Will Old Blighty be left in the cold?

Eighteen years in the waiting for a Conservative-only cabinet meeting! Whilst a majority win for the Conservatives, the newly-elected “captain of the boat” David Cameron must ensure he has the backing of his fellow back benches when attempting to introduce unpopular legislation to curtail public spending and balance the national budget deficit. As such our abacus genius George Osborne, quasi deputy PM, needs to co steer the rudders cautiously through the torrid waters ahead when endeavouring to balance the books and appease our European partners to amend the rules of our EU membership.

On Tuesday, May 12, our number 2 suffered another blow when our friends across the pond, Germany, said: “UK’s partners would not be intimidated into changing the EU’s treaties to meet its reform demands.”

Wolfgang Schauble, Germany’s Finance Minister, also lashed out at George Osborne quoting: “Silly and unnecessary record of intervening over the Eurozone crisis. Many people in Brussels believe London intentionally sought to undermine monetary union.” Good luck to all who sail on your boat George!

Dichotomy of cultures between Germany and England
Notwithstanding the above urgent and important pending matter, another equally important, if not more so, is David Cameron’s vow to schedule an in-out legally binding referendum on EU membership by 2017 and the word on the grapevine is that the PM will accelerate this on the back of his decisive win in the elections.

One of the underlying issues, of seismic proportion, is the damaging harmonisation of accounting principles. One specific area of divergence is how UK’s largest companies account for their pension liabilities, a muted subject of late.

Perhaps nowhere is this distinction between on and off balance sheet items more relevant than when it comes to corporate pension plans. The aggregate value of defined benefit pension assets/liabilities for UK quoted companies is estimated in their trillions, an amount far greater than that of any other off-balance sheet item. Such liabilities do not appear anywhere on the balance sheet, many of which are recorded in complex opaque ways that obscures their economic reality.

Doom days scenario, in simple terms, should Wolfgang Schauble and his fellow men force harmonisation then a substantial number of UK corporates will be requested to write the liability back on balance sheet. This, in turn, may cause a short term technical insolvency for UK corporates whilst they seek to recapitalise their positions. Not an easy task to innovate under formidable constraints.

To be or not to be that is the question. Are we brothers in arms or not?
I attended an interesting meeting at a prominent asset management company (established since 1772) in London on May 12 and the looming referendum was featured high on the agenda as a daunting task ahead.

A renowned fund manager from said firm emphasised: “The key factor is, how will David Cameron sway the public to his thinking? Ergo the real issue is, what will be his thoughts should Chancellor Merkel not succumb to his charms on EU reform? What the financial markets fear most is uncertainty. Companies and people alike defer investment decisions because of murky waters ahead. The EU in-or-out referendum will need to be factored in the markets and what was difficult to fathom was whether the people would vote on passion or with a financial level head. This uncertainty could attain a short term negative gyration of an enormous magnitude and we have learned of late not to trust the polls”.

He went on to qualify in detail as to his prognosis of how we, the common folk, will be impacted. However, due to “professional confidentiality”, I am not at liberty to disclose the fund managers’ detailed analysis.

*Information from FT Wednesday May 13 edition.

By Antonio Rosa

Antonio Rosa is Regional Manager Lisbon at Blacktower Financial Management (International) Limited | Quinta do Lago: 289 355 685 | Cascais: 214 648 220 | [email protected]
Blacktower Financial Management (International) Limited is licensed by the Gibraltar Financial Services Commission Licence 00805B.