Dubya marches into deficit

THE enduring legacy of President Clinton's eight years in the White House was the longest peacetime expansion in a century and an end to the heavy budget deficits of the Reagan-Bush Senior era.

Now, just over a year into office, George W (Dubya) Bush looks in danger of making the same kind of mistakes that cost his father a second term. Bush senior believed that his strategic record in the Gulf would see him through, and neglected the economy. Bush junior, in his budget sent to Congress last night, places the war on terrorism above all else.

This is fine in the context of September 11 and Bush is playing this for all it is worth with a budget decorated with fighter jets in a red, white and blue livery. But it comes at a considerable price. Defence spending is lifted by $48bn, the biggest increase in two decades, and spending on domestic security is doubled to $37.7bn.

All of this, together with slower growth and the tax cut package introduced soon after he took office, means the return of budget deficits in the US. Projections show a deficit of $106bn in 2002, falling to $80bn in 2003 and just $14bn by 2004. That is okay if it represents a cyclical response to economic slowdown.

The fear must be that unleashing the dogs of war just as tax cuts are coming through will signal an end to the fiscal discipline that lowered bond yields in the Clinton years. This will be especially so if for some reason the expected recovery fails to materialise.

With the markets looking less than impressed by his fiscal arithmetic, the President should remind himself of his predecessor's dictum: 'It's the economy, stupid.'

Imperial perspective
THAT ICI has been required to launch a rights issue at a whopping 44% discount to the closing market price at the end of last week speaks volumes as to how the mighty have fallen.

The speciality chemicals group failed to deliver on its debt reduction plans, the ratings agencies threatened a downgrade of its debt (which would have raised interest costs) and management, headed by Brendan O'Neill, decided that raising fresh equity was the lesser of two evils.

For this, he and the ICI board can expect to face considerable vitriol. But, before the criticism becomes too heavy, it is worth remembering that rights issues, an offer of discounted shares to existing investors, are partly what equity markets are about. Efficient markets should be able to respond to setbacks by stumping up new capital.

ICI may appear to have more than its fair share of problems. The repayment of debt by the sale of its legacy heavy chemical operations has been slower and more disappointing than expected. Its move into the more glamorous speciality chemicals coincided with a downturn that also hit its paint operations.

So, for the moment, ICI's rebirth as a high-growth business has been postponed. On top of this, there are serious concerns about its liabilities for the environmental mistakes of the past.

While all of these are difficult problems, none is terminal. This is not another Marconi. ICI made real profits of £401m last year and dividend policy remains intact.

It is not the first time that there has been City hand-wringing over rights issues. Much the same debate took place a decade ago when Barclays went to the market to improve its capital base. Rights should be seen as a new beginning, not the beginning of the end.

BA challenged
FOR the time being at least, British Airways, another FTSE company weighed down with debt, is not contemplating the rights route. Its third-quarter loss was a little less than the market expected and Britain's flagship carrier looks set to produce more encouraging numbers when its January traffic figures are released today, with some revival in premium passengers.

It recognises that, in this financial year, any improvements will have to come on the cost side. The 'size and shape' review will be critical here.

This will be as much aimed at headquarters costs as route structures and there is a determination that BA should not return to the old BOAC long-haul model, but compete in short-haul routes with the cut-price carriers.

As important as adjusting the size of BA for a more frugal and competitive era will be reducing the debt burden. Chief executive Rod Eddington thinks this can be achieved without a rights issue as the company remains cash flow positive before interest charges.

But he must also recognise that there have been too many disappointments since he took over from Bob Ayling 18 months ago with such high hopes.