Peston's Picks

Lloyds to convert?

• Robert Peston
• 26 Jan 09, 02:47 PM

It's slightly odd that the penny should at last have dropped for investors - that if Barclays says it's profitable and doesn't need to raise new capital, then that's to be believed.

For a bank to have to give this reassurance in the form of an open letter from the chairman and chief executive is highly unusual. And the message they delivered wasn't new.

The bank has been shouting that it's in reasonable nick for 10 days, ever since the steep slide in its share price began.

Only belatedly have investors realised that Barclays could not make such confident statements without the approval of its auditors and also that of the City watchdog, the Financial Services Authority - and that surely they can't all be wrong.

What's good for Barclays' share price has also had a more modest positive effect on shares in Lloyds.

As for Lloyds, I'm hearing that it may yet follow the lead of Royal Bank of Scotland by converting £4bn of preference shares held by the government into ordinary shares.

That would save it just under £500m a year in dividend payments, but would see taxpayers' stake in Lloyds rise to well over 50%.

Lloyds has been signalling that it does not want to be nationalised to that extent. If it's so desperate to prevent public ownership going through the 50% threshold, it could try to persuade UK Financial Investments, which holds the investment on behalf of the Treasury, that the new shares should not carry any votes.

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China's moment

• Robert Peston
• 26 Jan 09, 09:25 AM

We've known for some weeks that the developed economies of the world are collectively in recession for the first time since the World War II.

But there has been a residual hope that emerging-market economies, led by China, India and Brazil, would still provide momentum to global growth.

That residual hope is quite close to evaporating.

At the end of last week, official figures indicated there was no growth in China at all between the third and fourth quarters, according to analysts (published year-on-year growth was 6.8%, the lowest rate in seven years).

And yesterday, a senior official of the International Monetary Fund told Reuters that the IMF's forecast of global economic growth in 2009 would be revised down sharply later this week to between 1 and 1.5% - which would be the worst economic performance since the early 1980s and is perilously close to zero.

As for international trade, that's shrinking in an alarming fashion. The World Bank expects trade volumes in 2009 to contract for the first time since 1982.

What's at work here is a vicious interaction between the financial crisis, which has led to a massive reduction in credit to finance trade, and a slump in real demand for real goods and services.

All of which is to highlight the limits of what the rescue packages for any individual economy - Gordon Brown's or even President Obama's - can hope to achieve.

If the Treasury's proposals to stimulate loans to households and businesses succeeds, that could lessen our economic pain.

In that context, the Treasury will be encouraged by the positive tone of Barclays' unusual open letter this morning, in which its chairman and chief executive say they are looking to procure insurance from the taxpayer against future losses on dodgy loans - and that doing so would allow them to increase lending in the UK (as a brief digression, it must be a great relief to them that Barclays' share price has at last responded positively to this latest and most theatrical declaration that the bank really isn't in dire need of new capital).

That said, if there's no demand from other countries for the stuff made by British businesses, all the credit in the world isn't going to create revenues for them.

Which is why the likes of Corus, GKN, almost every carmaker you can name and pretty much every exporter is cutting costs and laying off staff.

In fact, as I've been arguing for weeks, the repatriation of credit - the demand from national government's like ours that banks concentrate their lending on domestic customers - may actually worsen the net availability of credit around the world, especially the all-important finance for lubricating the levers and pulleys of cross-border trade.

What's required is the co-ordination of measures taken by the world's biggest economies to revive the ability of banks to lend - and explicit encouragement of banks and other financial institutions to fund business and commerce outside of their home countries (as I say, the reverse is happening - with potentially devastating consequences).

It has also got to be fervently hoped that the likes of China and the other great exporting nations recognise that their future wealth requires them to reconfigure their economies in a substantial way - and it's not just the debt-addicted US, UK and other developed economies in the West that face tough decisions in reconstructing themselves.

If the Asian and South American emerging economies were to import more and export less, thus helping to reduce the scale of the contraction in economies like ours, their longer term prospects would surely be that much better.

This is not to berate them for making us in the West feel so much richer over the past decade, by selling us cheaper and cheaper goods and by recycling their financial surpluses to us in the form of low-interest loans. It's just to say that we've bought all we can afford for now. And that if they don't buy a bit more of what we produce, well then we're going to represent a pretty anaemic market for them in years to come.

Which is why Obama has already signalled - in perhaps too blunt a manner - that he believes the Chinese authorities are holding down the value of China's currency to obtain unfair trading advantage.

How China reacts, with a defiant devaluation or a statesmanlike confident revaluation, will have a bearing on the prosperity of us all.

PS: If you're interested in how we'll know when we're through the worst of this economic mess, you might want to take a look at the short film I made for Friday's News At Ten.

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