Another day, another bazooka. The Bank of England’s cut in interest rates on Thursday to a record low of 0.1% was actually the minor display of armoury. Far bigger was the £200bn expansion in quantitative easing, meaning the purchase of government debt and corporate bonds.
It was an attempt to quell financial conditions that were “bordering on disorderly”, said Bank governor Andrew Bailey. Investors have been rushing for cash and dollars, making UK credit markets suddenly very tight, the last thing the crisis needs.
The Bank’s midafternoon intervention eased the pressure a little, but the next bazooka can only be unveiled by the government – measures to protect incomes and employment.
The UK looks a laggard. France, Germany and Scandinavian countries have unveiled various schemes to protect laid-off workers, underwrite company wage bills and provide basic incomes. The Treasury’s version is awaited – and cannot wait much longer.
Nobody would pretend these schemes are easy to design. The degree of burden-sharing between the public purse and private balance sheets is a critical calculation. But speed is essential. Job losses are happening and the risk of a domino effect of business failures is obvious.
The government can have a role as both “lender and employer of last resort”, said Simon Wolfson, chief executive of clothing retailer Next. The latter role sounds startling, but he’s right. In the banking crisis, the first job was to reassure savers that their money was safe; this time it’s about giving confidence in jobs and income.
Put another way, the really disorderly ingredient in the mix is people’s confidence in how they will pay their bills. Intervention on pay and livelihoods must happen “within days”, said the CBI. Correct.
Next can ‘comfortably sustain’ £1bn loss in Gloria Gaynor mode
Still on Next, one could call it the moment when UK plc switched to Gloria Gaynor mode. Amid the tide of profit warnings and cancelled financial forecasts, quoted companies primarily sought to reassure shareholders that they will survive.
Next scored well in the credibility stakes, which was predictable. Wolfson is one of the few FTSE 100 chief executives who was in post during the 2008 financial crash and he also knows the power of a worked-up financial model.
He’s produced stress tests in the past that tackled a no-deal Brexit and online retailing, but this was different. It was a mitigation plan to demonstrate how cash can be conserved during the inevitable whack to revenues as customers conclude they don’t need to wear a new outfit while hibernating.
In short, Next reckons it can “comfortably sustain” the loss of £1bn of full-price sales, a year-on-year drop of 25%, without breaching bank or bond covenants. Capital expenditure can be cut, share buybacks suspended, dividends delayed and so on.
Other companies, especially non-food retailers, should take note. Stress tests are genuinely useful for shareholders and every numerical detail creates a small degree of confidence for employees. Plan beats no plan.
CEO of easyJet defends £170m shareholder dividend
Executives would help their case for bailouts if they didn’t sound quite so entitled. Johan Lundgren, chief executive of easyJet, when asked on BBC radio why he hasn’t cancelled a shareholder dividend worth £170m now that the airline is in cash-preservation mode, replied that the payment is “legally binding” because it has been approved by shareholders.
His answer dodged the question of why, since airlines have been in the eye of the storm for a few weeks, easyJet’s board didn’t seek shareholder approval to undo the dividend. Instead, millions are being dispatched to Sir Stelios Haji-Ioannou in Monaco (he and his family own 34% of easyJet) while the company seeks assistance from the UK public purse.
Lundgren’s answer on that point was that easyJet is merely requesting loans from government on commercial terms. Well, yes, but “commercial” is a slippery concept right now. Not many commercial lenders are rushing to lend to airlines at any rate of interest.
One can see, of course, what Lundgren’s getting at: the UK will need an airline industry and, for all the reasons above, the government urgently needs to support employment. But the tone-deafness suggests not all boardrooms have yet grasped that life has changed overnight for them.
By contrast, bus and coach operator National Express at least announced a pay “deferral and sacrifice” plans for its executives. That’s the spirit.