Labour’s slight revival in the opinion polls has the newspapers discussing the possibility of a hung parliament.  As Andrew Rawnsley says, a hung parliament would reflect the public mood:

People are sick of Labour but reluctant to swallow the Tories. That points to either a hung parliament or a Conservative victory with a narrow majority.

Or, as Henry Porter succinctly puts it:

The next election sometimes seems like a choice between root canal work and an operation for haemorrhoids.

A hung parliament is certainly a possibility, though we shouldn’t get too excited about the results of one poll. But, while hung parliaments make things interesting for political commentators, what might the effect be on the economy and, more specifically, on the UK’s credit rating?

Back in May, when Standard and Poors threatened to downgrade the UK’s credit rating, they did not do so just because the country has high levels of debt. The UK’s debt is no worse than that of any other major western economy. No, the reason they gave for picking on the UK was the lack of a clear plan to bring the rising deficit under control and reduce the level of debt over the long-term. As S&P’s spokesman said:

The outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing.

In other words, your credit rating will be fine if the next government bites the bullet by raising taxes and cutting spending to pay off the debt. The trouble is, both of these things are deeply unpopular and a government would need a strong mandate to do either, let alone both. A coalition government, or one with a weak majority, might lack the mandate to make the necessary tough decisions. More to the point, such a government would be perceived as weak by the ratings agencies and by investors. That might be enough to mess up our AAA credit rating.

The FT’s Alex Barker raised this scenario in an interview with Brian Coulton, Head of EMEA Sovereign Ratings at Fitch.

Q: The Fitch stable rating is based on the government articulating “a stronger fiscal consolidation program next year”. Do you expect that to happen regardless of who wins the election?

Yes. As we get into 2010 the downside risk of deflation will be significantly diminished and fiscal policy goals are expected to shift from stabilisation towards consolidation. It is a feature of large AAA sovereigns like the UK – which have exceptional near term funding flexibility – that they can “sequence” fiscal policy goals in this manner and act in the near term to prevent an unnecessarily deep recession. But the re-orientation does need to happen during 2010.

In other words, whoever wins the election will have to make definite commitments to reduce the deficit or they will be toast. But what if no-one wins the election?

Q: Is the likelihood of a hung parliament a factor in your calculations? Is it the election outcome that would most threaten the UK’s sovereign credit rating?

We detect a growing cross party consensus that fiscal adjustment needs to happen. A hung parliament could complicate the process of agreeing how this should be done but we do not believe it would lead to an impasse, unduly delaying the adjustment plans.

In other words, even a Lib-Con or Lib-Lab coalition will have to make definite commitments to reduce the deficit or they will be toast.

He has a point, of course. Whatever happens, the government’s sources of funding will dry up if it doesn’t make some tough decisions in the next couple of years. That will be true whether the next government is Tory, Labour, Lib Dem, Green, BNP or Monster Raving Loony.

That said, I still think a hung parliament would make investors nervous. OK we might get Vince Cable as Chancellor but it would still make the government look weak and unstable, especially if the horse-trading and coalition building went on for too long. It would be less of a problem in a country such as Germany which is used to coalition governments. In Britain, though, there is still the assumption that we are governed by a single party and our political system would take some time to adapt to the new circumstances.

Last week, in the pub, a colleague asked me what I thought would be the best election outcome for UK PLC. I was at bit of a loss because I can see potential advantages and disadvantages in both Labour and Tory proposals. That said, a hung parliament could well be the worst outcome of all. In tough times, rightly or wrongly, people seek certainty, especially from those in charge. A prime minister at the head of a coalition government, faced with the worst economic crisis for decades, would need to be an outstanding leader to meet these challenges while holding his troops and the country together. I’m not sure that there is anyone on the front benches capable of doing that.

Here’s an interesting and rather disturbing story.

Earlier this year the recruitment firm Hays was accused of racism after three employees claimed they were subjected to abuse by colleagues and managers.  The employment tribunal started this week and the accusations were repeated in the usual lurid detail.

What is different about this case, though, is that, according to the Guardian, the employer is suing the claimants for libel.

An employment tribunal claim, especially one for race or sex discrimination, can see a company’s name dragged through the mud. Usually, the sensational allegations are reported at length but if most of the accusations against the employer are dismissed by the court, the news rarely gets beyond the HR and employment law press. People are therefore more likely to remember the allegations than the final verdict.

Vexatious claimants are a frustrating problem for employers. It is understandable that exasperated managers might try to fight back with whatever legal weapons they can find. Even so, the use of libel law is a worrying development.

The trouble with English libel law is that it reverses the usual innocent-until-proven-guilty rule. In a libel case it is up to the defendants to prove that their allegations are true. It is also extremely expensive if they lose as there is no cap on damages.

An employment tribunal can sometimes find in favour of claimants, judging that, in the light of all the evidence, some discrimination has occurred, without ruling that all the allegations presented were true. In theory, then, it would be possible for the men claiming against Hays to win their tribunal case while still having to prove in a libel case that all the things they alleged in the tribunal claim happened just as they said. That would be a lot harder to do.

I should make it clear that I’m not pre-judging the outcome of this case. The allegations certainly sound extreme but extreme things do sometimes happen, even in the most reputable companies. Regardless of whether or not the employees’ claims are true, completely made up or somewhere in between, the use of libel laws to defend against tribunal claims is a very worrying development. If it is allowed to become common practice it will deter many with legitimate cases from taking their employers to court. The risks would just be too great.

Anecdotal evidence suggests that vexatious employment tribunal claims are on the increase. They are extremely frustrating and can be very damaging for companies. But there has to be a better way of challenging them than employers resorting to libel laws.

The news that October’s budget deficit was the highest since 1993 had all the Labour-hating newspapers jumping up and down with barely concealed glee. The suggestion that this is all Gordon Brown’s fault is being relentlessly pushed by his enemies. He spent lots of cash he didn’t have on public services so now we’re all in a mess, or so the story goes.

It is perhaps an indication of just how far gone the government is that it doesn’t try to challenge any of these assertions or, if it does, no-one seems to be listening. Even the traditionally Labour-supporting newspapers apparently no longer try to put this news into context, simply telling their readers the same story as all the other papers; that the UK has borrowed a hell of a lot of money recently.

Now it is true that the financial situation is dire but none of these figures make sense unless you look at what has been happening in other countries. The latest OECD Economic Outlook does just that and, for the first time since the financial crisis, its debt predictions for the UK are slightly better than those for the USA and France. Well, the short-term ones are; the long-term ones are still pretty horrendous, although not as bad as they were in the summer.

As this graph shows, the UK’s debt in 2007, just before the financial crisis, was considerably lower than that of France, Germany and the USA. By the end of 2011 the OECD estimates that it will be ahead of Germany’s but a little way behind France and the USA. The dark blue bar on the graph shows why. Since 2007, we have borrowed more than anyone else. This is where the stories about the UK being ‘the most indebted in the world’ are coming from. Yes, we’ve borrowed more recently but we were starting from a relatively low base.

Labour profligacy is a minor cause of this sharp rise in debt. Even the public spending of the mid-2000s didn’t take our debt up to the levels of other developed economies. What screwed us was the financial crisis. Our tax revenues collapsed and we had to bail out the banks. We have (or had) bigger banks and a greater proportion of people working in financial services than most other countries, therefore we got screwed even worse than everyone else. As this not-very-good ONS graphic shows, the financial sector interventions alone have added around 10% of current GDP to our public debt.

Of course, it would have helped if the government had not made spending commitments on the assumption that economy would continue to grow, but that is not the main reason for the spiralling debt.

The OECD has given the UK a warning about its debt but it has said pretty much the same to the French too. With debt levels projected to be close to 100% of GDP in two years time there is no room for complacency but most other large western economies are in a similar position.

If there is a lesson from the financial crisis, it is not about reining in public spending, although that will clearly have to be done over the next few years. Britain’s disproportionate hit from the events of the last two years has been largely due to our over-reliance on banking. Regulation will, to an extent, insure us against another shock in the world’s financial system. In the longer term, though, if we want to avoid another crisis like the last one, we should learn to make more of our money by doing something other than banking.

I haven’t had time to write anything about the blustering from bankers and their cheerleaders in response to the government’s plans to regulate City bonuses. Read Alex McGarry’s piece in the Spoof instead. It’s along the lines of what I was going to say, only much funnier.

Another week another story about bankers’ bonuses. When I heard the headline this morning about how the government plans to give the FSA powers to strip bankers of their bonuses I wondered how the hell it was going to work. Surely, I thought, that would be forcing employers to renege on existing employment contracts.

Apparently, these powers will only apply to employment contracts formed after the legislation comes into force. So if you change jobs after the new law comes into force, the government can step in and stop you getting a huge bonus. If you were  in your job before the effective date, though, you will still be free to trouser as much as you can wring out of your employer.

This might have some interesting effects on the labour market. Will there be a rush to move to new jobs before the deadline? Will people be less willing to move afterwards due to the risk of working under one of the new government regulated contracts? This law could help ease the banks’ perennial retention headaches by simply making it less attractive for people to move jobs.

Whatever happens, though, if this legislation is passed there will be a rush to secure high salaries and, more importantly, high guaranteed bonuses before the deadline. It could lead to a frenzy of bargaining and job moves in the months before it becomes law.

Given that the Labour Party will probably lose the next election, it is unlikely that this legislation will be passed, unless the government rushes it through. Which is a pity, because I’d be fascinated to see what the effects would be.

The Tories are accusing the  government of chasing headlines, which is surely a case of the pot calling the kettle.  Tory Treasury spokesman Philip Hammond claimed that the FSA already has the power to regulate bonuses and asked why it hadn’t used them to stop the payment of huge bonuses this Christmas. Now there’s headline grabbing for you. With his background in business, Mr Hammond knows full well that it would take expansive and draconian legislation to mess about with existing employment contracts and that the FSA can’t stop the non-nationalised and foreign-owned banks from paying out whatever they like. There will be a bonus bonanza this Christmas and there is very little the government can do about it.

Barclays and HSBC posted upbeat results today and the question everyone wants to know is, “Does this mean the recession is over?”

No, stuff that! The question everyone really wants to know is whether or not they will be paying bonuses, bankers remuneration having joined paedophilia and X-factor as a national obsession. Both banks are understandably being cagey about how much they will pay out. They are making the right noises about sticking to the G20 guidelines but, even so, they will almost certainly be rewarding their staff more handsomely than Lloyds and RBS have been able to. With foreign banks in the City also starting to pay bonuses again, does this mean that there will be a mass exodus from the bonus-capped state-rescued banks?

In the wake of the bonus cap, City headhunters claimed to have been inundated with CVs from bankers at RBS.  That, in itself, is a sign of the times.  In the good old days, before 2007, you didn’t contact headhunters, you waited for them to contact you. Only the desperate sent out unsolicited CVs. If you were getting fed up at work, the chances were that the headhunters would know about it even before you did and would call you up to tell you that you needed to look for another job. There was a time when they would have been all over a stricken firm like RBS, cherry-picking the key talent. Not now though, it seems.

So is the bonus cap really a stick that their rivals can use to beat the state-backed banks? Will Lloyds and RBS be stripped of their key talent?

No-one really knows because no-one has ever dared to challenge the City’s bonus culture until now. The assumption for the last twenty years has been that if you broke ranks and refused to pay huge bonuses you would just lose all your staff and your profits would collapse.

As City boy Andrew Clavell said two years ago:

One might as well howl at the moon as clamour for changes in compensation structures.

If one firm broke ranks on compensation structures, its employees will vapourise, starting with the best, and the firm will be destroyed. And good luck recruiting at Harvard or INSEAD next year too.

When I worked in comp and ben in the City, over a decade ago, a few people used to mutter that the reward merry-go-round could not go on forever. But, of course, it did, largely fuelled by the complex financial instruments and cheap money from China that eventually tipped the financial system over the edge. As long as profits continued to rise, the shareholders were happy and no-one wanted to rock the boat.

Many of us used to wonder, albeit quietly, whether some of the so-called stars were really worth the money. After all, the way reward is determined in the City isn’t just about pure numbers. A lot of lobbying and politicking goes on too, which is why it is so difficult to get anything done in an investment bank at this time of year. The same is true of the massive bonus hikes that come when staff are poached by one bank from another. Yes, they are usually capable people but often the amounts paid to them are as much a function of the acquiring boss’s ego as the team’s profit generating potential. People in the City like to get one over on each other and if that means paying a large amount of money to coax a team away from a rival then so be it. In short, the link between pay and financial performance in the City is not as direct as some would have you believe. Like everywhere else, politics, power, pride and prejudice muddy the waters.

So what would happen if a bank decided that it could get better returns by paying lower salaries for people who were not quite stars, or not arrogant enough to claim to be stars? I have heard it argued more than once that, even if you didn’t pay top-dollar, salaries would still be high enough to attract a steady stream of bright young things who could be trained up to do many of the jobs in investment banking relatively quickly. OK, they might not be as good as your experienced staff but, so the argument went, if you got eighty percent of the performance for sixty percent of the remuneration, you’d be laughing. Furthermore, it might be that even your existing ’stars’ are not as much in demand from your competitors as they would have you believe. What if you called their bluff and refused to pay them the extra bonuses they were demanding? You’d soon find out if they really did have a queue of competitors waiting to take them on.

Of course, no-one ever dared to try any of this out. Until now, that is.

The government’s capping of bonuses at RBS and Lloyds will put the myths around banking remuneration to the test. If the claims of the investment bankers were right all along then Lloyds and RBS will suffer an exodus of staff and a massive drop in profits as a result. But if, on the other hand, high City bonuses were simply the result of banker collusion and self-justifying hubris, then the state-backed banks may yet be able to make healthy profits without shelling out the rewards that were previously thought to be essential. Bonus capping is, indeed, an interesting and bold experiment.

Not that the government is being bold, of course. It only capped bonuses for the same reason as it does many other things; as a knee jerk response to a public outcry. The government is not sure whether to run Lloyds and RBS in the public interest, as nationalised banks, or simply as a shareholder looking for a commercial reward and a medium-term profit. Its policy on bonuses has arisen from this confusion, rather than from any systematic attempt to change the culture in the City. 

But, even though no-one is saying so, bonus capping is a risk. If bonuses really are crucial to the success of banks, the policy may yet damage the taxpayer’s investment, as the key assets of RBS and Lloyds are headhunted away. However, if they pull off a return to profit despite the reduced rewards for their staff, they may yet explode some of the myths around the bonus culture.

Only time will tell but I wouldn’t want to bet my house on the outcome.

With a little nudge from Brussels, the government has decided to break up the state backed mega-banks into smaller retail banks, a bit like the ones we used to have in the olden days. These are going to be Boring Banks, says Alistair Darling. The ones older people will remember and younger people might have read about or seen in old TV programmes. The sort we used to have when everyone knew and respected the bank manager; banks that made sound investments using the savings of thrifty depositors. No casino banking and trading in exotic financial instruments for these chaps. No, this is going back to banking as it should be. As if the underline this message, there is talk of restoring many of the old names to the high street. We’ll have the Trustee Savings Bank again and the staid but prudent Williams and Glyn’s. Who knows, if RBS is split up even further we might even see National Provincial back again.  

Ah, the tinkling of the old pub joanna as I pop in for a light-and-bitter. The shouts of the newspaper sellers, the ring of the bells on the red buses. Bowler-hatted gents walking to the station and and cloth-capped workers cycling away from the factory as the whistle blows.  And isn’t that old Mr Mainwaring locking up the bank after a hard days work? Regular as clockwork; you could set your watch by him.

It’s all bollocks of course. If anything, the finance for the new banks will be even more exotic than that which got their previous owners into so much trouble. Secretive US private equity funds, unknown foreign investors fronted by Richard Branson, Gulf oil barons and, in the greatest irony of all, sovereign wealth funds are among the most likely new owners of these quaint old names. It may be that Steely Neely simply forces a change in ownership from one state to another.

They might be given names from the 1950s but these will be 21st century banks in every way that counts.

I have long believed that sexual relationships between work colleagues are best avoided. The unholy mess at Aviva, gleefully reported at HR With Balls, only reinforces my view.

This is one of the best things I have ever seen on YouTube.

They’re called Lulu and the Lampshades and, as far as I can tell, they are from London. They are playing at the ICA in London on 6 November, when I shall be in France.  Oh well, maybe next time…..

Hat Tip: John Band

There are a number of golden rules to follow when preparing for difficult meetings.

If you are going to say something which will make you really unpopular, make sure you are prepared, know all your facts and can reel them off with confidence.

If your case is not watertight, anticipate where you are vulnerable and rehearse your evasion tactics so that you cover up the fact that you are being evasive.

If your ground is really shaky, your only chance is to make doubly sure that you can deliver your line in bullshit with confidence and aplomb.

In the last case, rehearsing your responses with critical friends is essential. Ask yourself, “What are the questions I really hope they don’t ask?”  Then get your colleagues to ask you those questions as spitefully and aggressively as they can.  Practice your responses so that you get used to delivering them while managing your own fear and anger.

Unfortunately, many people don’t do this. The more senior they are, the more likely they are to surround themselves with people who agree with them and reinforce their views. They are therefore able to kid themselves that they influence people by force of personality and argument rather than by their position power. The result is that when they go into adversarial situations they are too arrogant to prepare for the conflict and end up being unable to deal with the hostility. I’ve seen it happen many times. Under an unexpectedly effective assault, they bluster, sweat, laugh nervously, make inappropriate jokes and comments to hide their anxiety and, eventually, lose it and insult someone.

Which is pretty much what happened to BNP leader Nick Griffin last night. The PR professionals’ verdict is that his performance was disastrous.

A word of advice from the corporate world, Nick. If you are going to spout such ludicrous rubbish,  make sure you are really well prepared and rehearsed before you go on.