Azure Global : 07/25/13

Thursday 25 July 2013

Vince Cable has swallowed the bankers' line on capital

Business secretary used the phrase 'capital Taliban' to describe Bank of England officials, which was both unhelpful and wrong

Hark the words of Robert Jenkins, former external member of the Bank of England's financial policy committee, earlier this month: "I fear that the banks have bamboozled government into believing that society must choose between safety and growth, between safer banks and bank shareholder value, and between a safer financial framework and a competitive City of London. These are all false choices."

Bad news, Mr Jenkins, your fears are well founded. On the evidence ofVince Cable's extraordinary outburst to the FT, the government has indeed been well and truly bamboozled.

The business secretary used and endorsed the phrase "capital Taliban" to describe Bank of England officials. The term is bankers' favourite way to insult the Bank and, aside from bad taste, there are two reasons why a cabinet member should not use it.

First, the criticism of the Bank's Prudential Regulation Authority (PRA) is plain wrong: asking banks to hold more capital should not impede lending.

Second, ministers should keep their noses out of the day-to-day judgments of the independent regulator.

This row has broken out after the PRA demanded that lenders achieve leverage ratios of 3% – that is, that they should hold £3 of capital to support £100 of lending. By no stretch of the imagination can 3%, implying a 33 times levered balance sheet, be regarded as an onerous demand. The Vickers commission argued for 4%, meaning a leverage cap of 25 times, and the US is heading towards 5%.

Nor is a 3% leverage ratio for British banks hard to achieve in practice. All the main lenders apart from Nationwide and Barclays are there already. Nationwide – conceivably an institution with a "safe" book of mortgage assets – has been given until the end of 2015 to fall into line. The PRA's verdict on when Barclays must conform is awaited eagerly, making the timing of Cable's comments appalling.

The key point is that more capital and more lending go hand-in-hand, as Sir Mervyn King stressed time and again when he was governor. "Capital supports lending and provides resilience. And, without a resilient banking system, it will be difficult to sustain a recovery," King said in his last Mansion House speech.

Business secretary Vince CableCable seems to have swallowed the bankers' line that the regulator is making them assemble vast sums of capital that could otherwise be used to lend to small businesses. No, that is not how the system works: to repeat, weakly capitalised banks won't lend because they can't lend. And getting more capital into the system looks a sensible policy when the starting point is a banking industry that is still hugely over-leveraged by historical standards. As Jenkins says, we don't have to choose between safety and growth.

Of course, it suits the lenders to muddy the waters. Barclays would be unpopular with its shareholders if it had to whack them with a rights issue to find capital in a hurry. Nationwide has a particular reason to worry because it is a building society without access to shareholder capital. But the PRA's job is to manage financial stability. By speaking out, Cable makes it harder for the Bank to be seen to act independently.

What if Barclays is next week given a Nationwide-style waiver to meet the 3% ratio by the end of 2015? Would that be because the PRA is satisfied with the current financial strength of Barclays or because the regulators have been intimidated by Cable and the Treasury, which apparently shares the view that jihadists are running amok in Threadneedle Street?

Mark Carney, the new governor, should be spitting blood. He's got a tough job. He doesn't need politicians who make it harder. Cable, who in opposition was quick to spot the danger in running an under-capitalised banking system, should know better.

Article Source : http://www.guardian.co.uk

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Unilever sales miss forecasts as emerging markets growth slows

Anglo-Dutch maker of Marmite, Ben & Jerry's, Hellman's and Persil shows little sign of recovery in North America or Europe

Consumer goods giant Unilever has warned that growth in emerging markets was slowing, while there was "little sign" of recovery in North America or Europe.

The Anglo-Dutch firm reported underlying sales growth of 5% in the second quarter on Thursday, just below market expectations.

The maker of Marmite and Persil said growth in emerging markets in the quarter was 10.3%, compared with 10.4% in the previous quarter, while developed markets fell by 1.3%.

"Growth is slowing in emerging markets, as macro-economic headwinds influence consumer behaviour," the company said.

"Within this overall trend we see a mixed picture across the major countries reflecting different local circumstances. Developed markets remain sluggish with little sign of any recovery in North America or Europe."

Unilever makes products including Marmite, Cornetto, Pot Noodle, Flora, Vaseline and DomestosShares in Unilever fell 1.5% in early trading, losing 41p to £26.74.

The FTSE 100 company's strongest growth came from its home care and personal care divisions, while refreshment was held back by "adverse weather" which hit ice cream sales. Its ice cream brands include Ben & Jerry's, Magnum, Wall's and Carte D'Or.

In its foods division, the good growth of Knorr and Hellmann's was offset by a decline in spreads.

Group turnover in the first half overall rose 0.4% to €25.5bn (£21.9bn), while pre-tax profit rose 14% to €3.6bn.

The chief executive, Paul Polman, said: "Our innovation pipeline is robust which will be vital as we navigate the slowdown in many parts of the world.

"The tougher economic environment and reinvigorated competition require us to set the bar higher on innovation and to increase investment behind our brands. At the same time we need to continue to take costs out of the system to help finance this investment."

The International Monetary Fund warned earlier this month that emerging markets are slowing down, as it cut its forecasts for global growth this year.

Article Source : http://www.guardian.co.uk

GlaxoSmithKline CEO: London HQ knew nothing of China scandal

Sir Andrew Witty said the drug firm had 'no sense' of the 'shameful' allegations that some GSK China executives bribed doctors with cash and sexual favours worth £320m

The chief executive of GlaxoSmithKline has insisted the British drugs group had no knowledge of the alleged cash and sexual favours bribery scandal which has engulfed the company in China before the police arrested four of its senior Chinese executives last week.

Sir Andrew Witty, GSK's chief executive, said the company's headquarters had "no sense" of the "shameful" and "deeply disappointing" allegations that some GSK China executives are the "godfathers" of a criminal scam, bribing doctors with cash and sexual favours worth £320m.

Witty, who was speaking publicly about the "fraudulent behaviour" for the first time, said: "It appears that certain senior executives in the Chinese business have acted outside of our processes and our controls to both defraud the company and the Chinese healthcare system."

He said the company has "zero tolerance" for the alleged behaviour, which is "totally contrary" to GSK's values.

However, he repeatedly refused to say if he would hand back some of his bonus this year if the company was found to have broken the law in China. He said the level of his bonus – which totalled £2.7m last year – is "really a matter for the board".

Witty added that he was "absolutely committed to rooting out corruption and we are absolutely committed to getting to the bottom of what has happened".

The GSK boss, who was paid £3.9m last year, said he was "absolutely willing and ready" to go to China to head up the company's investigation. However, he is leaving the day-to-day handling of the crisis to Abbas Hussain, GSK's head of emerging markets, who flew out to China take control of the situation last week.

He refused to provide details of how the alleged fraud operated, but said the Chinese policeinvestigation is focused on the four Chinese nationals already detained by the police. He said they appear to have been "potentially defrauding GSK and also at the same time allegedly doing some things in the market which are clearly inappropriate and illegal".

The Chinese investigators have "no allegations" against Mark Reilly, the British head of GSK China, or Steve Nechelput, its finance director in the country, Witty said. He said Reilly, who has left China for the UK, and Nechelput, who the Chinese have banned from leaving the country, have been helping GSK with its investigation.

GlaxoSmithKline (GSK) headquarters in London. CEO says HQ was unaware of the alleged bribery in ChinaWitty said GSK's head office in London had no knowledge of the alleged fraudulent activity until the Chinese police raid its offices in Shanghai earlier this month. "As far as headquarters, we had no sense of this issue."

This is despite GSK declaring last month that a four-month internal investigation into allegations of bribery and corruption in China found "no evidence of corruption or bribery in our China business".

Witty said the previous allegations raised by a whistleblower were "quite different" to the new charges. "They are two completely different sets of issues: we fully investigated the first and of course this has now surfaced in the last couple of weeks," he said.

GSK has already pumped in extra cash into its investigations team in China to help them to get to the bottom of the scandal, Witty said.

Despite the apparent serious breach of compliance, Witty said GSK's controls and audit systems are "extremely robust", but promised the company would "learn from this and make changes".

It comes a year after Witty promised a company-wide overhaul to prevent a repeat of a scandal in which GSK staff tricked and bribed doctors into prescribing dangerous antidepressants to children in the US. "We're determined this is never going to happen again," he said last summer after GSK paid a record $3bn (£1.9bn) fine to settle the claim.

GSK has "reached out" to regulators in the UK and the US and has "consulted with the UK government" about the Chinese investigation.

He warned that the allegations are likely to have "some impact" on GSK's future performance in China, but said it was "too early to quantify the extent".

GSK reported a 2% rise in second-quarter sales to £6.6bn. Its drug and vaccine sales in China rose 14% to £212m. China accounts for just over 3% of the company's global sales.

China indicated that its investigation into the "rampant" bribery scandal will be extended to other foreign and local drug companies. "It will not be surprising if more pharmaceutical companies and hospitals, domestic or international, are to be involved in probes in the days to come," the Chinese state news agency said yesterday. "Big international firms should shoulder [their] due responsibilities to bid farewell to malpractice, setting a good example and serving as a wake-up call for domestic pharmaceutical companies."

Article Source : http://www.guardian.co.uk

UK GDP growth of 0.6% shows 'Britain is on the mend,' says George Osborne

The pace of second-quarter economic growth doubled from the first three months of 2013, ONS data shows

Britain's recovery picked up pace in the second quarter, official figures have confirmed, with GDP expanding by 0.6%.

George Osborne, the chancellor, welcomed the fresh evidence that the economy has moved, as he has put it, "out of intensive care".

"Britain is holding its nerve, we are sticking to our plan, and the British economy is on the mend," he said, "but there is still a long way to go and I know things are still tough for families. Unlike the unbalanced economy before the crisis, we are going to make sure that everyone benefits from this recovery."

Labour's shadow chancellor, Ed Balls, speaking from the US, said the stronger growth was "both welcome and long overdue" – but he stressed that for most families, living standards are still falling. "While millionaires have been given a huge tax cut, for everyone else life is getting harder with prices still rising much faster than wages." Balls added that the US economy has grown almost three times as fast as the UK's since mid-2010.

George Osborne meets workers on a section of the M6 motorway near Birmingham on Wednesday night.The 0.6% quarterly rate of growth was twice the pace of the first three months of 2013, and exactly as predicted by economists, after signs of a pickup in retail sales and strong readings in business surveys.

"The economy is coming out of the shadows, with a doubling in its quarterly growth rate from 0.3% in Q1 to 0.6% in Q2. The recovery is not quite on dry land yet, but at least it is a step in the right direction," said David Brown, of consultancy New View Economics.

The Office for National Statistics (ONS) said that all sectors of the economy recorded growth between April and June. Both industrial production, and the key services sector, expanded by 0.6%, the ONS said, with construction – which has been a heavy drag on the economy in recent quarters – picking up by a healthier than expected 0.9%.

Within services, which makes up almost 78% of economic output, the ONS said there was "widespread growth" with retail and hotels, transport and communications, and business and government services ,all showing an improvement.

John Longworth, director-general of the British Chambers of Commerce, said its members had become more optimistic in recent months. "Firms are feeling upbeat and are capable of expanding. More and more are adopting a 'have a go' attitude when it comes to exporting, which is really encouraging as this will go a long way to driving growth further still."

Measured at an annual rate, GDP was 1.4% higher than the same quarter a year ago, but the ONS stressed that the extra working day, after 2012 output was trimmed by the jubilee bank holiday, had flattered the calculation.

Despite the modest upturn, the economy still has not recovered the output that was lost during the deep recession of 2008-09: the ONS said GDP remains 3.3% below its pre-crisis peak.

The Treasury hopes that with the eurozone crisis in remission, the economy is now poised for a more solid recovery, after almost three years of flatlining. As recently as April, there were fears that after shrinking in the final quarter of 2012, the UK could have slipped into a renewed recession.

Chris Williamson, chief economist at City data provider Markit, said: "Prospects look good for a continuation of the recovery in the third quarter, with consumers and businesses both helping drive the upturn. There are even signs that exporters will see improved sales, helping drive the long-awaited re-balancing of the economy.

The relatively firm growth figure is also likely to influence the Bank of England's thinking, as it prepares to decide whether to deliver renewed stimulus to the economy in August. The new governor, Mark Carney, favours giving growth an extra fillip through so-called "forward guidance", which reassures financial markets and consumers that interest rates will remain low for a prolonged period; but other members of the Bank's monetary policy committee are known to be more sceptical.

Article Source : http://www.guardian.co.uk