HL Deb 27 October 1987 vol 489 cc436-44

4.35 p.m.

The Secretary of State for Trade and Industry (Lord Young of Graffham)

My Lords, with the leave of the House I shall now repeat the Answer which has been given by my right honourable friend the Chancellor of the Exchequer to a Private Notice Question in another place. It is as follows:

"The sharp falls in share prices throughout the world over the past fortnight will tighten monetary conditions somewhat and are likely to have a dampening effect on world demand. It is far too soon to put any figures to this, but I have already responded by reducing interest rates by one-half of 1 per cent. Interest rates have also come down in the United States.

"I will of course continue to watch the situation closely, and take whatever steps are required. I am also in regular contact by telephone with my opposite numbers in the other major industrial countries. Meanwhile, the robust economic health and sound public finances we have in this country put us in the strongest possible position to weather this storm, just as we successfully coped with the year-long coal strike and the collapse in the world oil price.

"As for the implications of the stock market slide for the BP sale, there is provision under clause 8 of the BP fixed price underwriting agreement for the underwriters to seek consultation with the Treasury if a majority of them form the opinion that there has been an adverse change of circumstances, as specified by the agreement, in the light of which they believe that they are no longer assuming a proper underwriting risk. I have been informed by N. M. Rothschild and Sons, on behalf of the UK underwriters, that a majority of them now take that view. They therefore sent a written representation to the Treasury yesterday afternoon seeking consultation with a view to terminating the offer for sale. I have to say I was surprised by this. I am now considering the points they have made, as I am contractually bound to do.

"The underwriting agreement sets out a series of steps which must be followed if the consultation process is triggered. The Treasury consider the representations and consult BP. Rothschild's also seek BP's views. Rothschild's and the Treasury then consult together. If they are unable to agree, they jointly approach the Bank of England for its assessment. I will take full account of that assessment before I take a final decision.

"I understand that a copy of the agreement has today been deposited in the Library.

"It is my intention to proceed as quickly as possible, consistent with the proper observation of the procedures. The House will understand that, now that the underwriters have invoked this consultation process, I cannot say more until the process is concluded. But I will gladly listen to the views of right honourable and honourable Members".

My Lords, that is the end of the Answer.

Lord Bruce of Donington

My Lords, the House will be grateful to the noble Lord, Lord Young of Graff ham, for having given that Answer this afternoon. It broadly covers two grounds, as one would expect it to do. First of all, there is the impact of these disastrous events of the past week on the domestic and possibly the international economy. Secondly, the Minister has raised, of course quite properly, the whole question of the feature of the issue of BP shares.

I was a little surprised, if I may say so, at the bland manner in which the noble Lord expressed his confidence in the ability of the robust and successful economy of the United Kingdom to withstand any consequences of these recent events. The words "sound economy" come very frequently from the noble Lord these days, and from the Chancellor of the Exchequer.

We on this side of the House have to lay down a marker that if words mean anything, "sound economy" does not mean the fortunes of a particular section of the economy; it means the economy as a whole. It is really an abuse of the English language to describe the British economy as a sound economy when there are no fewer than 11 million people in the country living at or below the poverty level, and over 3 million unemployed.

The first question I have to ask the noble Lord is: on the assumption that the medium-term financial strategy, as put forward by the Minister's right honourable friend the Chancellor of the Exchequer, still has any validity, will the Minister assure the House that the precise plans put forward in the medium-term strategy last March still stand, notwithstanding the events of the past few days? In particular, do the Government consider that it is right to allow the value of the pound against the dollar to go steadily up. Does the Minister think that it would be right in terms of the competitiveness of British manufacturers, in terms of employment in manufacturing industries in this country, that there should be a growing tendency for it to be more difficult for our exports to penetrate to other countries and for a continuation of the subsidisation of our imports?

Does the Minister think that recent events will have any substantial impact upon interest rates? Does he consider that confidence in investment in manufacturing industry will in any way be up to the faltering level at which it is now, investment in manufacturing industry, even today, being some 14 per cent. below what it was in 1979? Can we have some answers to those questions?

One thing that has been proved over the past few days is that although the free play of market forces may be of considerable assistance as a servant of the country and also of the international community, market forces are, as such, a very bad master. They must now be accompanied by the assertion, first, of firm governmental policies, however interventional they may seem, and, secondly, by the initiation at the earliest possible moment of another meeting of the council of seven so that a firm policy, a generally accepted policy, may be worked out in order to avoid a similar situation.

As regards the BP issue, the City and the general public are no further forward than they were. However, I am bound to draw your Lordships' attention to the quite remarkable statement that the Chancellor of the Exchequer made to the City yesterday referring to the colossal drops that had taken place in share prices. He said: It was neither unexpected nor in any way unprecedented that sooner or later there would be a sizeable correction. If it was not unexpected, then there must have been at any rate a lurking expectation in the back of the Chancellor's mind when the issue price of BP shares was fixed at 330p. Would it not have been more honest to have contained in the prospectus a specific statement rather than the general one that shares may go down as well as up? Would it not have been a little more honest to have inserted that it would not be unexpected if a very considerable realignment of share prices took place including possibly those relating to the company itself?

We ourselves have never advocated the privatisation of public monopolies and, of course, we oppose the sale of these particular shares. However, if it is going to be done, then the utmost fairness has to take place. We sincerely trust that when the Chancellor reaches his decision he will bear in mind also the fate of those 100,000-odd citizens who, on the faith of a very hyped-up publicity campaign, complete with bands, television and the lot, have already purchased shares at 330p.

4.45 p.m.

Lord Diamond

My Lords, we on these Benches also thank the Minister for repeating the Answer to this Private Notice Question asked in another place. I understand the view he has taken that in the circumstances he is not in a position to answer questions, but it does place a slight difficulty on those of us whose duty it is to ask questions. However, I will cope as best I can.

Perhaps I may make a comment or two in general summary of the views that we hold on these Benches. Of course we take the view that the real issue, the important issue, is the effect of the fall in prices on stock exchanges worldwide on the British economy and on the international economy. We must ask ourselves what, if anything, the Government can do to ameliorate any ill effects that there may be.

I am bound to bear in mind that to some extent the falls in the Stock Exchange prices are caused by economic circumstances, particularly in the United States of America, as well as having an effect on economic factors. Moreover, to some extent I have long since learned to appreciate that confidence feeds on itself, as does lack of confidence. The unfortunate fact is that confidence is slow to be built up and very quick to be destroyed.

In these circumstances, what are we asking the Government to do? Clearly, the Government have a responsibility to keep in mind the position with regard to interest rates. I hope the Minister can say that the Government are doing that. What has happened so far in the judgment of many is a step in the right direction, but only one step. A reduction in interest rates will obviously increase confidence, which is perhaps our major problem at this time. It will encourage economic growth and it will help to achieve what has already been referred to—a sensible sterling rate on the foreign exchanges.

There is also the question of the small shareholder which has been much canvassed. I need hardly repeat that we on these Benches have always favoured wider share ownership. In the circumstances, do we recommend some special treatment be offered to the small shareholder? I am unable to put that forward. I am not able to suggest how one easily defines a small shareholder. Many small shareholders have done no more than offer to spend money within their own means—money which they have—and not spend money which they do not have in the hope of making a stagging profit, some form of speculation, or whatever the case may be. I am not able to say that there would be a great disaster befalling those small shareholders who have only spent within their means.

I also take it, and I am sure the House agrees, that it is a salutary experience and lesson for all would-be shareholders who are not aware of the fact that what goes up not entirely always comes down—to use wartime parlance—but often does. That should be learned by them and brought home to them. Although I repeat that we are solidly in favour of spreading share ownership, I am not able at the moment to make any recommendation with regard to the small shareholder. Therefore, I am asking the Government whether they can perhaps say now if it is part of their thinking that, whatever decisions they ultimately reach, they have in mind separate treatment for the small shareholder.

As regards the underwriters, I can easily imagine that it could be just as damaging to the standing of the City and to the growth of its services, and helpful to the individual underwriters, that the underwriters should be relieved of their contractual responsibility. In view of what the Minister said we will leave it at that for the moment, for him to be good enough to consider.

We conclude at this time that there is no compelling reason to intervene on behalf of the underwriters or small shareholders but that the Government should keep their eyes glued to the interest rate situation. We have no further questions to ask beyond what has been put so well from the Labour Front Bench at the present time, and I underline "at the present time." Nobody can foretell the future. A week is a long time in politics and two days a very long time on stock exchanges.

Lord Young of Graffham

My Lords, I am grateful to the noble Lord, Lord Bruce of Donington, but I should like to remind the noble Lord that my Statement actually said that, the robust economic health and sound public finances we have in this country put us in the strongest possible position to weather this storm I think that I should let that point rest, except to remind the noble Lord—it may have escaped his attention—that unemployment, while still too high, has fallen below 3 million and since the last election has been falling at a rate which exceeds any of the promises made by the Opposition parties.

The noble Lord asked some more questions about that. I think that I should leave the positon like this: my right honourable friend the Chancellor of the Exchequer says that he cannot say more until the consultation process is concluded. There is of course no inhibition to asking questions; the only inhibition lies in my not being able to answer them. That puts me in a difficult position, as the noble Lord, Lord Diamond, recognised.

With regard to small shareholders, applicants for shares are bound by the terms and conditions of the offer. Once the applications have been made, they cannot be withdrawn without the agreement of the underwriters. The position rests until the matter has been determined as a whole. Concern has been expressed by the noble Lords, Lord Bruce of Donington and Lord Diamond, about the general position. My right honourable friend the Chancellor of the Exchequer said that he continues to watch the position closely and will take whatever steps are required. He is in regular contact by telephone with my opposite numbers in the other major industrial countries. I am sure that all your Lordships, or, I suspect, those on the Benches behind me, will be satisfied that all is being done at present to keep a close watch on the general economic situation. The consultation process on the underwriting of BP shares will proceed.

Lord Polwarth

My Lords, will the Government consider asking the Stock Exchange Council to investigate to what extent the collapse of the market has been accentuated by the widespread dependence on electronic communications systems, with the consequent reduction in reliance on human judgment?

Lord Young of Graffham

My Lords, as I have some responsibility for the financial markets, I shall bear in mind all that your Lordships say today. I do not believe that reliance on electronics has had that effect on the market. There will be time to look at all these matters in detail. I suspect that that time is still in the future.

Lord Cledwyn of Penrhos

My Lords, is the noble Lord saying to the House and the country that the Government have no responsibility towards share applicants who may have lost small but important sums of money—their savings, and so on? That is what he has just said. Is there no way in which the Government are prepared to help the many thousands of people who have sustained substantial losses (in their terms, not in the terms of the big men of finance) as a result of the huge propaganda exercise and the whole razzmatazz which has been fully supported by the Government and especially by the noble Lord?

Lord Young of Graffham

My Lords, I fear that the noble Lord did not catch my reply, for which I apologise. I thought I made it absolutely clear that, under the terms of the underwriting agreement, once applications have been made they cannot be withdrawn without the agreement of the underwriters. I then said that that obviously awaits the result of the present consultation process. I believe in all sincerity that this is not the time to make emotional statements about the economic situation; it is time for cool reflection. I suggest that we should leave it at that.

Lord Harmar-Nicholls

My Lords, with regard to BP and the underwriters' request, is my noble friend aware that many people will share the surprise expressed by the Chancellor that they should have made that request at this stage? Is my noble friend aware that if they are relieved of the obligation into which they have entered and upon which they signed their contracts, it would give the appearance of putting one group of people in the City into a position where they can win but cannot lose? If that safeguard is given to one group of people, it will undermine people's confidence in the City. The basis of the Government's general policy, as I understand it, is to allow them to act as agents for many important parts of government policy.

Lord Young of Graffham

My Lords, I shall pass my noble friend's views to my right honourable friend. I can do little more at this time other than say that.

Viscount Caldecote

My Lords, perhaps I may express the hope that my noble friend will support his right honourable friend the Chancellor in taking a robust line with the representations made by the underwriting institutions, for the reasons that the noble Lord has just given.

Lord Young of Graffham

My Lords, I fear that I am even inhibited from saying whether I will take a robust line. The noble Lord must form his own conclusions.

Lord Grimond

My Lords, I appeciate that the Minister cannot say much more now, but as I understand it the Chancellor has asked for comments. My comment is that I wholly agree with the noble Lord, Lord Harmar-Nicholls. If the underwriters are now let off from their contracts, the contrast between their treatment and that of the small shareholders will be ill thought of in this country. Further, the underwriters have had a pretty good time over the past 10 or 15 years. If the doctrine now is, "Heads they win; tails they do not lose", that will destroy the last vestiges of faith in the City.

Lord Young of Graffham

My Lords, I do not want to be drawn into this matter, but I did not in any way suggest that there would be one set of rules for underwriters and another for shareholders. I said that once applications from small shareholders have been made they cannot be withdrawn without the agreement of the underwriters. Obviously the position of the underwriters must depend upon the consultations with my right honourable friend the Chancellor.

Lord Morris

My Lords, what are the circumstances in which the fees payable to underwriters are returnable by them to the Government?

Lord Young of Graffham

My Lords, it would not be right for me to go into the details of the underwriting agreement, save to say that a copy has been deposited in the Library. It is there for any of your Lordships to examine.

Lord Bruce of Donington

My Lords, I have one final point for clarification so as to get the noble Lord absolutely right. Is he saying that if the underwriters agree that the applications that have already gone in should be cancelled and the money returned, that would in fact be accomplished?

Lord Young of Graffham

My Lords, my words were: once applications have been made they cannot be withdrawn without the agreement of the underwriters.

Lord Boyd-Carpenter

My Lords, is it implicit in my noble friend's last two or three answers that any concession to the underwriters, if that is thought necessary, would be conditional on similar concessions by them to small shareholders?

Lord Young of Graffham

My Lords, what is implicit in my last two or three answers is that I am inhibited from answering.

Lord Barnett

My Lords, I recognise the Chancellor's difficulty, whichever way he moves, in respect of the underwriting. But I am sure the noble Lord will accept that the most serious problem relates to the tighter monetary conditions that prevail, as the Chancellor indicated in his Statement, and which would be even tighter if the accepted the advice given by the noble Lord, Lord Harmar-Nicholls. I leave that aside.

I accept that the Chancellor has already taken some steps to make the monetary conditions a little less tight by his reduction in interest rates and his consultations with the other signatories of the Louvre Accord. May we take it from the noble Lord that, although he cannot speak about the BP matter, the Chancellor will be working closely with the other signatories to take the opportunity as far as possible to loosen the monetary conditions by reductions in interest rates, especially in Germany and Japan, to ensure higher rates of growth to counter the inevitable effect of what has been happening in the markets?

Lord Young of Graffham

My Lords, in his Statement my right honourable friend the Chancellor of the Exchequer said that he was in regular contact by telephone with his opposite numbers in the other major industrial countries. I am sure that that is the case and will continue to be.

Lord Gladwyn

My Lords, I realise that the present discussion must relate to the BP share issue. May we have the noble Lord's assurance that we shall have an early opportuntiy to discuss the reasons and responsibility for the stock market crash?

Lord Young of Graffham

My Lords, that is surely a matter which should be taken up through the usual channels.

Lord Hatch of Lusby

My Lords, further to that point, surely the Statement includes the fall of the stock market as well as BP shares. If one leaves aside the BP issue, the noble Lord and his right honourable friend the Chancellor of the Exchequer have been at some pains to distance the fall of Stock Exchange prices from the British economy. Is he saying that the fall in the stock market last week and this week has nothing to do with the American deficit, nor with the deficit in manufacturing trade in this country, which is growing at an alarming pace?

Lord Young of Graffham

My Lords, I remind all in your Lordships' House that when the balance of trade figures were published last week we saw that the deficit on trade, which is the important figure, is some £800 million so far this year against a Budget forecast of £2½ billion for the whole year. So far, therefore, until the figures are published, the position is looking satisfactory. I am sure that many economists will write many books and give many lectures on the cause of the recent slide in the Stock Exchange and whether it is related to the deficit in the American economy or to the phases of the moon. It is too early to say at the moment. We are looking at present conditions.