I almost feel sorry for Alistair Darling. Everyone said that whoever took over from Gordon Brown at the Treasury would have the worst job in British politics.
But no one could have foreseen how quickly it would all go so disastrously wrong.
The scale of administrative incompetence revealed at the Treasury and HMRC makes one wonder how Gordon Brown survived ten years without a major disaster on his watch. If fortune smiled on him then, she’s certainly turned on him now.
But Darling’s woes are due to a lot more than bad luck. His great mistake – from which all his troubles have flowed – was made back in September when he failed to act decisively as soon as the Northern Rock crisis broke either to force the Rock into the hands of Lloyds TSB or to have nationalised it. Instead, he dithered and offered the Rock a lifeline in the hope that a solution would turn up.
Whether he genuinely believed his arms were legally tied by the Takeover Panel – as he and Bank of England governor Mervyn King have unconvincingly argued – or whether he was swayed by political pressure to prop up an icon of the northeast establishment remains a mystery. But from that moment, he became de facto responsible for the fate of the Rock without ever being in control of events.
Now he really is between a Rock and a hard place. He essentially faces exactly the same two options as he did before, except now the stakes are impossibly higher. The Rock owes the Bank of England more than £20bn – and there’s no scenario under which the Treasury can be sure of getting it all back.
Indeed, given the news coming out of the housing market, there must be real questions about the quality of the Rock mortgage collateral, whatever Darling’s assurances. Meanwhile, whatever value was left in the Rock brand has now completely disappeared – and with it, any hope of preserving Nothern Rock’s 6,000 jobs in Labour’s critical North East heartland.
Darling seems to have been labouring under the illusion that some bidder might miraculously appear that would repay the government in full, guarantee jobs and give shareholders a decent price. If that was a joke in September, it is a fantasy now.
The offers on the table all involve government help and next to nothing for shareholders. Plus, of course, the risk that the successful bidder walks off with a huge gain at government expense around the time of the next election.
Yet Darling has to make one of these choices – and soon. Not just because the situation is more likely to get worse than better, the longer he dithers. But because this fiasco is now risking damage to the standing of the City. London used to sell itself on the strength of its regulation. The longer the crisis carries on the more hollow this looks. That will cost London business.
Worse, it will make it harder for the UK to fight off demands for tougher EU regulatory rules. But is Darling now too compromised to take hard decisions? He must know that whatever he decides will be judged in the light of his earlier dithering.
Under the circumstances, you might hope that his boss, Gordon Brown, would step in and make the decisions for him. But as usual when things go wrong, Brown is nowhere to be seen.
So there we have it: Britain’s future left to the hands of Mr. Macavity and Mr. Micawber – one who’s never at the scene of a crime, and the other always waiting for something to turn up.
Asia decoupled? I’m not so sure
The pattern over the last couple of decades has been that as soon as one bubble bursts, the next one starts to inflate. For the last few weeks, it has looked as if the same is happening again. Money has been pouring into emerging markets. In the ten weeks to the beginning of November, more flowed into emerging markets than in the whole of either 2005 and 2006, according to Merrill Lynch. During September and October, while the rest of the world was in the grip of the credit crunch, emerging market equities soared 23%. As a result, emerging market equities are now valued on almost identical multiples to developed markets.
No one doubts the long-term potential of Asia, Latin America and central Europe. But these valuations look like bubble territory. Apart from the usual political risks, no one can be sure how these economies will fare in a global slowdown, or how they will cope if their currencies suddenly rise.
The buzzword in the City is that Asia in particular has “decoupled”. But I’m not so sure. I wrote a few weeks ago that the way to play these markets was to avoid equities and instead buy local currency-denominated debt. That way you get the benefit of any currency appreciation without exposure to the economic risks or the sky-high equity values. I still think that’s right.
Simon Nixon is executive editor of Breakingviews.com