or returns – to rise after a period of say five years, which was an incentive for the banks to buy them back and start over again. 

When they didn't, and the yields soared, it was assumed the banks concerned were in dire straits.

At a retail level the exceptional returns were the reason why ordinary investors were attracted to so-called PIBs – permanent interest-bearing shares – issued by damaged building societies such as the Bradford & Bingley.

Spanish bank Santander has had more than its fair share of sensations recently, most notably when chairman Ana Botin decided to abruptly cancel a contract to take on well-heeled UBS banker Andrea Orcel as chief executive.

As puzzling to bond market investors is Santander's decision not to buy back a €1.5billion (£1.3billion) perpetual debt, as the market expected. 

This was upsetting because after the crisis it generally has been expected that banks will buy back perpetual bonds early, demonstrating their confidence in being able to raise new money.

Santander defied the convention on the grounds it as cheaper to hang on to the bond it has rather than having to refinance with more expensive paper. That made sense in cost terms but proved reason to question decision-making at the top.

Golden goal

One successful bond issue that has taken off is the €175million (£153.4million)fund-raising by Italian football champions Juventus on the Milan stock exchange.

The prospectus highlighted a 161pc rise in income in eight years, sharply boosted by signing Cristiano Ronaldo. Bellissimo!

 

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