LONDON (SHARECAST) - Economists at Morgan Stanley calculated that Britain’s budget deficit could total 126bn pounds, or 7.8 per cent, of gross domestic product in 2013-14. That would make Britain’s the highest projected European deficit, with the bank predicting that Greece’s would stand at 6.3 per cent and Spain’s at just under 6 per cent. In general, economists predicted that the bleak picture on borrowing threatened to undermine the Chancellor’s cast-iron fiscal rules. Howard Archer of IHS Global Insight said: “It is likely in his autumn statement that he will have to acknowledge that he will be unable to start bringing down debt as a percentage of GDP by 2015/16.” “It may be time for a ‘Plan C’ of sorts,” said economists. “The ‘least worst’ option, we think, would be to stick to the existing austerity plans but make no attempt to repair the projected fiscal slippage and risk breaking at least one of the fiscal rules,” they added, according to The Sunday Telegraph.
BAE Systems and EADS have told the Pentagon they will create a ring-fenced American defence company with a board of US nationals in return for approval for their planned £28bn merger. The American arm will have just one British director — Ian King, BAE’s chief executive. No French or German executives will be given seats, or be able to see details of US contracts. The offer is aimed at preserving BAE’s privileged relationship with the Pentagon, which is governed by a unique contract, the special security agreement (SSA). Senior sources at BAE say the merger, news of which broke 10 days ago, will not go ahead unless the SSA is preserved. BAE and EADS have also told Paris and Berlin the deal is dead if they do not scrap their “concert party” agreement, which gives the two governments special powers, including the right to appoint members of the EADS board. Angela Merkel and François Hollande discussed the merger yesterday during their meeting at Ludwigsburg in Germany, and promised to consult widely before giving their verdict, The Sunday Times reports.
Spanish banks may need a cash injection of more than €100bn (£80bn), the results of an official stress test are expected to show this week, placing more financial pressure on to an already explosive political crisis in Madrid. A bank-by-bank test of financial stability due on Friday is expected to conclude that Spain's lenders are dangerously over-burdened with toxic debts and need to be recapitalised, restructured or shut down. The stress test is expected to show a dramatic deterioration since the previous tests were carried out at the beginning of the summer which suggested a €60bn cash injection would be the worst-case scenario. Nomura Global Economics said in a note: "Our initial reaction to the publication of those estimates has been negative. The announced figures are well below the market expectations, which start at around €100bn, and, in our view, not only fall short of bolstering market confidence but may actually increase the risk of Spain losing market access," according to The Sunday Telegraph.
France has said Greece should be given more time to meet the terms of its international bailout, the clearest call to date by a leading Eurozone country for an easing of the stringent conditions attached to the €174bn rescue package. Jean-Marc Ayrault, the prime minister, taking a clear swipe at Germany, warned that a Greek exit from the Eurozone would be “unmanageable” and could be “the beginning of the end of the European project”. Speaking in an interview with the French news website Mediapart, Mr Ayrault said: “We can already offer [Greece] more time ... On the condition that Greece is sincere in its commitment to reform, especially tax reform,” The Financial Times reports.
BAE has received a fresh boost to its plans to merge with EADS, after the former defence secretary, Dr Liam Fox, said he backed the £30bn deal as long as important hurdles could be overcome. Writing in The Sunday Telegraph, Dr Fox said that, on balance, the deal was good for Britain's defence giant as it gave it access to the lucrative civil aviation market. Dr Fox's backing comes as Whitehall sources confirmed reports that the Prime Minister is minded to back the merger. David Cameron is also willing to lobby the French and German governments and give reassurances to the American government that BAE's tie-up with European EADS will not damage US interests. Last week, the newspaper revealed that ministers had laid down a number of "red-line" issues concerning national securitythat need to be settled before they would back the deal.
Howard Archer, chief UK and European economist at forecasting group IHS Global Insight, said there was a “very good chance” that Thursday’s figures would reveal a quarter-on-quarter contraction in the United Kingdom´s second quarter gross domestic product (GDP) of 0.4%, with the better-than-expected construction data accounting for the positive revision. “Latest data and surveys have lifted hopes that GDP growth in the third quarter will more than recoup the drop currently reported for the second quarter,” noted Archer. “We expect the economy will continue to grow in the fourth quarter, but will likely struggle to expand by more than around 0.25% quarter-on-quarter. “As a result, we see GDP contracting by 0.3% overall in 2012 as growth in the second half is insufficient to offset the contraction suffered in the first half.” He said the UK would “struggle” to grow by more than 1% in 2013, The Scotsman on Sunday reports.
North Sea driller Trap Oil is hoping to “turn the head” of a potential suitor as it reports the benefit of its first producing asset this week. The company’s interim figures, due on Wednesday, will be the first since its “transformational” acquisition of a 15% stake in the Athena development in March. The oil that started flowing in May from the field’s first well will help finance the exploration ambitions of a number of the industry’s smaller firms. However, one of the partners, Lochard Energy, has already put itself up for sale as it seeks to cash in on a wave of consolidation in the industry. Further tax breaks on production from mature fields granted recently by Chancellor George Osborne have made North Sea-focused companies a more alluring target for cash-rich oil majors and have sparked a number of rumours regarding takeovers, although the allowance is also benefitting smaller explorer-producers such as Trap, The Scotsman on Sunday explains.
A new era for Kiddicare and Morrisons will begin this week when internet-focused Kiddicare opens the first of ten new superstores on Wednesday. The new store in Nottingham is part of a drive by grocery chain Morrisons to establish Kiddicare as the biggest baby retailer in Britain. Scott Weavers Wright, chief executive of Kiddicare, said: “This is huge for us. We are a £55m to £60m business today. I am expecting to double business within 12 months. I am looking for £200m within three to four years.” Mr Weavers Wright said he was taking a “multi-channel attitude” to the profitability of stores, meaning that he expects many consumers to buy goods online after visiting stores and therefore will judge stores on their service, not their sales. “They will stand on their own two feet, the business will be modelled and need a return. But I am not particularly fussed about individual stores. We will rate stores not on sales, but on service,” he said. Nonetheless, Mr Weavers Wright expects Kiddicare to be profitable within 12 to 18 months, The Telegraph says.
ENRC has shelved plans to split the company in two as a result of market conditions and lower production volumes. The Sunday Telegraph has learnt that the Kazakh mining conglomerate has admitted internally that the £4.4bn separation will not happen, in the near term at least. Although a final decision has not been taken by ENRC's board, it is understood that advisers indicated efforts to split the company's Kazakh assets from its African assets would not get off the ground. "There is no way you can do that transaction at the moment," said one source. The FTSE 100 company's share price has fallen by 46% in the past six months, and it was forced to cut its interim dividend on the back of lower production volumes and price weakness in its key commodities. "We're keeping it alive, as it's worth examining, but we're a long way away from executing it," the source continued.
Analysts believe that Lonmin has no chance of meeting covenants after a violent industrial dispute at its Marikana mine in South Africa that left 47 dead and brought operations to a standstill for six weeks. Grant Sporre, an analyst at Deutsche Bank, said: “Given this precarious state of the company’s balance sheet, we believe a rights issue is almost inevitable, and increasingly the equity market will begin to price this in,” said Mr Sporre. He suggested Lonmin needs to raise about $700m, with the share price expected to drift down to 470p to reflect the heavily discounted cash-call. Lonmin shares closed down 16.5 at 594p on Friday night. While Lonmin is thought to have told its advisers, Citigroup and JP Morgan Cazenove, to prepare a rights issue, the company’s first tactic is to ask its lenders for some breathing space. The miner fears investors would only stump up at a vast discount, The Telegraph explains.
Sir John Bond has indicated that he will not stand in the way of Glencore's $80bn (£49bn) merger with Xstrata amid calls for his departure from some shareholders. The chairman of the FTSE 100 mining giant is believed to have told colleagues on the board that his paramount objective is to do whatever is in the best interest of investors. Furthermore, it is understood that when he agreed to take the post, which he did in March 2011, he indicated that he did not expect to be in place in five years' time. Sir John, who formerly held the same position at HSBC and Vodafone, is believed to be keeping an open mind about his role should the mega-merger take place, The Sunday Telegraph writes.
America looks set to triumph in the controversial part-privatisation of Britain’s weapons buying agency after the Ministry of Defence shortlisted six bidders. Five of the six on the list are led by large American project management groups, with just one British company in the frame. Serco, the homegrown outsourcing giant, is up against Bechtel, Fluor, CH2M Hill, Jacobs and Kellogg Brown & Root. The six are battling to take over the running of Defence Equipment & Support (DE&S), the MoD unit responsible for ordering kit for Britain’s armed forces. It oversees the purchase of all equipment, from machine guns to fighter jets and aircraft carriers. Based at Abbey Wood, Bristol, it employs about 18,000 people and oversees an annual budget of £14bn. Bernard Gray, chief of defence materiel, has been working on a radical plan to overhaul the organisation. It will be part-privatised, with management control handed to the private sector, The Sunday Times reports.