Saturday , April 1 2023

Kwarteng’s latest ‘we’re listening’ messaging fails to reduce credibility gap | Nils Pratley

At last, some clarity from Kwasi Kwarteng, even if we’re only talking about the day on which the chancellor intends to make himself clear. The grand unveiling of the debt-cutting plan will happen on 31 October, which risks riffs about ghoulish Halloween tricks but is better than trying to prolong the agony until late November.

The Office for Budget Responsibility will be released from captivity on the same day and permitted to opine on Kwarteng’s “medium-term fiscal plan”. So normal service, or something like it, is being restored – and in time for the Bank of England’s interest rate-setters to announce their critical next decision on 3 November in full possession of the fiscal facts.

By way of further “we’re listening” messaging, a Treasury old hand, James Bowler, was installed as permanent secretary on Monday. Orthodoxy hasn’t been banished completely. And the Bank made its market-calming contribution by tweaking its emergency gilt-buying programme – the one designed to prevent mayhem among defined-benefit pension schemes and a risk to UK financial stability.

Is everybody now feeling relaxed and refreshed? Well, not exactly. First, a potential cliff-edge comes as soon as this Friday, when the Bank ends its gilt-buying programme. On that score, Threadneedle’s Street’s Monday manoeuvres were only partly reassuring.

On one hand, the original timetable is intact, which implies some level of confidence that liquidity in the gilt market has improved, as does the light use of the £65bn facility so far.

On the other, there is still a need to create a new facility from next week in which the Bank will accept investment-grade corporate bonds as collateral; that could suggest there are still a few stragglers in pension-land with the potential to cause further upsets. Visibility is not perfect.

More worrying, gilt yields are rising again. The yield on the 30-year bond – the one seen as most sensitive to strains among pension funds’ LDI (liability-driven investment) exposures – rose to 4.7% in late-afternoon Monday trading.

It went as high as 5% in the aftermath of Kwarteng’s “mini-budget” but Bank action brought it back under 4%. The Bank, note, is not targeting a level. But, for a chancellor with a credibility deficit, it is not a good look to be closer to the top of the range than the bottom.

Meanwhile, the yield on 10-year gilts, at 4.5%, is now back at mini-budget levels. These are now critical numbers to watch. No, calm has not broken out in markets.

Have ministers missed open goal on energy revenues cap?

Some of the big corporate winners from soaraway gas prices, as everybody knows by now, have been those renewable energy generators with old-style incentive contracts. They are the accidental beneficiaries of a mad system whereby the price of gas sets the price of electricity. Then these generators enjoy a “renewables obligation” payment on top.

So the case for extracting some extra revenue in current circumstances is overwhelming. The question is how to do it. Plan A, according to prime minister Liz Truss only a month ago, was a negotiation to lower the wholesale price of energy.

Relevant wind, solar, hydro and biomass projects would be encouraged to sign modern “contracts for difference”, or CfDs, whereby revenues above a set “strike” price flow to the Treasury; in return, companies would get a guaranteed income if wholesale prices ever fall below the agreed price.

Now, it seems, we’re on to plan B. Negotiations looked to have failed, as seemed likely last week, and the government is set to impose a revenue cap, reported the FT at the weekend. All revenues above the cap would flow to the Treasury; it would be a windfall tax by another name, and thus another government U-turn.

Cue tumbling share prices across the renewables sector on Monday as companies engaged in last-minute public lobbying. Don’t set the revenue cap lower than the European Union’s, they say, or else you’ll deter investment in the entire UK renewables sector.

And, yes, one has sympathy. The windfall gains of renewables operators should be taxed in roughly equivalent fashion to those of North Sea oil and gas producers. If not, there is a basic unfairness. And, the way things are heading, it is very likely that the renewables sector will get a rougher deal for no sound reason.

Yet let’s not pretend that the EU’s formula was perfect. It capped revenues for all non-gas producers – so wind, solar, nuclear, coal and the rest – at €180 (£158) a megawatt-hour, which was an unsophisticated one-size-catch-all design.

The better approach, which was open to the UK government, was a fuel-by-fuel method that recognised the differences between, say, the economics of wind and nuclear.

If ministers have missed that open goal, let the complaints begin. There has to be an underlying logic to how a revenue cap is set. At the moment, it is hard to spot.

Land grab in rapid grocery deliveries seems never-ending

In the battle for the “hyperlocal” grocery delivery market, Turkish-backed Getir is in talks to buy German group Gorillas in a cash-and-shares deal, Bloomberg reported on Monday.

Such a transaction could not be called unexpected, of course: consolidation seems to be a core part of most firms’ business plans.

The trouble is, the restaurant-delivery end of the game has been engaged in mergers and acquisitions for years and still seems miles from earning respectable returns on capital.

Somebody may make money eventually, but the “land grab” part of the industry’s evolution never seems to end.

About admin

Check Also

A US ban on TikTok could damage the idea of the global internet | Kenneth Rogoff

The spectacle of the US Congress grilling TikTok CEO Shou Zi Chew on 23 March …

Leave a Reply

Your email address will not be published. Required fields are marked *