Editor's view: the need for optimism in the City

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There’s a strange mood in the Square Mile at the moment

No one seems quite certain whether these are the best of times or the worst of times for the City. Well, OK, few think these are the best of times (that accolade still belongs somewhere back in the pre-2008 boom). But while there are still major problems in the banking sector, including what to what to do on executive pay and bonuses and how to deal with the fallout from scandals such as Libor-rigging and the sale of dodgy loan insurance products to SMEs and individual, there is nevertheless an upbeat mood in the air. This is most obviously epitomised by the FTSE 100 share index, which crashed confidently through the significant 6,300 mark last month and with only a few minor blips since has continued to regain heights not previously seen since before the crash.

But there has also been a noticeable upswing in corporate finance activity, with a rash of major M&A deals either done or on the cards.

Let's face it, who isn't a little bored after five years of depression and all that talk of a lost decade?

In the last week there have been announcements about the leveraged buyout of a majority stake in computer giant Dell, the acquisition of Virgin Media by Liberty Global and even rumours of a private equity backed leveraged buyout of a significant chunk of the UK’s largest mobile telecom provider EE (formerly Everything Everywhere, itself formed from a merger between Orange and T-Mobile). All these deals point to a more buoyant start to 2013.

There have been several theories hatched to explain this sudden upswing. It started with a growing belief towards the end of last year (misguided according to the more bearish commentators) that the actions of the European Central Bank (ECB) and others have done enough to make the euro crisis recede, if not go away all together.

Then the US managed to avoid dropping off the fiscal cliff (again the bears would suggest that we’re not out of the woods here either, with a no real budget agreement struck and the pain merely deferred). But all these attempts to rationalize this upswing (which has so far not been matched by any sort of similar recovery in the real economy) don’t really explain it enough. Now, there will be plenty of people keen not to ask too many questions.

So desperate have we become for good news (any good news) that it seems like heresy to even question the source of any optimism.

And yet it’s difficult to shake off the idea that this is a self-fuelled bubble of optimism generated as much as anything by relief (Greece didn’t crash out of the euro, let alone Italy or Spain; the US didn’t plunge over that cliff) and boredom. Let’s face it, who isn’t a little bored after five years of depression and all that talk of a lost decade? It’s also worth reflecting on the timing. This is, after all, bonus setting season. Those discussions, for all that they will be focused on deals and results from last year are inherently easier to have when the world outside the window looks a little rosier. Lavish bonuses always cause a media fuss, but they are that bit harder to justify when things are depressed or falling apart. All of which would suggest a tip back down at the start of the second quarter.

However, in the same way that few people expected the fallout from the 2008 collapse to be quite as severe as it was (remember the reaction to then chancellor Alistair Darling’s prediction that we were heading for the worst recession in 60 years?), it is possible that the recovery may take us by surprise.

No politician is allowed to use the phrase, but it is possible that what we are witnessing is not some false dawn but those elusive first green shoots of recovery.

 


Richard Cree

Richard Cree is the editor of economia


 

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