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Breakfast with Frost
Sir Howard Davies, chairman, Financial Services Authority
Sir Howard Davies, chairman, Financial Services Authority

Please note "BBC Breakfast with Frost" must be credited if any part of this transcript is used

DAVID FROST: Now when the Worldcom and Enron scandals rocked the world the economic effects rippled of course across the Atlantic, you could say we're still feeling the aftershocks now, one of the reasons that the stockmarket dipped below the psychologically important 4000 mark on Friday before a minor recovery. Pension funds seem to be diminishing every day and at the heart of those US financial disasters was a failure to regulate and audit the companies in question so could it happen here? Also tomorrow is the tenth anniversary of Black Wednesday and everyone's mindful of just how costly economic mistakes can be. Joining me now is the Chairman of the Financial Services Authority, Sir Howard Davies. Howard good morning.

HOWARD DAVIES: Good morning.

DAVID FROST: Can we start on the subject we were raising earlier, we're going to raise with Jack Straw in a minute or two, what effect would a war on Iraq have on the stockmarket and the City of London, I see here Irwin Seltzer in today's Sunday Times says the Iraq conflict won't wound the economy but what, what would you say?

HOWARD DAVIES: Well I think the main route between a war if you like and the economy is probably via the oil price and at the moment because people are worried about potential for a disruption of supply in the Middle East there is a premium in the oil price related to the war. I can't say exactly what it is, some people say $5, some people say as much as $8, but certainly the oil price is higher than it would otherwise be and that in turn is being regarded in the markets as slightly depressing news for the economy in the rest of the year and it's certainly dampening expectations of growth. So in a sense you've already got a war kind of built into the markets, markets tend to anticipate things rather than wait for them to happen and they'll react to them afterwards. So I think if you had a shortish, sharpish war with a short disruption in oil supplies probably you've already had the effect of that on the markets. Clearly what you can't forecast is you know what if it were a long drawn out conflict which spread into Saudi Arabia etc then all bets are off, I'd say. But at the moment I think the market is just cautiously reacting and anticipating a short conflict.

DAVID FROST: And can the market go on going down, hopefully it won't but I mean it's around 4,000 now as we know, but if it went down to 3,000 would there be insurance companies in trouble and so on or could the market absorb that shock?

HOWARD DAVIES: Well interestingly the top of the market was 6,950 two and a half years ago and we've gone down to 4,000, indeed we've been below 4,000 without too much disruption except of course that anybody who is long of equities, who has a lot of shares, has seen it in their personal portfolios, or in their life insurance companies or in their pension funds, if you'd bothered to open those envelopes you get from your ISA you'll discover some pretty horrible figures. Insurance companies of course are very long equities, they tend to have a lot of shares and are bound to be affected by this, of course many of them have been readjusting their portfolios as the market's fallen moving out of shares and into bonds so I think there are many of them quite robust. However a very short, sharp fall would certainly be a problem but what you can't answer is what would be a fall down to 3,000. If that happened over six months I would say probably people would be able to position themselves against that and happen comfortably. If it fell, you know on Monday to 3,000 I couldn't answer for the consequences...


HOWARD DAVIES: But that's not very likely.

DAVID FROST: Well we're looking for the, for it to rocket up to 5,000 this, this week of course. Tell me something in terms of looking at the current situation and so on, is it a case of when the USA sneezes the UK catch a cold in terms of the effect of things like Enron?

HOWARD DAVIES: It certainly seems to be and indeed what is quite interesting is that although the prudent man has to say it could happen here because you could have a case of major corporate fraud here as a matter of fact it hasn't yet. And yet our markets have been affected just as much as the US, indeed...


HOWARD DAVIES: Some European markets a little bit more actually. So there undoubtedly is a kind of apparent unfairness in what's going on in the sense that people are putting a discount in the market for uncertainty and for possible fraud and stated earnings based on the American experience when we actually haven't had it. Now I think you've just got to roll up your sleeves and make sure that your system is as robust as it can be, make sure your regulations are as tight as it can be and hope that somehow you can overcome that uncertainty factor and I think we're moving towards that.

DAVID FROST: How would the Euro, Howard, affect the Financial Services Agency, what I mean is that we've seen how they feel there must be a single European central bank, if Europe happened would there have to be a single financial services agency for the whole of the new Europe?

HOWARD DAVIES: By no means necessarily so, I mean most of European regulation, you know whether it's financial services regulation or clean beaches or whatever, is a set of European rules determined obviously in Brussels by the member states but implemented locally. You know we don't have Italian beach inspectors in Blackpool which some thing for which people are grateful I think. But you know we typically regulate domestically so I think whereas it may be necessary to have more European wide rules and perhaps more common standards when we've got one single currency, if we have one single currency with the UK as well, that doesn't necessarily mean that they would have to be administered by a great all-singing, all-dancing authority in Brussels and I think indeed most people would be very nervous of that idea.

DAVID FROST: And what about the odds, the odds of 5 to 2 against, pretty good odds against your becoming the next Governor of the Bank of England. If you were offered the job would you accept?

HOWARD DAVIES: I'm a very cautious man, David, and nobody's talked to me about this job so far and if anybody does I'll cross that bridge when I get to it in the meantime if you want to put a bet on I can introduce you to my bookmaker.

DAVID FROST: To your bookmaker, that would be great. And coming round just at the end of our conversation to the question of Black Wednesday. Did we learn any lessons from that or not?

HOWARD DAVIES: I think we did, I think the world in general has learned a lesson that as far as exchange rates are concerned you can over float or you can be permanently fixed like the Euro but that being somewhere in between, where you're trying to fix within a range and support a currency within a range but without it being permanently fixed is a very difficult place to be. We learnt it, the Argentinians have learnt it, a whole range of other countries have learnt that lesson and I think what you've now seen is that the world is polarised into either floating or permanently fixed. I think that's the biggest lesson.

DAVID FROST: Thank you very much indeed Howard, thank you for being with us today. I can only wish you, you've got, your team are playing lunch time today, Manchester City, but we can only officially offer best wishes for a draw because of course Mr Jack Straw who's about to come on screen is an absolute zealot for Blackburn. So it's one guest against another, at least a draw we wish you.

HOWARD DAVIES: Kind of you to be neutral.

DAVID FROST: Bless you, thank you very much indeed.


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