Thames Water makes the front page of most papers today, as the company looks like it’s running headlong into insolvency and the government is preparing an intervention: Thames Water is buckling under £14b of debt, most of which is inflation linked, and a severe inability to raise funds from either the markets, or from shareholders, that it would need to continue to service existing debts. The company is looking like an unattractive investment because of several factors; it’s currently loss-making, so some of the funds raised would need to go into servicing or restructuring existing debts. It’s also in an industry that is a political hot potato, with sewage dumping taking up more column inches than ever before. Lastly, the UK is the only major economy with entirely privately owned water and sewage services – and it’s been a bone of contention pretty much from the get go when Margaret Thatcher privatised it in in
1989 – with public opinion (particularly with this current situation) heavily favouring renationalising the industry, the risk-reward ratio for any investor looking to lend a few billion hands will need to be deeply non-commercial, which leads us to think that this either comes down to existing shareholders doubling down and hoping the house doesn’t take it all, or the government steps in and uses the taxpayer to provide some kind of bailout – which would be a hugely unpopular move that Labour would jump all over. It’s also worth noting that other water companies are going to be similarly debt burdened and we wouldn’t bet against this being a domino situation. I’m at a credit and insolvency conference this afternoon and can imagine this being front and Carter of the conversation, so we’ll keep you posted.
Yesterday Central Bank Policy Makers met in Sintra, Portugal for third day of the ECB Symposium. The main event took place at 1430 where Powell, Bailey, Ueda and Lagarde took centre stage to discuss financial conditions. The general tone was hawkish as policy makers across the board reiterated the persistence of elevated inflation and the need to maintain tight monetary policy. For example, on the topic of monetary conditions, Powell stated that “although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough”. Given the release of the Fed’s dot plot shortly after their decision pause on 14 June (which left the fed funds target rate at 5%-5.25%), Powell reiterated that the “strong majority for two more rate hikes in dot plot”. As such, the Fed could be looking a funds target rate of 5.5%-5.75%.
This came as Bailey – a little more cryptically – stated that “[Markets] have a number of further increases priced in for us, and my response to that would be, well we will see”. Money markets are currently pricing in an implied terminal rate of 6.09%, as core core inflation is now at highest level since 1992. Regarding the BoE’s 50bps rate hike on 22 June, Bailey stated that “the cumulative data – both particularly on the labour market and on the inflation release we had, which to us showed clear signs of persistence – caused us to conclude that we had to make really quite a strong move“. Their decision to raise the main benchmark rate to fresh 2008 highs followed the UK’s inflation print which which saw headline inflation (annualised) for may remain at 8.7% vs estimated 8.4%.
With Bailey and Powell sharing comments on the prospect of further hikes, Lagarde too indicated that Frankfurt would likely conduct further tightening. Here she stated that “if the baseline stands, we know we will likely hike again in July”. Over the course of the symposium, Frankfurt have pushed back against market projections of H1 2024 cut and markets continue to question whether the ECB will raise rates in September too. On the topic of inflation, Lagarde cautioned that “we are not seeing enough tangible evidence of falling underlying inflation”. Of course, these comments come as Eurozone core inflation is just 40bps down from all-time peak.
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