Changing times will reward those who change


The Ground Floor: Our own Government is hoping to shore up the coffers by selling third generation licences and raising a bit of cash writes Sheila O'Flanagan

I'm getting bored with being so bearish on markets - it was fun when there was still some semblance of positive thought from other people but now the whole world seems enveloped in the doom and gloom of equity trauma and it's become stifling. When financial experts start telling you that you'd have done better with your money in the building society, you know we've hit rock bottom.

A few years ago it didn't matter what kind of negative news came out, everyone looked on the good side - despite continuing conflict in the Balkans, Eastern Europe was a more stable region, the Asian crisis was a necessary adjustment, crazy valuations were simply the new paradigm. Now we're faced with carnage in the Middle East, the threat of nuclear action in India and Pakistan, corporate corruption and budget deficits. It's hard to see how much gloomier we can get.

And, as on the upside people ignored any semblance of downward pressure as a blip, now we're unmoved by gains that are made or companies that are reaching, or even beating, their forecasts.

The lead is, as always, coming from the US. A few months ago I talked about the impact that poor corporate results in the United States would have on currencies and that impact is truly being felt. The dollar is now at two-year lows against the euro and, horrifyingly, the current account deficit for the first quarter this year was a record $112.49 billion (€113.9 billion).

Clearly the US can't sustain a deficit of that order and that's why the dollar is being whacked by traders and investors alike. Negativity breeds negativity. As the dollar falls and makes US assets look less attractive, people start selling those assets and driving the currency lower. It's nearly impossible for the dollar to react well even if any positive news comes out of the US during the corporate reporting season.

According to the technical guys, the next level for the dollar to test against the euro is $0.98. Then, after some profit-taking, we get a signal to buy euros and drive it back through parity. That's almost an argument for what goes around comes around, which might allow a sliver of hope for everyone holding the dreaded telecom sector in their portfolio.

Our own Government is hoping to shore up the coffers by selling third-generation licences and raising a bit of cash. This is akin to trying to flog England football shirts in Trafalgar Square last Friday afternoon - only at a deep, deep discount, I'd have thought, and even then they'll be lucky.

Government departments have been spending as though they were telecom chiefs on a round of acquisitions back in 2000. The harsh realities of a changing environment have yet to reach our public representatives. Reading dire predictions about the future of many new economy stocks didn't stop people piling in.

Alleged warnings of troubles in the treasury services division didn't give the management of Abbey National any sleepless nights a few years ago, but I doubt that any of them are getting a decent eight hours now. It's gut-wrenching to think that a financial services company could be rocked so badly - and this time not by rogue traders or fraud but by poor trading and risk management.

Yet it can happen so easily. The treasury services department invests funds on behalf of the bank and, as interest rates fall, needs to increase its exposure to other areas to improve the rate of return. At first everything goes well so it ploughs more cash into different investments. Not only that but it buys dollar-denominated corporate bonds and so gets the benefit of currency appreciation too.

When it all starts to go wrong, it goes wrong in spades. Credit spreads widen, nobody wants corporate paper and the dollar dives.

Most worrying is the fact that Abbey had to inject more funds into its Scottish Mutual life assurance division. This is one of the problems of integrated financial services - if life companies start to suffer due to adverse market conditions, the parent firm may have to bail them out, compromising its own situation. Now it appears that Abbey National - which failed in previous merger talks with Bank of Scotland and fought off a hostile take-over bid by Lloyds TSB thanks to the Competition Commission - is up for sale.

Its chief executive has admitted talking to a number of banks about "partnerships". Although, according to Abbey National, they've always been talking to potential partners in Europe. On somewhat different terms, I'd imagine.

Bank of Ireland, which set up a new board to oversee its British operations, has been mooted as a possible "partner". It would be an interesting move by Michael Soden, whose dream of a merger with AIB is unlikely. So the doom and gloom of recent times may be gripping most of us, but it's still leading to opportunities.

In the end, the strong and the innovative will survive. Being big isn't enough, you need to be big with the will to change. It's not to say that there shouldn't be a long-term plan, but that plan must be flexible enough to take account of short-term opportunities.Thing is, everyone already knows that. But it's putting it into practice that seems so hard.

Sheila O'Flanagan will return in August