As the post-Budget buying spree waned, investors sat back and looked at areas of the market which have been left behind. The health and household sector was one of the first to spring to mind - it has underperformed the FT-All Share Index by almost 40 per cent over the past year.

A year ago the p/e ratio on the 500 Index, which reflects the performance of all stocks excluding financial issues, was 17.12 while the health and household sector, traditionally viewed as a fast growing area was above 23. At the close of trading on Thursday the position was reversed. Several of the sector's leading companies are now seen as low growth yield stocks rather than rising stars. Hoare Govett sees Glaxo yielding 5 per cent and Zeneca 4.8 per cent.

That yield potential was underlined as the market caught wind of a further cut in base rates yesterday. Glaxo, which received approval for an influenza compound to be tested on humans in the United States next year, rose 8 1/2 to 695 1/2 p, It was also said to have been upgraded by Smith Barney in the US. Zeneca gained 11 to 796p , Wellcome 8 to 684p and SmithKline Beecham 5 1/2 to 399p.

The startling gains in bank shares this week, based partly on the market's reaction to the Budget, but also on Royal Bank of Scotland's sparkling preliminary results, were often extended yesterday as marketmakers scrambled to cover short positions.

In a classic bear squeeze, Standard Chartered powered ahead to another all-time high, closing 43 up at 1153p, after turnover of 1.9m, while Abbey National also reached a peak, settling 15 better at 452p after big turnover of 9.4m.

TSB continued to attract much higher than usual activity, the shares moving ahead to 237 1/2 p on 9m traded, with the market said to have been caught on the wrong foot. There was also speculation that the bank could be considering the sale of its United Dominions Trust business. TSB, the next big bank to report preliminary figures, announces profits in January.

Royal Bank of Scotland rounded off a splendid week on a sound note, the shares edging up 2 to 430p, a week's gain of 46p, or 12 per cent, after the exceptional results which saw the dividend total increased by no less than 25 per cent.

Bank specialists continued to highlight the substantial shift in sentiment in the bank sector, which it was said, could quickly respond to a steep decline in bad debt provisions and recent cost cutting. There was, however, significant profit-taking in Barclays, 5 lower at 609p, while HSBC was hit by bearish news on the Anglo/Chinese talks on Hong Kong.

NEW HIGHS (155)

BRITISH FUNDS (25) OTHER FIXED INTEREST (1) Utd. Mexico 16 1/2 pc 2008, AMERICANS (3) Gen. Elect., Lowe's, Varity, BANKS (7) ANZ, Abbey Natl., Bank of Scot., Lloyds, Ottoman, Standard Chart., TSB, BREWERS (4) Gibbs Mew, Matthew Clark, Regent Inns, Scott. & New., BLDG MATLS (9) BPB, Blue Circle, Do. Pf., Meyer, Pilkington, Do. Wrrts., Rugby, Travis Perkins, Wolseley, BUSINESS SERVS (2) Chubb, Fact (EW), CHEMS (2) Bayer, ICI, CONGLOMERATES (1) Harrisons & Crosfield, CONTG & CONSTRCN (2) Banner Homes, Crest Nichol., ELECTRICALS (3) BICC 10 3/4 pc Bds., Denmans, Philips Finance 5 3/4 pc, ELECTRICITY (6) Eastern, Midlands, Northern Ireland, Norweb, Sth. Wales, Sth. Western, ELECTRONICS (2) Electrocomponents, Farnell, ENG GEN (1) Hill & Smith, HEALTH & HSEHOLD (1) Court Cavendish, HOTELS & LEIS (4) Castle Comms., Jurys Hotel, Rank, Do. Pf., INV TRUSTS (39) MEDIA (5) Haynes Pub., Intl. Business Comms., Radio Clyde, Reuters, Sleepy Kids, MTL & MTL FORMING (1) Firth (GM), MISC (3) Brit. Bloodstock, Dinkie Heel, Plantsbrook, MOTORS (2) Dixon, Lex Service, OIL & GAS (1) Brit. Gas, OTHER FINCL (1) Perpetual, OTHER INDLS (3) Amber Indl., Ferromet, OMI, PACKG, PAPER & PRINTG (2) Ferry Pickering, Filofax, PROP (8) Daejan, Derwent Valley, Frogmore Ests., Grainger, Greycoat, Lon. Merchant, Southend Prop., Warner Est., STORES (6) Argos, Cantors, Courts, Kleeneze, Marks & Spencer, Sears, TELE NETWORKS (1) Securicor A, TEXTS (2) French (T), Yorklyde, TRANSPORT (3) BAA, Irish Continental, Norish, SOUTH AFRICANS (1) SA Brews., MINES (4) CRA, Ennex, Navan, Ovoca.

NEW LOWS (23)

BRITISH FUNDS (4) CHEMS (1) Holliday, CONTG & CONSTRCN (1) Green (E) & Part., ELECTRONICS (2) Micro Focus, Radamec, FOOD MANUF (1) Northern, FOOD RETAILING (2) Geest, Kwik Save, HEALTH & HSEHOLD (1) Huntingdon, MEDIA (1) Blenheim Pf., MISC (1) Shanks & McEwan, OIL & GAS (1) Midland & Scottish Res., OTHER FINCL (2) Policy Portfolio, St. James's Capital, OTHER INDLS (1) Harris (P), PACKG, PAPER & PRINTG (2) Microgen, Ossory, PROP (1) YRM, STORES (1) Pentos, TEXTS (1) Dawson.

Data based on those Companies quoted on the London Share Service.

The London stock market ended Budget week on a triumphant note yesterday, with the FT-SE 100 Share Index pushing through to a new closing peak, helped by firmness in sterling and in UK government bonds. Earlier in the session, the UK market traced an erratic pattern and the focus on domestic factors restrained it from following the upward trend in other European bourses which greeted the cut in French interest rates.

Technical factors also helped the UK market ahead. Although the squeeze in the futures market eased, the premium on the December contract on the Footsie remained strong and the pressures were transferred to the equity market where marketmakers have been caught badly short of stock this week. There were reports that some marketmakers urgently sought a widening of price spreads yesterday.

After moving between an early low of 3,212.2, followed quickly by a day's high of 3,240.8, the FT-SE Index closed 10.3 higher at 3,234.2. The FT-SE Mid 250 Index edged ahead by 0.6 to 3,566.5, also a closing peak. Seaq volume died away a little to 747.1m shares compared with 1,048.6m in the previous session. Thursday's retail business was worth Pounds 2.31bn, among the highest daily totals for the year, and confirming the increased business levels which have cheered securities firms in the City of London this year.

Government bonds also showed uncertainty at first as profits were taken in the wake of the dramatic rise of the past two trading sessions. Firmness in sterling and in the sterling future contract at the very close of trading spurred a recovery in bond prices.

Short-dated gilts ended a touch firmer as confidence that UK base rates will be cut soon after Christmas grew stronger. The longer dates, reflecting similar confidence that domestic inflation will remain low, gained around 1/4 points higher, bringing yields down to 6.76 per cent.

At last night's close, the Footsie showed a gain of 122.8 points or nearly 4 per cent over the week. Investment confidence has been boosted by the absence from the UK Budget of the feared assault on the tax status of the UK pension funds and by the relatively benign stance adopted by Mr Kenneth Clarke, the UK chancellor of the exchequer.

Some further selling pressure was seen in oil stocks, however, as international investors continued to back away in the face of the persistent weakness in global oil prices.

There were further gains yesterday in the bank stocks which will benefit quickly from improvement in the trading success of their customers, many of whom feature on the banks' bad debt lists and also in store and consumer issues which look for early cuts in base rates. Firmness in pharmaceutical issues provided a boost for market indices.

While most equity strategists remained optimistic for the near term, there were warnings that Friday afternoon is well known as a treacherous time for investors. A highly optimistic weekend press review of the Budget and of the stock market's response is expected and the stock market expects increased private investor activity.

This week's interest rate cuts in Europe, although not spearheaded by the Bundesbank, have strengthened the likelihood that the UK base rates cuts widely predicted by analysts in London could come earlier in the New Year than expected.

Dealers were surprised once again by the hefty premium in the futures market and said it was largely responsible for preventing the cash market slipping into negative territory, writes Peter John.

The cash market wanted to take a pause after hectic post-Budget gains but the futures contract on the FT-SE 100 index, expiring in two weeks, refused to give ground.

When the December contract opened at 3,243 it was at a premium of some 29 points to cash. Most marketmakers calculate however that for the last two weeks of its trading life the contract should have no estimated fair value and should, perhaps, be at a small discount to cash.

December closed at 3,247 with some 12,900 contracts traded. The cash market closed at 3,234.2.

Options volume was down to more normal levels with turnover of almost 42,000 contracts. Hanson was the most active stock option with more than 4,300 lots dealt.

The French and Spanish authorities took their cue from the Bundesbank yesterday to cut their interest rates by a quarter of a point, writes Rachel Johnson.

The French cut their intervention rate by 25 basis points to 6.2 per cent, while the Spanish central bank lowered its benchmark interest rate by the same amount to 9 per cent at its regular seven to twelve day repurchase tender.

Both moves followed the Bundesbank's clearing of the decks for lower European interest rates with its 25 basis-point cut in the repo rate to 6 per cent on Thursday. The Bundesbank said the rate would not change until January 5, taking the steam out of market speculation of a cut on December 16.

The unexpected aspect of the French move was timing. The Bank of France announced the rate for its repurchase tender yesterday, days before it takes place on Monday.

In London, the French franc rose to close at FFr3.437 against the D-Mark, after a previous FFr3.446. Currencies which have had their interest rates cut over the past couple of days rose against the D-Mark.

This follows the pattern in European currencies since the summer crisis in the exchange rate mechanism: investors have been favouring currencies with better growth prospects rather than those with the highest interest rates.

The Spanish peseta was the latest to flout conventional wisdom by rallying against the D-Mark after the 1/4 point cut in its money rate.

The peseta set a Pta82.74 low after the rate cut news but closed higher in London at Pta82.26 compared with the previous close of Pta82.37.

The dollar rose against the D-Mark on the back of encouraging US payroll data but its rise was not sustained for long.

Figures from the US Labour Department showed a rise of 208,000 in non-farm payrolls in November, with the unemployment rate at 6.4 per cent, better than analysts' expectations of 170,000 and 6.7 per cent respectively.

Sterling rallied against the dollar and the D-Mark, gaining over a pfennig on the German currency and around a cent on the dollar in late European trading. Rate cuts in France and Spain helped underpin the pound, as did the fizzling-out of the dollar's rise very soon after the US data had been released. Investor interest in UK government bonds and shares helped boost the pound.

In London, sterling closed at DM2.5650, after a previous DM2.5525, and against the dollar it finished at Dollars 1.4905, after a previous Dollars 1.4825.

On the UK money markets, expectations of a further cut in interest rates were only modestly reflected in the three-month interbank rate which finished at around 5 9/32 , unchanged on its previous close. But the December short sterling contract closed around 6 basis points higher at 94.70 amid continuing high expectations for further monetary easing.

France's decision to cut lending rates served to strengthened optimism among money market dealers that Mr Kenneth Clarke's Budget opened the way for a sustained, lower level of interest rates.

In the morning the Bank of England forecast a shortage of Pounds 2.15bn. The forecast was later revised to Pounds 2.3bn. This was removed in afternoon operations and no late assistance was offered.

German call money eased in a liquid market, encouraged by the Bundesbank's decision on Thursday to lower its repo rate.

Cash was on offer as banks, in anticipation of cheaper money, unloaded liquidity which they had obtained from the Bundesbank at the former rate of 6.25 per cent.

TOMORROW: EU economic and general affairs councils meet in Brussels. Venezuelan presidential and congressional elections.

MONDAY: Japan and the US hold two-day bilateral trade talks in Tokyo. Credit business (October). EU foreign ministers meet in Brussels. Pacific rim conference in Kuala Lumpur. Interim figures from Scottish and Newcastle. Paterson Zochonis holds annual meeting.

TUESDAY: Japanese government announces new economic stimulus measures. Cyclical indicators for the UK economy (October). US consumer credit (October). EU monetary committee meets in Brussels. Deutsche Bank's interim statement.

WEDNESDAY: US wholesale trade (October). International bankers forum in Frankfurt. Mrs Benazir Bhutto, Pakistan's prime minister, pays three-day visit to Iran before visiting Turkey. Official start of work on the London Underground Jubilee Line extension.

THURSDAY: Details of employment, unemployment, earnings, prices and other indicators. New earnings survey, Part F: Distribution of hours; joint distribution of earnings and hours; analyses of earnings and hours for part-time women employees. US producer price index (November). Mr Boris Yeltsin, president of Russia, visits Brussels for signing of letter of intent on co-operation with the European Union. Meeting of Black Sea economic organisation to discuss setting up a Black Sea trade and development bank in Sofia. Nato defence ministers meet in Brussels. Mediterranean conference on transport in Trieste (until December 10).

FRIDAY: EU summit meeting in Brussels at which Community leaders will discuss final positions on Gatt (until December 11). Balance of visible trade (October). Usable steel production (November). Construction output (third quarter). Short-term economic survey of enterprises in Japan published. Nationwide general strike expected to take place in Belgium. TML construction consortium due to hand over Channel Tunnel to operators Eurotunnel.

THE OIL market ended a nervous week with a tentative recovery from fresh five-year lows reached early yesterday.

As with other recent setbacks, the morning selling that pushed the February futures price to Dollars 13.85 a barrel at one point was linked to concern about the prospect of Iraq returning to the market sooner rather than later. In late trading, however, the price had moved up to Dollars 14.07 a barrel, down 9 cents on the day and 68 cents on the week.

Last week's downward reaction to the failure of the Organisation of Petroleum Exporting Countries's ministerial meeting to agree on production cuts continued on Monday, pushing the February futures price down another 35 cents to Dollars 14.40 a barrel.

Tuesday saw prices staging a modest recovery for most of the day, but that was reversed in late trading after Iraq announced that it might negotiate with the United Nations about a one-off sale of Dollars 1.6bn worth of oil to finance humanitarian aid and compensation to victims of the 1990 invasion of Kuwait. It had earlier rejected this idea, seeking instead a permanent easing of UN export sanctions.

Prices steadied on Wednesday but moved sharply lower again on Thursday as the fears about Iraqi sales adding to the present oversupply returned to the fore.

At the London Metal Exchange copper led a general rise in base metals prices. Having broken through technical resistance on Thursday the three months copper price climbed to Dollars 1,688.50 a tonne before backtracking to Dollars 1,679.75 at yesterday's close, up Dollars 24.25 on the week.

Aluminium prices took a prominent part in the rally until they succumbed yesterday to disappointed selling following the overnight announcement that no specific production cuts had been agreed at inter-government talks in Washington.

At the two-day meeting US, Russian, Australian, Canadian, Norwegian and European Union officials had discussed ways of easing the severe oversupply that has been driving aluminium prices lower since the collapse of the Soviet Union released a flood of metal from the former Eastern bloc (chiefly Russia). There had never been much hope of substantial progress being made at this stage, but news that the delegates had succeeded only in identifying objectives and had deferred consideration of practicalities to follow-up talks scheduled for January 18-19 nevertheless prompted a sharpish market sell-off.

By yesterday's close the LME three months delivery price, which climbed as high as Dollars 1,088 a tonne on Thursday, was quoted at Dollars 1,075.75 a tonne, down Dollars 9 on the day but still Dollars 17.25 up on the week.

Lead was once again the strongest LME market, with prices maintaining the strong upward trend that began late last week. The three months price closed yesterday at Dollars 446.50 a tonne, up Dollars 18 on balance but Dollars 2.50 below the seven-month high reached on Thursday. Dealers attributed the market's strength to increased demand from car battery makers and tightness of supplies of lead concentrate (an intermediate material).

The London Commodity Exchange cocoa market struggled to build on recent gains as fresh harvest news was awaited from west African growing regions. The March futures position edged up to a 5 3/4 -year high of Pounds 1,064 a tonne yesterday afternoon and ended Pounds 8 up on the week at Pounds 1,061 a tonne.

----------------------------------------- LME WAREHOUSE STOCKS (As at Thursday's close) tonnes ----------------------------------------- Aluminium +3,900 to 2,395,450 Aluminium alloy -140 to 49,060 Copper +1,925 to 592, 425 Lead -675 to 298,075 Nickel +960 to 119,904 Zinc +6,050 to 870,575 Tin +130 to 19,125 -----------------------------------------

Mr Rupert Murdoch's News Corporation will not know until next year whether it is permitted to issue its controversial 'super-voting' shares.

After a meeting yesterday between the Australian attorney-general, Mr Michael Lavarch, and Mr Laurie Cox, head of the Australian Stock Exchange, the ASX said that if it decided to alter listing rules to accommodate News Corp's request, it would first issue a formal 'exposure draft', detailing the proposed changes.

There would then be an unspecified period during which comments would be sought. The attorney-general would then have 28 days to allow or disallow the decision.

This process means that no rule change could come into effect until well into 1994. The ASX is shifting through about 60 responses to its earlier discussion document, dealing with principles underlying differential voting rights. The earliest date on which it might consider the results of this process is December 21 - but it now seems likely that even that determination will be pushed back to late January.

In any event, the subsequent comment period on the exposure draft will ensure that no rule change becomes operative until well into the new year.

The attorney-general's office, meanwhile, said it planned to set up an 'expert advisory' group, to look at the issues surrounding the introduction of differential voting rights and the implications for public policy. Membership of the group will be announced shortly. The group would be expected to participate in the comment period following publication of an exposure draft.

Mr Murdoch in October first outlined his plans to issue 'super voting' shares - ones with multiple voting rights - on a pro rata basis to existing shareholders. But the scheme has generated enormous controversy, with critics claiming it would serve to entrench the Murdoch family at News, at the expense of other shareholders. News, by contrast, has argued that the scheme is required so that it can pursue joint ventures without management becoming vulnerable.

BCE, Canada's biggest company, has finally sold its financial services and property interests and is investing in US cable TV in preparation for the multi-media age.

BCE will now be solely a telecommunications group with large international interests in the Americas, Europe and Asia. It controls 54 per cent of Northern Telecom, the international equipment make.

'Our policy is to pursue leadership in telecommunications,' said Mr Lynton Wilson, chairman.

The group is paying USDollars 275m for 30 per cent of Jones Intercable, a Colorado-based cable TV operator with a subscriber base of 1.3m homes in 24 states and cable investment in the UK and Spain.

BCE has an option to take 51 per cent of Jones and will invest in its expansion.

BCE said the move gives it a major presence in the US home entertainment market without making a 'blockbuster investment of the kind that some US telephone companies have made'. It already has cable TV investments in the UK.

In addition BCE has sold its fully-owned loss-making financial services unit, Montreal Trustco, Canada's fourth biggest trust company, to the Bank of Novia Scotia for nearly CDollars 300m in the bank's stock. The deal includes all MT assets and liabilities except CDollars 100m of office buildings.

BCE is expected to sell the bank shares and the office buildings. It paid CDollars 1bn for MT in 1989 as a diversification, including a recent capital infusion. It will take a CDollars 400m write-down to cover its losses on the deal.

BCE is disposing of its remaining property interests to Carena, a Hees-Edper holding company, for a nominal sum. This will require a CDollars 350m write-down.

BCE's total write-offs for 1993, including CDollars 940m for its share of Northern Telecom special charges, will total almost CDollars 1.7bn.

Ford of Europe's president, Mr William Fike, is to retire at the end of the year, when the post of president will effectively be abolished.

Mr Fike's responsibilities in the areas of manufacturing, sales and product development are to be redistributed among Mr Jacques Nasser, who took over as Ford of Europe's chairman at the start of the year, and members of the business management committee, which reports to Mr Nasser.

The committee includes vice-presidents such as manufacturing director Mr Albert Caspers, who is also chairman of the German company, Ford-Werke.

The Euro Disney banks have formed an official steering committee to represent them in the negotiations towards an emergency financial restructuring package for the ailing leisure group.

The committee, which includes 11 of the 60 international banks that own Euro Disney's FFr20.3bn (Dollars 3.45bn) net debt, plans next week to meet representatives of Euro Disney and Walt Disney, its US parent company, in order to begin discussions over the restructuring.

The formation of the steering committee should enable the restructuring negotiations to get under way. 'This is going to be a very tense, complicated affair,' said one of the members. 'The sooner we start talking to Disney in earnest the better.'

Banque Nationale de Paris and Banque Indosuez, the French banks, will take leading roles in the steering committee.

BNP is the head of the 1989 banking syndicate that provided loans to Euro Disney to finance the construction of the Euro Disneyland theme park. Indosuez led a second syndicate in 1991 which lent money to build the park's hotels.

The other French banks on the steering committee are Credit Agricole and Credit National. Caisse des Depots, the state-controlled French financial institution will also be involved, although it is negotiating independently with the Disney camp over the terms of its FFr4.8bn fixed interest rate loans.

JP Morgan and Citibank, the powerful US banking groups, are also represented on the committee: as are Deutsche Bank of Germany, Barclays and National Westminster of the UK and LTCB of Japan.

Walt Disney, advised by Lazards in New York, last month laid out its case to the creditor banks at a special meeting in Paris. It hopes to halve Euro Disney's debt to around FFr10bn by persuading the banks to exchange part of their loans for equity and by staging a rights issue.

However, the banks are anxious to ensure that Walt Disney will play its part in alleviating the financial strain on Euro Disney, which is advised by SG Warburg in London.

The steering committee is next week expected to table proposals for Disney to reduce its royalty entitlement from Euro Disney.

Hoogovens, the Dutch aluminium and steel group, has priced its issue of 8.3m new shares at Fl 40 (Dollars 21) each to raise about Fl 330m towards bolstering its balance sheet.

The retail phase of the two-phase offer opened yesterday and is due to close on Tuesday. If demand is heavy, some shares earmarked for institutional investors and the Dutch state will be clawed back for sale to private investors.

The first phase of the offer, a private placement of shares with institutions and the Dutch state, was oversubscribed when it closed on Thursday night.

The company said the institutional placement had achieved a good spread between the Netherlands and overseas investors but it gave no further details.

The state's participation could raise the national government's stake in Hoogovens to a maximum of around 17 per cent from the current 12.3 per cent.

However, the decision by the city of Amsterdam to sell its 5 per cent stake in Hoogovens to institutional investors in the summer means overall ownership by public authorities will be no higher than it was before.

At 4pm this afternoon, potential shareholders in Credito Italiano, Italy's seventh biggest bank, will learn how much the government expects them to pay for the 840m shares being put on the block in the country's first big privatisation.

Making the Credito Italiano flotation a cast-iron success is essential for the credibility of Italy's long-delayed privatisation programme.

A keen price for Credito Italiano is a must for many reasons. In spite of the L10bn (Dollars 5.8m) advertising budget and an unprecedented selling campaign, next Monday's opening day of the flotation is far from ideally timed in view of the difficulties facing the bank and the Italian economy.

This year will be one of the toughest on record for the banking sector. Analysts expect heavy provisions on loans to recession-hit industry and a squeeze on margins because of falling interest rates. Large rises in fee-related income thanks to the buoyant stock and bond markets will counter the impact, but profits will remain subdued.

Credito Italiano is heavily exposed to some of Italy's most serious corporate crises, notably Ferruzzi, as well other prominent rescue candidates. Ominously, the draft prospectus warns: 'Provisions for possible loan losses in 1993 will be much higher than in 1992 and exceed amounts deductable for tax purposes.'

The less than ideal timing, coming before even preliminary 1993 figures for the bank are released, is accentuated by the turbulent political climate. Next week, the sparks are likely to fly in Rome as parliament gets to grips with the 1994 budget.

General elections are expected to follow before long. The poll, forecast for early next year, will mark a crucial step towards the renewal of Italy's political class, largely discredited by corruption scandals.

In the meantime, the stock market will remain a hostage to any of a thousand imponderables on the political front.

Credito Italiano's privatisation is also a pace-setter for other deals over the next two years. In February, the treasury is to sell up to 30 per cent of Istituto Mobiliare Italiano, the Rome-based financial services group. That will be followed within weeks by the flotation of IRI's majority stake in Banca Commerciale Italiana, another big bank, and by a first tranche of the Ina state insurance group.

If all goes to plan, 1994 will close with the privatisation of a stake in the Enel electricity generating authority.

This week, the treasury appointed Mediobanca, the Milan merchant bank, and Merrill Lynch of the US as global co-ordinators for the deal. The year after should see the privatisation of the Stet telecommunications group and most of the energy assets of the Eni energy and chemicals concern.

A successful sale of Credito Italiano's shares would set the tone for subsequent transactions.

'If investors find themselves with a tidy premium, they'll obviously be more likely to put up money for the other deals,' notes one experienced UK public relations man advising the treasury.

By contrast, a flop would cast a shadow over the entire privatisation process. Many investors recall the March 1992 flotation of an initial 20 per cent of Istituto Bancario San Paolo di Torino, the big Turin bank. After trading briefly at a premium, the shares soon fell below the issue price and have not recovered since.

The need for a success is accentuated by Italy's extremely tight timetable for privatisation. IMI is due to make its debut barely two months after Credito Italiano and BCI will follow within weeks. 'Investors will have to have exceptionally short memories to prevent them being influenced by a Credito Italiano flop. The treasury has got very little margin for error,' says one Milan analyst.

To some extent, matters are outside the government's control. The political scenario is so strewn with potential booby-traps that trying to steer round them appears pointless to many. Further signs of polarisation in voting patterns in Sunday's mayorial run-off elections; a surge in support for the neo-fascist MSI party; or inflammatory statements from the autonomist Northern Leagues could all give investors a fright and set the bourse tumbling.

At least Mr Achille Occhetto, leader of the Democratic Party of the Left, (the former Communists), which performed strongly in last month's partial municipal elections, has pledged to support the government in getting the 1994 budget through parliament.

Given the risks, the treasury may veer towards generosity in pricing Credito Italiano. This week, the marketing machine has moved into full swing, with plentiful hints that the offer will be oversubscribed. Were Italy on its 10th privatisation, ministers could afford to be tough on pricing. In the circumstances, discretion may be the better part of valour.

Sweden yesterday unveiled its biggest privatisation to date when it announced plans to raise between SKr5bn (Dollars 588m) and SKr8bn from the sale of a 49 per cent stake in a new grouping of state forestry interests.

It also signalled it was aiming to sell off Pharmacia, the pharmaceuticals group which used to be part of Procordia, in May or June next year.

This probably means that plans to privatise two other state-owned groups, Nordbanken and the electricity giant Vattenfall, will be deferred beyond next September's general election.

The forestry company, which will be one of Europe's top 10 pulp and paper groups, has a market value of between SKr10bn and SKr16bn, according to Mr Per Westerberg, the Swedish industry minister.

It will be privatised in the spring, once three existing forestry groups - Assi, Doman and Ncb - have been combined. Assi and Doman, both 100 per cent state-owned, are to combine at the year-end before making an all-share bid for Ncb, in which the state holds 51 per cent, in February or March.

Most of the shares in the group are to be offered to the Swedish public. This follows heavy criticism of Sweden's last privatisation when the public offered to buy 80m shares in the defence group Celsius, more than 17 times the 4.6m shares allotted to them.

The new group will have annual sales of SKr15bn making it nearly as big as MoDo, Sweden's third largest forestry company. It will be Sweden's largest forest owner and its biggest producer of sawn timber products.

Pharmacia, the next privatisation candidate, is Sweden's second largest pharmaceuticals group after Astra. It is 46 per cent state-owned, after Volvo and the government, Procordia's main owners, agreed to divide the company last month.

Greycoat won a new lease of life yesterday when shareholders overwhelmingly approved an Pounds 86m rescue plan presented by South African financiers, the UK Active Value Fund.

The agreement came just one week before trustees of the property company's zero coupon bond holders were due to pull the plug.

Greycoat is now believed to be preparing an approach to work with Postel, the suitor whose Pounds 120m rescue plan investors rejected in October.

Greycoat is thought to be seeking to implement some of the ideas discussed with Postel as part of its original rescue package. There has been some speculation that in the longer term, the pension fund group might join Greycoat on the Paternoster Square development, near St Paul's Cathedral in London, among other sites. Postel also has a Pounds 2.3bn property portfolio it is keen to exploit.

In the past, Postel has developed its property through joint ventures. Such a strategy would suit the revived Greycoat, which will in future seek to fund its developments on a project by project basis.

Greycoat is expected to set up joint ventures, where it would provide the site and/or development expertise. Financing would come from joint venture partners. Postel's strength lies on the financing side, with a Pounds 23bn fund at its disposal.

Neither party would comment on such a proposal. Mr Alaistair Ross Goobey, chief executive of Postel, said yesterday he was not bitter about the decision by shareholders to accept the UKAV offer over his own.

Mr Geoffrey Wilson, Greycoat's chairman, said the company was now 'back on a completely sound financial footing'.

Each of the group's four classes of stakeholder voted in favour of the financial restructuring which will result in a 37 per cent reduction in borrowings to Pounds 234.5m, raise Pounds 86m before expenses and remove the breaches of covenant which threatened to sink the group. The deal also allows preference holders to convert all or part of their shareholding into ordinary shares.

Postel is expected to have a stake of about 8.5 per cent in the company after the rescue deal. The other two largest shareholders will be UKAV, which will have between 22 per cent and 48 per cent, and Schroders.

Midland Independent Newspapers, publisher of the Birmingham Post and Mail is expected to go for a stock market flotation in the spring.

The management buy-out team, led by chief executive Mr Chris Oakley, which acquired the titles from Mr Ralph Ingersoll in November 1991 for Pounds 125m, has made it clear the group would float when the timing was right.

One factor standing in the way of a float was fears that Mr Kenneth Clarke, the chancellor of the exchequer, would impose VAT on newspapers in this week's Budget.

Net asset value per share at Govett American Endeavour Fund, the Jersey-based investment concern, fell to 155 cents as at September 30, compared with 170 cents a year earlier.

Total income for the six months rose from Dollars 5.82m to Dollars 6.19m (Pounds 4.15m) while net revenue came through ahead from Dollars 3.4m to Dollars 4.68m.

Earnings per share were 8.6 cents (6.25 cents) and the interim dividend is unchanged at 5.52 cents.

Shares in YRM fell a further 2p to 19p yesterday after the building design consultancy announced that its results for the six months to October 31 would be significantly below current market expectations.

It said that trading conditions had remained extremely difficult and further cost and overhead reductions had accordingly been made.

On Thursday the shares shed 8p, which the company said it understood was the result of a small volume of selling in the market.

For the year to April 30 YRM incurred pre-tax losses of Pounds 1.98m.

Adare Printing, the Dublin-based printing group, more than doubled pre-tax profits to IPounds 419,000 (Pounds 407,000) on turnover of IPounds 12.6m in the half year ended October 31. Profits last time amounted to IPounds 175,000 on sales of IPounds 4.58m.

The results included a three month contribution from Waddington Business Forms, acquired in July.

Mr Denis Bergin, chairman, said the profits growth was held back by initial costs of developing and streamlining the acquisitions. He said further restructuring would take place and the acquisition search would continue.

The interim dividend is lifted to 0.945p (0.9p), payable from earnings per share of 5.87p (3.34p).

Celltech, the emerging bio-technology company, received applications for 1.84m of the 7m shares available to the public in its flotation.

Last week, Celltech successfully placed the entire 20m shares, raising Pounds 50m.

Celltech said yesterday the shares were not expected to be a short-term investment. The flotation raised Pounds 27.3m after expenses. Dealings are expected to begin on December 9.

Umeco, the USM-quoted aerospace components distributor and maker of aircraft refuellers, reported pre-tax profits up from Pounds 53,000 to Pounds 154,000 for the six months to September 25.

The improvement was achieved on turnover up by Pounds 451,000 to Pounds 6.01m.

The directors said that the raising of Pounds 1.04m earlier in the year had left the group with net assets of Pounds 3.5m and net cash of Pounds 500,000 after a term loan of Pounds 375,000 at the end of the half.

As a result Umeco had interest receivable of Pounds 5,000 in the period (Pounds 54,000 charge). Earnings per share came out at 1.1p (0.6p) and the interim dividend is maintained at 0.75p.

Reduced pre-tax losses of Pounds 1.1m were announced by Explaura Holdings for the half year to June 30. Losses last time for the USM-quoted company, which quarries limestone aggregates in Newfoundland, Canada, were Pounds 1.7m.

The loss reflected an extremely low level of activity, the company said, with sales restricted to existing stocks at its New York terminal.

However, following the settlement in September of the strike which hit the concrete industry in New York, record daily sales were being achieved and the terminal was operating at maximum capacity.

Turnover in the period halved to Pounds 585,000 (Pounds 1.1m). Losses per share fell to 0.72p (1.15p).

AAH, the diversified distribution company, has acquired Foster & Plumpton, an operator of 29 retail pharmacy outlets in Yorkshire and Humberside, for an initial Pounds 12.5m.

Consideration will be met via Pounds 7.3m in ordinary shares with the balance in loan notes. An additional sum not exceeding Pounds 500,000 is dependent on valuation of the net assets being acquired.

For the 12 months to September 30 1992 F&P returned profits before tax of Pounds 212,000. Net assets at that date totalled Pounds 838,000.

AAH estimated that F&P would contribute profits (before financing costs) of not less than Pounds 1.5m for the year to March 31 1995 as a result of reduced overheads and operational synergies.

Mr Charles Saatchi has resigned from the board of the holding company of which Saatchi & Saatchi, the advertising agency he founded with his brother Maurice in 1970, is a part. He is to become honorary president of the company and will 'concentrate on his creative role for the group'.

Dares Estates, the property investment and development group, has reached agreement with its principal lenders for a restructuring of its banking arrangements.

The deal, which is subject to shareholders' approval, also involves a reorganisation of the company's share capital.

Under the terms of the agreement, the main creditors will convert a proportion of the debt into preference shares and extend the maturity date of the balance.

At a later date the new preference shares will be convertible into ordinary equity, which if fully taken up, would give lenders some 39 per cent of the enlarged share capital.

Ossory Estates yesterday unveiled proposals for a financial restructuring, a placing and open offer to raise Pounds 8m net and the acquisition of a portfolio of properties.

The company also estimated that pre-tax losses for the year to end-June would total not more than Pounds 41m. That included a write-off of investments amounting to Pounds 22m, the writing down of properties under development totalling Pounds 2m and interest and other charges accounting for Pounds 16.2m.

The directors believed the restructuring proposals represented the 'only realistic prospect' for shareholders obtaining any value from their holdings of ordinary shares.

They warned that if the proposals were not implemented and no alternative proposal put forward Ossory would be unable to continue trading with the result that it would have no alternative other than 'insolvent liquidation, administration or receivership'.

The placing and open offer would involve the issue of 835m new ordinary 1p shares at 1p each. The maximum number of shares available for subscription under the open offer would be 408m with clawback terms of 9 new ordinary 1p shares for every two 25p shares held.

The 25p shares would then be sub-divided into one new 1p share and one 24p deferred share. Following the reorganisation the Pounds 73m deficit on the profit and loss account would be reduced to about Pounds 25m via the cancellation of the deferred shares and the share premium account.

The acquisition is of six commercial and industrial properties for Pounds 2.83m in cash and shares.

The shares closed 1p lower at 1 3/4p.

Bombardier, a Canadian supplier of trains for the Channel tunnel, is to receive some Pounds 190m in compensation from Transmanche Link, the main contractor, to cover the cost of design changes it had to make.

The boards of the two companies and of Eurotunnel, the operator of the cross-Channel link, yesterday gave their formal approval to a preliminary agreement reached at the end of last month.

The agreement has been designed to link payments with the success of the project and to tie Bombardier into the start of services through the tunnel.

ESC Wagons, the company set up by Bombardier to build the trains, will receive FFr700m (Pounds 80m) in phased cash payments and up to 25m new Eurotunnel shares. At the closing price of 463p, a rise of 8p, last Friday these shares would be worth Pounds 116m, making a total payment of Pounds 196m.

'This agreement ties the fortunes of Bombardier to the fortunes of Eurotunnel,' Mr Andre Benard and Sir Alastair Morton, chairmen of Eurotunnel, said in a statement.

The cash payments will be phased over the period during which the trains are delivered, while Bombardier has agreed not to sell any Eurotunnel shares until all the trains which it is supplying have been commissioned.

The Barclay brothers, the reclusive property developers and publishing entrepreneurs, have taken a 12.4 per cent stake in Southend Property in part payment for one of their investment vehicles.

Twins Mr Frederick and Mr David Barclay have agreed to sell Trenport Properties, a wholly-owned subsidiary of their Ellerman Investments company, to Southend for Pounds 31m.

Southend said yesterday that the Barclays were taking 13.3m new ordinary shares of 5p each, while the remainder of the purchase price would be met with Pounds 12m in cash and Pounds 7m from the issue of Pounds 6.19m of convertible unsecured loan stock.

Mr Michael Hickey of Paribas, the brokers overseeing the transaction, said negotiations with the Monaco-based Barclays began last summer in the south of France, where Southend chairman Mr Malcolm Dagul owns a property.

The Barclays are thought to have been seeking a buyer for some time for Trenport, which they bought for an undisclosed sum in 1988 from Bond Corporation, the former vehicle of bankrupt Australian businessman Mr Alan Bond.

Welcoming the Barclays' shareholding, Mr Dagul said the brothers had undertaken to retain their stake as a medium-term investment and he was hopeful of 'other deals' with them.

He said that the addition of Trenport's three properties in Birmingham, London and Godalming would increase the size of Southend's portfolio by 15 per cent.

Together the properties - totalling 250,000 sq ft of office and leisure space - are expected to generate rental income of Pounds 2.9m next year.

'We see a lot of potential in these properties and this transaction could lead to further acquisitions,' he said.

Southend was able to seek new acquisitions because it had built up cash balances of Pounds 40m from property sales and a loan stock issue in June, he added.

The company, meanwhile, also announced an increase in pre-tax profits from Pounds 1.23m to Pounds 1.78m for the six months to September 30.

The results were achieved on reduced turnover of Pounds 12.7m (Pounds 18.2m). Earnings increased to 1.23p (0.67p), while the interim dividend is reduced from 1.52p to 0.8p.

The receivers to Ferranti International, the UK-based defence electronics group which collapsed on Wednesday, yesterday played down suggestions that up to 14 per cent of the worldwide workforce may lose their jobs.

In plans drawn up by management in advance of the company's collapse after the General Electric Company withdrew its takeover bid, 500 employees of the 3,600 workforce were being considered for redundancies.

The team of more than 60 receivers from accountants Arthur Andersen have been holding meetings with union representatives to prepare them for possible job losses. Most of the losses would be in the UK, which has a workforce of about 3,000.

However, Mr John Talbot, one of the joint receivers and head of insolvency at Andersen, said: 'We are optimistic about the group and the ability to sell many businesses as going concerns.'

He said he had received 'lots of expressions of interest' from possible buyers of Ferranti businesses, but that he would not be considering any serious offers until after he had completed more detailed investigations and developed a strategy for the company's future.

Sales of some parts of the group would need clearance from the Ministry of Defence because many contracts are for highly sensitive military equipment.

A number of companies within the Ferranti group are continuing to trade and have not entered receivership, including the joint ventures and most of its overseas operations.

Mr Talbot also confirmed suggestions that he would consider demanding more money from customers on any lossmaking contracts Ferranti was currently undertaking. He said it was 'quite possible' that some customers had already been approached to discuss the position.

The Ladbroke group is believed to have drawn back from its announcement earlier this week that it would definitely take advantage of the new foreign income dividend scheme.

The group is thought to have decided to postpone a final decision on whether to make use of the scheme until it has had time to discuss the matter with its shareholders.

Ladbroke announced last Wednesday that it would take advantage of the foreign income dividend (FID) scheme when paying its 1993 final dividend in early July 1994. The announcement was one of the factors which led to the group's share price falling from 171 1/2 p at the start of trading on Wednesday to 145p yesterday.

Using the scheme would result in a significant loss to pension fund investors because FIDs, unlike conventional dividends, do not carry a 20 per cent tax credit which tax-exempt investors can reclaim.

The confusion over whether or not Ladbroke had made a final decision on FIDs appears to arise from a senior management hiatus at the group, following the announcement last September that Mr Cyril Stein, the veteran chairman, was to retire. Mr John Jackson, the new chairman, and Mr Peter George, the new chief executive, do not formally take up their positions until January 1. The long handover period has led to some uncertainty as to the group's future direction.

The revelation this week that discussions were taking place over the future of Mr Michael Hirst, head of the Hilton International hotels subsidiary, is believed to have arisen from the same confusion.

Mr Hirst is regarded as an outstanding hotel operator but the group had decided that a new senior manager was needed to work alongside him to exploit one of the world's best-known brand names.

While discussions were going on, Mr Hirst sold 125,000 Ladbroke shares. The group said Mr Hirst sold the shares for personal reasons. The sale was announced on Budget day, four days after it had taken place. This created the impression that the group was trying to hide the share sale and also forced a premature announcement that discussions were taking place about his future.

The new leadership at Ladbroke is expected to take steps to improve its communication with investors and the press in an attempt to avoid such mishaps. It is thought that many in the group now accept that its traditional reticence has led outsiders to assume the worst about its fortunes.

Among other changes likely to take place is a more active property disposal programme.

The gloves are off in the battle for control at Bristol Scotts, the stadium and restaurant group wracked by shareholder dissent, writes Peggy Hollinger.

Mr Ian Stevens, head of the company's pubs division, whose family own just over 20 per cent of the shares, yesterday called for the resignation from the board of three members of the Kerman family, which has controlled the company for decades. Mr Stevens made the call in a letter to the company in which he withdrew an earlier request for an EGM to vote on appointing himself and fellow shareholder Sir Ian Rankin to the board.

He has requisitioned a second EGM at which he proposes to remove Mr Anthony Kerman and Mr Nicholas Kerman, directors, and Mr Isidore Kerman, chairman. He has called for the resignation of company solicitors, Forsyte Kerman, and again proposed the appointment of himself and Sir Ian.

Meanwhile, the High Court is expected to rule on Monday on the voting status of 830,000 Bristol Scott shares - 12 per cent of the company - sold by Mr Nicholas Kerman to the investment vehicle Mayfair Capital which sold them on to Mr Nicholas Berry. The Kermans are claiming to have an option to buy the shares back from Mayfair. Mr Berry has said that if allowed to vote he will vote for the appointment of Mr Stevens and Sir Ian.

Forte has appointed Mr Stefan Bokaemper, a senior executive with Inter-Continental Hotels, to head its luxury hotels division.

The appointment of Mr Bokaemper follows Forte's failure earlier this year to persuade Mr Willi Bauer, former general manager of the Savoy Hotel, to take the job. Mr Bauer said the post would have involved too much travelling.

Mr Bokaemper is currently Inter-Continental's executive vice-president in the Asia-Pacific region. He has been with the company for 26 years and will become managing director of Forte's exclusive hotels division. This is made up of 16 hotels, including the Hyde Park Hotel in London, the George V in Paris, the Ritz in Madrid and the Sandy Lane in Barbados.

Mr Rocco Forte, Forte's chairman, has said he would like to merge the division with the Savoy group's hotels. Forte holds a majority of the Savoy's shares but a minority of voting shares.

Forte is also in talks to take over the management of Ciga, the Italian-based luxury hotels group.

Shares in Betterware fell 10p to 148p yesterday as the home shopping company announced the appointment of a new finance director to replace Mr Terry Hockley, who is to lead the group's expansion overseas.

The shares have fallen from a six month high of 278p in recent months. The decline has been fuelled by the downgrading of 1994 annual profits after increased interims, decisions by the founding Cohen family to reduce its holding from 63.4 per cent to 50.3 per cent at a price of 230p a share, and a large overhang of stock.

The company stressed that Mr Hockley had been 'promoted to international director'. Betterware, which is facing a mature market in the UK, is seeking to expand in Europe. It entered the French market about two years ago, Spain earlier this year, and plans to set up in Germany next year.

Mr Hockley, who has been Betterware's finance director since 1990, had 'extensive international experience over many years', the company said, including US multi-nationals Textron, Burlington and United Technologies.

Mr Peter Hartley, former finance director and subsequently managing director of Texas Homecare, will succeed Mr Hockley. Mr Hartley, a chartered accountant, left Texas in July.

Mr Andrew Cohen, Betterware chief executive, said Mr Hartley's appointment 'adds further strength to our board and allows Terry to concentrate on our continuing thrust into the European market.'

Asda has sold its Allied business to Carpetland in a deal that will create the biggest carpet retailer in the UK.

Under the deal, Asda has subscribed for Pounds 8m of ordinary shares in Carpetland, which was acquired from the Lowndes Queensway receivers in a Pounds 12m management buy-out in 1991. This will give Asda an initial 40 per cent equity interest in the enlarged group, which will have 200 stores and be renamed Allied.

Asda's interest in the group can be increased to not more than 50 per cent, depending on the realisation value of Carpetland on a flotation or trade sale.

Asda, the UK's fourth largest grocery chain, has emerged from severe financial difficulties at the end of the 1980s determined to concentrate on its core business.

Mr Archie Norman, chief executive, described the disposal as 'a problem solved. Allied has been in decline for a number of years and threatened further losses.'

In the last two financial years the Allied business, which has soaked up more than Pounds 100m of investment since the late 1980s, incurred operating losses totalling Pounds 17.7m.

Carpetland made operating profits of Pounds 771,000 on turnover of Pounds 54.5m in the 12 months to the end of January. Mr Ray Nethercott, managing director, said that this year, before the acquisition, the company had been expecting profits of Pounds 2.5m on sales of Pounds 80m. 'Business has been flying in the last 12 months,' he said.

Mr Nethercott stated that there was 'real commercial logic' in the deal.

The combined group would have turnover of about Pounds 200m a year. He expected to have the group showing healthy profits in 18 months through cost saving measures, particularly on marketing and advertising. He hoped to bring the company to market 'within three years.'

As part of the deal, CINVen, the venture capital group and existing majority shareholder in Carpetland, is subscribing for Pounds 5m of 12 1/2 per cent preference shares and Asda is subscribing Pounds 10m of 12 1/2 per cent redeemable loan stock.

In the profit and loss account Asda will take a write-off of about Pounds 70m, mainly reflecting the total book value of its historic investment in Allied and Maples. It will also make a charge of Pounds 53.3m goodwill.

Mr Norman, who joined Asda 20 months ago, said he was pleased with the deal, which took another distraction away from management. Asda's debt had fallen from Pounds 700m to well below Pounds 100m since he joined. He expected to sell the 20 remaining Maples stores, 'within the next two months.'

See Lex

Carpet distribution in the UK 'has been described as a jungle', according to a recent report from Mintel, the market research organisation. It is 'highly fragmented with a large number of independent retailers and a small number of multiple operators', writes David Blackwell.

Allied Maples was the largest single outlet, followed by Carpetright, with 116 stores and a turnover of about Pounds 78m in the year to end-May. Carpetright was set up in 1988 by Sir Philip Harris, former chairman of Harris Queensway, with MFI, and was floated on the Stock Exchange last June.

An estimated 9,500 outlets sold floor coverings last year, including just over 6,000 independent retailers. About 2,200 stores were owned by multiples, with the remaining 1,300 belonging to voluntary buying groups such as AIS, Floreat and Green Group, as well as department stores and DIY sheds.

Mintel estimates that retail sales this year of machine made rugs and carpets will reach Pounds 1.35bn, up from last year's Pounds 1.3bn but still below the peak of Pounds 1.5bn in 1989. The market has been affected by fragile demand and price discounting which has curbed margins for both manufacturers and retailers.

The multiples deal direct with producers, and have the upper hand. The independent retailer either buys from a carpet wholesaler or belongs to a voluntary buying group. Wholesalers distribute 30 per cent of carpets and are reliant on the performance of the independent sector.

Imperial Chemical Industries is in talks to sell its Arizona-based Fiberite Composites Business, the last significant legacy of the UK chemical giant's unsuccessful venture into advanced materials.

ICI said market rumours had forced it to announce the possible disposal. If and when a deal was concluded, it would involve the writedown of about Pounds 100m, including Pounds 77m of purchased goodwill. However, ICI refused to identify the prospective buyer or the price. The shares closed 7p lower at 761p.

Fiberite, which employs about 800 people in the US and several dozen in Germany, produces thermo-set materials in their unfinished state, or pre-pregs.

Fiberite was bought in 1984 as part of ICI's Dollars 750m acquisition of Beatrice Chemical of the US. Pre-pregs, made of woven carbon fibres and resin, are used to make aeroplane parts such as tail fins and wing flaps.

ICI decided to get out of advanced materials before the restructuring process which saw the hiving off of its pharmaceuticals arm earlier this year to create Zeneca. ICI said yesterday: 'Advanced materials have not fulfilled the growth potential we saw in them in the 1980s.'

Analysts said ICI was at a competitive disadvantage in the manufacture of pre-pregs because it had to buy most of the feedstocks from rival chemical groups.

One said ICI produced a insignificant proportion of the added value in thermo-set, so the intrinsic profitability was small.

Fiberite last year made an operating loss of Pounds 10m on sales of Pounds 94m.

Mrs Alevtina Fedulova is the best Russia can offer as a female leader with the kind of clout once held by Mrs Thatcher. Blonde and articulate, she hopes to make big political advances for women as leader of the country's first party dedicated to female rights. In next weekend's parliamentary elections, Women of Russia is putting up 44 female candidates for the 450-seat State Duma.

Mrs Fedulova has a reputation as a formidable operator. Under the old Communist regime she headed the Pioneer youth organisation, which ran holiday camps for millions of children, where Marxist-Leninist values were mixed with games and music lessons.

This experience is both a disadvantage as well as a plus. Her background as a pillar of a Communist regime that did little to advance women's well-being means female voters, eager for a greater voice in Russian politics and society, are reluctant to support her. She admits the Communists 'proclaimed rights which were never applied in practice'.

It is ironic that Mrs Fedulova finds herself the founder of Women of Russia - and it is a sign of the difficulties women's rights activists have had in organising themselves in a fledgling democracy.

So far, few women have been able to gain the experience necessary to form parties.

The problem is not new. Equality between the sexes, promised by the Bolsheviks in 1917, meant, in practice, that many women were forced to work in heavy industry and other traditional male jobs but still to carry the burden of domestic duties.

As a result, Women of Russia seeks to appeal to women voters through largely pragmatic issues - for instance, pledging to give women the option of staying at home and stressing the importance of improved healthcare. It talks about bringing 'feminine qualities' - meaning reliability and tenderness - into Russia's male-dominated political arena.

The party is unique in trying to turn women's rights into a political issue - even though females account for 75 per cent of the unemployed and abortion remains the most common form of birth-control. The concerns of most other political parties revolve around the threat of a declining birth rate to Russia's influence as a world power and promises of improving health care.

One exception - Russia's Choice, the party set up by young radical reformers in the Russian government - has put Ms Ella Pamfilova, the social welfare minister, at number three on the party list used in the system of proportional representation. But in spite of her popularity, most women activists regard her selection as a token gesture.

Similarly, Mr Grigory Yavlinsky, the economist, has promised that the radical alliance he leads would try to pilot an equal opportunities law through the new parliament.

The pervasive indifference is due largely to the lack of pressure from women. Many blame themselves for the dominance of men in Russian society and politics. 'We spoil our men,' explains Mrs Natalya Starkova, a 60-year-old English-language teacher at Moscow University. 'They are accustomed to expecting Russian women to go out to work, to do everything at home and to look pretty for them in the evening.' Women made up less than 6 per cent of the last Russian parliament - against a third under the Soviet regime.

Politicians' wives traditionally stay in the background. Mrs Raisa Gorbachev, the only Soviet leader's wife to venture into the limelight, became unpopular because of her aloof image and taste for foreign clothes. President Boris Yeltsin has tried to avoid the same problem, keeping Mrs Naina Yeltsin behind the scenes. Not one candidate's wife has appeared on the campaign trail or posters.

Olga, the 36-year-old wife of Arkady Murashov, a leading candidate for Russia's Choice, says politicians' wives could play a more prominent role 'if things are done well, not like Mrs Gorbachev'.

The result of the relative sidelining of women is that the elections are unlikely to advance their cause. Nor are they likely to help themselves in Russia's first democratic election.

Many believe that supporting Women of Russia would be to waste their vote when economic reform as advanced by Russia's Choice is more important at this stage in Russia's history.

'I'm all for getting more women into parliament,' says Mrs Starkova, who plans to vote for Russia's Choice. 'But this time the main task is to fix our economy and Women of Russia can't do this.'

Mrs Valentina Konstantinova, one of Russia's few self-proclaimed feminists, says women must first increase their self-esteem before putting other women into parliament.

A few others are running as independents with an emphasis on women's rights.

Mrs Fedulova agrees women themselves are part of the problem. Her task is to convince them of their strength.

Sir, After all the recent hand-wringing and talk of moral teaching how refreshing to read Christian Tyler's interview with Karin Murris in which she stresses the importance of teaching children to think (Private View, November 27/28).

Towards the end of my teaching career in a south London school the thing that depressed me most was the growing mindlessness among pupils - a kind of animality, so unthinking that it often led to self-induced injury, as well as harm to others. Children lived in a dream world of pop and pap, aware only of the values inculcated by trivia and video nasties. How can anyone instil morality until such children learn to think clearly.

In contrast, the article by John Willman in the same issue ('Things can be done: hand-wringing over the James Bulger case is misplaced') was faint-hearted and unimaginative. Even if there is not enough money for universal provision, at least we could provide it for priority areas. Having done so, we must make sure that the very best teachers are appointed to work in them. They could make a tremendous difference to a child's future (partly because problem children - and families - would be spotted earlier).

By primary school age the damage has been left too long unchecked.

Diana Schomberg,

27 Gloucester Circus,

London SE10 8RY

Sir, The Budget announcement that the government has decided to go ahead with motorway charging as soon as the electronic technology is ready almost certainly defers implementation of any such scheme until after the next general election. However, it does not defer the need to continue efforts to ensure that charging, when it comes, is both sensible and fair.

Once again, it seems probable that the intransigence of the Treasury will turn out to be the main obstacle. Charging can be made acceptable to the motorist only if the money raised is committed to spending on the road network; is additional to current road investment; and there is a realignment of other motoring taxes to make introduction of a charging system fair and not unduly onerous.

If the Treasury cannot accept direct hypothecation of revenue from user charges then the motorist will resent motorway charging. An unfair system will have 'poll tax potential', and could backfire on the government. The UK's 35m motorists make up a significant proportion of the electorate and will not accept a proposal that is grossly unfair. The Treasury should look to the future and radically review its own rules, which look increasingly like outdated dogma.

For those concerned about provision of a road network on which the economy will remain hugely dependent, the battle over the coming months must be to secure a fundamental Treasury reappraisal.

Jeffrey Rose,

chairman,

The Royal Automobile Club,

89/91 Pall Mall,

London SW1Y

Sir, Transport secretary John MacGregor ('Motorway charges put on hold until after election', November 26) will be doing very well to develop a scheme for electronic road tolls by 1998. Quite apart from the little matter of the election, there is the total antipathy (initially apparent in the 'Traffic in Towns' report, 1964) of the department of transport and of road lobbies to any kind of direct charging of motorists for road use.

At present the only 'usage tax' (ie, related to road use, not ownership) is fuel excise duty at some Pounds 1.20 per gallon - that is, 6p to 3p per mile for large to small cars. To equate to typical EU toll levels and city public transport charges this direct charge ought to be three to four times higher. Thus Mr Kenneth Clarke, the chancellor, is to be congratulated for embarking on this route, for excise duty tolls are not only cheap to collect and hard to avoid, they also have formidable effects on fuel efficiency and pollution, and they surcharge congestion.

Mr Clarke's excise tolls are far superior to Mr MacGregor's electronic tolls which, given the negligible R&D pursued by the transport department so far, could easily remain unsuitable as a means of charging for direct road use for a very long time.

G W Goddin,

14 Ruskin Avenue,

Kew TW9 4DJ

Mr Pehr Gyllenhammar is leaving Volvo for the wilderness like a baleful Old Testament prophet cursing his people. Left in isolation by his shareholders and his senior management, he is prophesying only the apocalypse for his abandoned flock.

The Volvo organisation is 'crushed', the company 'wounded'. The critics of his vision are guilty of 'turning their backs on Europe and the world' and have 'reduced the probability of Volvo's long-term survival'.

The rejection of a full merger of Renault and Volvo's automotive operations was also a rejection of all that had been achieved in the last three years of alliance between the Swedish and French automakers, he claimed.

In his most damning imprecation Mr Gyllenhammar warned: 'The alliance will not remain. It will be dismantled by a Renault management which has lost its confidence in Volvo. To dissolve the alliance will require time, energy and will be demoralising.'

Yesterday Mr Louis Schweitzer, chairman of Renault and the man who shared Mr Gyllenhammar's vision for building Europe's second-largest vehicle maker, was understandably more cautious. 'The industrial agreement signed with Volvo in 1990 remains in force. It is not threatened by the failure of the merger,' he insisted. 'But the dynamism has been lost. We have to look with sangfroid at what we do now. We will examine our projects on a case by case basis.'

In reality the choices facing Mr Schweitzer - and Mr Gyllenhammar's successors at Volvo - are bleak. The challenges and threats in the fiercely competitive global automotive industry, which first encouraged the two companies to look at merger as a road to survival in the next century, remain.

The world's car and commercial vehicle makers are haunted by overcapacity, minimal growth in demand, continuous upward pressure on product development costs, increasing price competition, and the need to overhaul radically their components and materials supplier bases in order to reduce components costs.

To make matters worse, the auto industry is still caught in the worst recession in Europe and Japan of the postwar era. Much of the industry is in loss, and those parts still in profit are scarcely making enough money to support the demands for ever increasing investment.

Instead of confronting these external threats Renault and Volvo must now turn aside and use invaluable management time and resources to unpick their relationship.

Outright merger had always been the only logical conclusion of the far-reaching alliance announced by the two companies in 1990 and formalised with an exchange of large minority cross shareholdings at the beginning of 1991. The two companies must now examine what can be saved from their collaborative projects, and assess which activities have been rendered impossible by the breakdown of trust between the organisations, and which areas may lend themselves to collaboration with other rivals.

Some joint activities will still make sense outside the remit of a full merger. The world auto industry is a complicated square dance in which the big players co-operate in some regional markets of the world and compete in others. The exchange of major components such as engines and gearboxes is becoming increasingly common.

Renault already supplies engines and transmissions for the Volvo 400 series. Projects such as this will probably survive.

In doubt, however, will be the future of the ambitious plans that had been put into place in preparation for full merger. These include the establishment of common operations for purchasing and quality, the merger of car marketing and sales organisations in big markets such as Germany, and the creation of single project teams for the development of new model ranges, such as the joint executive car planned for the end of the decade to replace the Volvo 800/900 series and the Renault Safrane.

If a full divorce occurs, it would leave the Volvo car operations looking particularly exposed. Mr John Longhurst, automotive analyst for UBS, warned that Volvo's shareholders had won 'a hollow victory' by stopping the merger. 'Volvo Car will ultimately wither in the absence of the economies of scale that would only have come from a full merger.'

The development without a partner of the Volvo 850, the Swedish carmaker's latest new car project, had almost 'broken' Volvo's car division, said Mr Longhurst. 'Its replacement could finish the job.'

Most industry observers believe that Renault remains in a relatively healthy position without the merger. 'Volvo needed this merger much more than Renault,' said one automobile industry analyst in London. Mr Louis Schweitzer, Renault's chairman, is confident that the car group can remain profitable throughout the worst downturn in the world automobile industry.

New products are also on the way. At the beginning of next year Renault will introduce the Laguna to replace the Renault 21. A replacement for the Renault 19 is also due by 1995.

But the collapse of the merger is still a blow. Renault and Volvo predicted cost savings of more than FFr30bn (Pounds 3.4bn) by 2000 as a result of economies of scale in production, combined R&D efforts and joint purchasing programmes. Renault was also aiming to capitalise on Volvo's strength in upper-range cars and safety technology.

From Renault's perspective, the merger was particularly important in commercial vehicles, where Volvo is stronger. 'In the trucks sector, now more than ever you have size problems,' said Mr Schweitzer. 'R&D costs are growing rapidly and these are the kind of costs saved by a merger.'

It seems inevitable that the process of picking up the pieces will take place in a mood of bitterness. Renault said it 'deplored' Volvo's failure to ratify the merger. 'This is an unpredictable partner,' said Mr Gerard Longuet, the French industry minister. 'It is a missed opportunity for European industry.'

Most troubling for Mr Schweitzer is the state of limbo in which the group finds itself. 'The alliance with Volvo was meant to lead to a merger and synergies between the two groups,' said one industry observer. 'Instead Renault now finds itself with an albatross around its neck.'

Mr Schweitzer has consistently maintained that, without a merger, the existing co-operation would be jeopardised. 'It has always been a two-stage process,' he says. 'Co-operation has worked because we were heading towards a common goal of the merger.'

For the French government, the accord was regarded as a vital step before the privatisation of its automobile group, one of the most attractive assets on the list of 21 publicly owned groups slated for sale over the next five years. Resolving the status of the alliance, and in particular the cross shareholdings, will be crucial to the privatisation. In January 1991, Volvo took 20 per cent of the shares in Renault and 45 per cent of the shares in its trucks and buses division. Renault took 25 per cent of the shares in Volvo's car operations, 45 per cent of its truck activities and about 10 per cent of the voting capital in the parent company.

The French government said the failure of the merger did not affect its intention to privatise the car group, but it could hardly do so soon. 'For one thing, who would buy shares when the situation is so chaotic?' asked one merchant banker in Paris. 'Second, the French government must be nervous about the prospect of having Volvo so prominent in the share register after everything that has happened.'

The result is likely to be a delay in Renault's privatisation, which may be welcomed by the government. 'It may now be able to wait for conditions in the automobile market to improve to maximise its revenues,' said Mr Philippe Barrier, automobile analyst at Societe Generale, the financial group.

But the state of the car market is hardly the priority for either Renault or Volvo. Business-as-usual must take a back seat as they struggle to emerge from the wreckage of the failed merger, with Mr Gyllenhammar's prophecies ringing in their ears.

Sir, What an interesting article by John Cuthbert ('Put your trust in benchmarks', November 27-28). It has become my experience over the years that the top unit trusts are out there waiting for me to invest. Receipt of my money is their signal to leap off the cliff into obscurity, cackling insanely. Their 'health warning' should surely read: 'The value of your investment may plummet. . .'

But in the end the article disappointed. Unless you (or someone clever like you) were to publish and maintain a risk/benefit benchmark table along the lines of that suggested, the average decaying simpleton like me will be no better off. I hope you will decide to help. In these parts standard deviations are looked upon with deep suspicion. I don't allow them in the house, and if I find one in the garden I stamp on it smartly with my green wellies.

W S Bainbridge,

48 School Lane,

Ashurst Wood,

East Grinstead,

East Sussex RH19 3QP

Sir, Observer falls into the error ('Directorless', November 30) of regarding the IoD's building in Pall Mall merely as an administrative headquarters. Behind its historic facade is a heavily used, modern business centre at which, every day, businessmen and women transact business with customers, suppliers and clients.

Far from being a burden, our Pall Mall facilities are central to the service the IoD offers to its members, and make a substantial contribution to its revenues.

The challenge for my successor will be to build on its present success.

Peter Morgan,

director general,

Institute of Directors,

116 Pall Mall,

London SW1Y 5ED

The Gatt world trade talks have moved decisively into an end-game. Failure remains possible; but high-level talks in Brussels this week between the US and the European Union have left the impression that the two powers that can make or break the negotiations are committed to striking a deal.

On Monday, Sir Leon Brittan, the EU's chief trade negotiator, and Mr Mickey Kantor, US trade representative, aim to unveil an outline agreement on all outstanding issues, including agriculture. They want to create a bandwagon effect, sweeping along all 103 countries in the Gatt negotiations in Geneva so that an agreement can be reached by the agreed deadline of December 15.

It is a hard-sell, high-risk strategy. Much mind-numbing technical work remains to be done. Many wonder if there is enough time to reach a comprehensive deal that will persuade Latin American and Asia to climb aboard.

For the moment the mood is cautiously optimistic. On Thursday night, EU foreign ministers gave Sir Leon a vote of confidence to make the final trade-offs to achieve a deal. A few ministers grumbled about a lack of detail, but French veto threats were absent. 'There is a common approach, there is enough cohesion, there is confidence in the Com-mission,' said Mr Willy Claes, the Belgian foreign minister.

Still, if a final deal is to be struck, many disputes must be resolved. One of the stickiest is US demands that the Europeans further open their markets in films and broadcasting. The EU counter-proposals for measures to protect 'cultural specificity' remain unacceptable in their present form.

The US is also hanging tough on textiles and steel; and there is no agreement on new world trade rules to replace Gatt. One possible solution is a new Multilateral Trade Organisation which would license the terms under which members could take action against unfair trading practices.

But the calculation in Brussels and Washington is that the stakes are too high to countenance failure. 'We have an awesome responsibility,' said Sir Leon. 'Failure would carry with it the risk of a downward spiral of protectionism leading to immense damage to the world economy.'

Such rhetoric has echoed through the negotiating corridors regularly since the Uruguay Round started in 1986; but it is now taken seriously. This is most true of Europe, where a shift of opinion has taken place as business and political elites have woken up to the risks of failure.

Big business now realises that Europe missed 'an historic opportunity' in 1990 to conclude a deal at an earlier Gatt meeting in Heysel Stadium, Brussels, said a leading French businessman. 'They did not push hard because those were good economic times. Failure would be catastrophic now.'

The fear of the 'beggar-thy-neighbour' policies of protectionism and competitive currency devaluations reminiscent of the 1930s has galvanised European industry. While estimates of an annual Dollars 250bn boost to the world economy are long-range and perhaps exaggerated, business leaders argue that a deal would deliver a much-needed lift to confidence.

This was a theme in the report 'Beating the Crisis', by the European Round Table, the business leaders' group, unveiled yesterday in Brussels in the presence of Mr Jacques Delors, president of the European Commission. He, too, has undergone something akin to a conversion on Gatt.

A year ago, Mr Delors was happy to deliver sermons on the plight of the French peasant and the need to stand up to 'Big Brother' across the Atlantic. But recently he warned his fellow Frenchmen to snap out of their 'national psychodrama' and to avoid retreating behind a modern-day Maginot line, the ineffective defence system built between the wars to stop a German invasion.

The analogy is telling. It suggests that a collapse of the Gatt talks - if attributable directly to the French government - could crack the Franco-German alliance which remains the anchor of the European Union, whatever its present strains.

In this spirit, members of the German Industry Federation have pointed out to their counterparts in the French Patronat that, since German manufactured exports account for 13.8 per cent of world manufacturing exports, Germany's vital interests are at stake in a Gatt deal.

UK officials are equally blunt. They draw a picture of a European Union split between northern free-traders and a protectionist rump of Latin countries led by France. The likely result would be a rash of unilateral actions against cheap imports, the end of a unified EU trade policy, and the end of the single European market.

The broader concern is that Europe gets caught in a world of managed trade between blocs. Last month's Apec summit in Seattle was viewed in Brussels as an implicit threat that the US could gain preferred trading partnerships in the fast-growing Asian markets. When Mr Warren Christopher, US secretary of state, warned this week that a failure in the Gatt talks would damage the transatlantic alliance, he was taken seriously.

Similarly, Europeans fear a trading system without established rules and codes for regulating the subsidising and dumping of exports and settling trade disputes. It would mean 'a licence to kill', said a senior Commission official.

This reveals the widespread sense of vulnerability in Europe provoked by the conflict over the Maastricht treaty, the collapse of the European Monetary System and now the phenomenon of mass unemployment. A Gatt deal would not be a miracle cure, but it would restore confidence in Europe's ability to act collectively on a matter of vital interest.

Sir, The chancellor uncharacteristically missed a trick in his Budget.

As part of the government's 'back to basics' campaign, he should have reinstated the traditional British billion. That would have cut the deficit to Pounds 0.05bn at a stroke.

Martyn Thomas,

Chairman, Praxis,

20 Manvers Street,

Bath BA1 1PX

It is official: the welfare state is safe in Conservative hands - or so the government says. After months of speculation about radical reforms - spur-red on by ministers such as Mr Peter Lilley and Mr Michael Portillo - the chancellor sought to lay the issue to rest in his Budget statement on Tuesday.

'This government will never take part in any attempt to dismantle the welfare state,' he said. 'We want to see a better welfare state, well-run, well-judged and one that meets the priorities of modern society.'

That claim is borne out by the detailed measures in the Budget. There was a tightening up on eligibility for unemployment and invalidity benefits. A new drive on fraudulent claims was announced. Responsibility for sick pay was shifted to employers for larger businesses. And the state pension age for women will rise from 60 to 65 in the second decade of next century.

For all the opposition's sound and fury, this hardly adds up to what Mr John Smith, Labour leader, called a 'vicious attack on the welfare state'. Indeed, Mr Clarke took the opportunity to reaffirm his party's support for the basic state pension, the most expensive social security benefit, accounting for 10 per cent of public spending.

Mr Portillo, the hawkish chief secretary, may have suggested as recently as last month the state pension could be phased out for younger people. But the chancellor took the trouble to say the government was committed to the basic pension and 'retaining its value'.

And in case it was thought that ministers were picking on lone-parent families, Mr Clarke introduced a childcare allowance that would help 'tens of thousands of mothers' go back to work. While acknowledging that this would benefit married mothers as well, he highlighted the help it would give single mothers in breaking out of welfare dependency.

Further, the chancellor has secured the agreement of cabinet colleagues for an end to the sort of talk about fundamental reforms of the welfare state which might frighten backbenchers and Tory voters. Less will now be heard about moving from a welfare state to a 'welfare society', as trailed in the run-up to the Budget by Mr Lilley, the social security secretary.

At the morning cabinet meeting Mr Clarke exerted his political authority by telling colleagues to tone down their rhetoric. He wanted the welfare state reformed rather than run down. Others should sing the same tune.

Yet life is not so simple. The welfare state has never been a fixed entity. It has constantly mutated to meet new challenges during the 50 years since Sir William Beveridge set out the blueprint for a comprehensive social security system.

For much of its first 30 years, the welfare state gathered size, creating new benefits, improving the generosity of payments and extending coverage beyond those paying national insurance contributions.

Since the late 1970s, however, there has been a series of incremental changes designed to ratchet down the rising cost of welfare:

Some universal benefits such as maternity grant and death grant have been abolished (with employers taking over responsibility for maternity allowance). Unemployment benefit and sickness benefit have become flat-rate payments, with the elimination of the earnings-related supplements which used to be paid with them.

Since 1981, benefits have been increased annually in line with prices rather than earnings.

The state earnings-related pension scheme (Serps) has been scaled down to reduce its cost in the next century as the population ages.

The conditions for claiming most benefits have been tightened - restricting unemployment benefit to people actively seeking work.

These changes have generally reduced the value of benefits as a proportion of average earnings, encouraging individuals who can afford it to make greater private provision. Almost 15m people, for example, have opted out of Serps into private pension schemes or occupational pension schemes.

The result is that the welfare state plays a declining role in providing financial security for most people. Instead, it is increasingly becoming a safety net for those unable to provide for themselves.

This week's Budget measures are a continuation of this trend, with further changes which will cut costs and encourage greater provision by individuals and employers.

And while fundamental reforms may be off the immediate political agenda, Mr Lilley is keen to see the trend continue. He will pursue his efforts to encourage a debate on the subject with the aim of preparing the public for more incremental change and persuading them to do more for themselves.

He will be helped in this by the decline in value of benefits now that they are linked to prices rather than earnings. The basic pension, worth 15 per cent of average earnings, will fall to about 7 per cent of average earnings over the next 30 years.

Already two-thirds of people reaching state retirement age have income from occupational pensions of more than Pounds 56 a week, the amount of the basic state pension.

As Mr Lilley recently pointed out, the UK is better placed than many other countries to cope with the strains imposed on the welfare state by an ageing population. By a series of policy adjustments - undertaken in the case of Serps long before the problem emerged - Britain has avoided the often arbitrary cuts other countries have recently introduced.

The announcement that the retirement age for women will be raised starting in 17 years is a further example of this far-sighted approach, the chancellor argues.

Certainly the welfare state is not fundamentally changed by the sort of measures announced this week. But the underlying process of reducing the demands on social security, of encouraging greater individual provision and seeking a greater contribution from employers continues.

The outcome of that in the longer term is a welfare state which is more of a safety net, supporting only those who cannot make their own provision. The welfare state into which all pay contributions in good times and all draw out when times are bad withers.

Beveridge might welcome elements of the switch, including the increasing emphasis on individual responsibility in welfare. But it is a far cry from the cradle-to-grave social insurance system he envisaged in his 1942 report.

Masochism has been designated the English vice. Rightly so, it appears from the ecstatic reaction accorded to the second of two tough budgets in one year. Lashed by Mr Clarke, the financial markets, the pundits and Tory backbenchers have gone into paroxysms of delight.

The joy of the gilts markets is understandable. Nothing is better designed to bring a smile to the lips of the nervous investor in long-term fixed income securities than the spectacle of depression in the economy and austerity in the budget. Austerity is what Messrs Lamont and Clarke have delivered. In 1996-97, taxes are to be Pounds 17bn (2.2 per cent of gross domestic product) higher than they would have been without the 1993 budgets. That is what the two chancellors would have obtained if they had raised the basic rate of tax to 34p in the pound.

Meanwhile spending has been cut by Pounds 3bn (0.4 per cent of GDP) in 1996-97, over and above already tough plans. As the Institute for Fiscal Studies promptly pointed out, the government intends to allow non-cyclical public spending to rise by less than 4 per cent in real terms between 1992-93 and 1998-99, a third as fast as in the recovery phase of the last cycle under Mrs Thatcher.

With Pounds 7bn of underfunding promised as well, it is hardly surprising that the redemption yield on a medium-term bond fell from 6.68 per cent on Monday to 6.46 per cent yesterday evening. This comes on top of an extended bull run, during which the yield has fallen from a peak of 12.7 per cent in April 1990.

Optimism about inflation is understandable, but what about the soaring equity market? The FT-A 500 Index has gained 2.6 per cent since Monday night. Why should budgetary austerity deliver this, especially when the price-earnings ratio is already barely short of where it was before the October 1987 crash?

Conventional wisdom is that low interest rates, particularly low short-term rates, have driven up prices of alternative investments, be they bonds or equities, because investors have nowhere else to put their money. If current equity valuations are to endure, however, investors must be right to believe in the government's rhetoric about the feasibility of sustained growth with low inflation.

Triumph of hope

This is the triumph of hope over repeated disappointment. But it is indeed what the chancellor is promising. Growth of real GDP is, says the Red Book, to accelerate smoothly from 2 1/4 per cent in 1994-95 to 3 per cent by 1996-97. Meanwhile, underlying retail price inflation is to fall from 3 1/4 per cent next year to 2 1/2 per cent in 1996-97 and 2 per cent thereafter.

It looks too wonderful to be true. It is not that wonderful, since what is to deliver this happy combination of growth with falling inflation is persistent excess capacity. Unemployment is, for example, assumed to remain at 2.75m until 1996-97. But, given the relatively depressed starting point and the fiscal action that has now been taken, the forecast looks at the least feasible.

Cost competitiveness, allowing for exchange rate changes, was 'probably 20 per cent better in the third quarter of 1993 than a year earlier and is forecast to remain at close to that level during 1994', says the Red Book. The current account deficit is now forecast, on imperfect figures, at only Pounds 9 1/2 bn (1 1/2 per cent of GDP) in 1993 and the same in 1994. If right, this suggests the first of the twin deficits is not going to be the problem some have feared, or at least not soon. As for the second of the twins, the fiscal deficit, that too now looks under control.

Sadistic policies

The interesting question is not whether markets are right to believe in the logic of the masochistic fiscal policy, but rather whether they should trust in the durability of its sadistic politics. One issue is whether the government can get away with freezing the public sector's wage bill in nominal terms for a period of three years. Earnings in the economy are bound to rise by about 10 per cent or so over the period. If earnings in the public sector were to rise pari passu, employment in the public sector would have to fall by half a million, which looks neither feasible, nor desirable.

The policy would only be sustainable, without an explosion, if inflation were to fall even faster than forecast. This suggests slow declines in short-term interest rates. But this also means there would be the risk of only a gentle recovery and, given the fiscal squeeze, very slow rises indeed in real personal disposable incomes after tax for those in work. The Red Book says real personal disposable income could rise 1 per cent in 1994, the same as in 1993. It is unlikely to rise any more than that, on the government's forecasts, for many years thereafter.

With the public sector possibly in turmoil and most voters not becoming noticeably better off during the recovery, it will take a great deal of nerve for the government to persist. Maybe Mr Clarke has the guts for the task. But does his party? Once markets begin to question the politics, for how long will they find Mr Clarke's hairshirt economics so delightful?

Mr Kenneth Clarke is just like the rest of us. He likes to be patted on the back. So in the aftermath of Tuesday's Budget the no-nonsense chancellor has been in more than usually expansive form.

Entertaining at Downing Street, sipping from a chipped coffee mug in his House of Commons office or putting away a pint or three in the MPs' bar, Mr Clarke has basked in the applause for his debut.

The only moment that he has looked disconcerted was when one of No 11's smart caterers offered him a pre-lunch glass of something called elderflower presse.

Never mind that voters will eventually wake up to the biggest tax increase in living memory and discover that there is no money to build the village by-pass or new school promised for next year. This government lives by the day and week not the month and year.

Mr Clarke was charged on Tuesday with rescuing Mr John Major's government. A public borrowing requirement of 8 per cent of national income - the level which forced Labour to call in the International Monetary Fund back in 1976 - had to be dealt with. But it had to be done in a way that did not give the Conservative party at Westminster an excuse for another collective nervous breakdown.

The new boy at the Treasury - he has been there for only six months though it may seem longer - had also to present a plausible case that a return to fiscal responsibility would not stifle the still-fragile economic recovery.

The judgment at Westminster was that Mr Clarke pulled off the trick. The right and left of the Conservative party were satisfied by the judicious mix of cuts in public spending plans and higher taxes. Tory MPs began to sound as if they had remembered that they belonged to the party of government not opposition.

Some in the Treasury judged the Dollars 1bn plan to compensate the poor and the elderly for the imposition of value-added tax on domestic fuel ludicrously generous, but it did take the immediate political sting out of the issue.

Even Mr Norman Lamont, his still-disappointed predecessor, had a good word for Mr Clarke's package. So too did Lord Lawson, not one to lavish praise where criticism will do.

For all his self-confidence and experience of running big Whitehall departments, Mr Clarke resented jibes from city scribblers that he would be at sea at the Treasury because he had not been tutored in theoretical economics.

True to his son-of-the-smokestack roots in the industrial Midlands, he sees economics as the application of common-sense policies according to a set of basic principles.

Governments should hold down inflation and give industry a liberal, lightly regulated, environment in which it can expand. They should not borrow too much. They should keep marginal tax rates low (he still believes it, honestly), and act as a powerful force for free trade within what, as a good European, Mr Clarke is quite happy to call the Union.

They should also move in from time to time to fill the gaps left by the market, such as education and training and help for small businesses. Stable exchange rates are a good idea because they allow business to plan ahead. So, too, would be a single European currency.

You do not, as Mr Clarke might put it, have to spend your evenings buried in economics textbooks to apply such a common sense approach.

So in the interests of brevity (he thinks it is possible to keep the attention of the House of Commons for no more than 90 minutes) he put a thick red pencil through the Treasury's traditional Budget lecture on the state of the world economy.

But the Budget package was essentially political not just because Mr Clarke has a natural disdain for smart-Alick economists.

The first big decision he took after arriving at the Treasury in June was that the budget deficit had to come down faster than envisaged in the medium-term plan set out by Mr Lamont in March. The new blueprint had to be delivered in November.

Mr Clarke's reasoning was that a government which had rarely been in charge of events since it was elected 18 months ago might then claim to have restored its grip. Even the punters outside the precincts of Westminster might think that it was worth taking some pretty bitter medicine if the doctor appeared half-way competent.

The second decision was that his first Budget would not be an occasion for fancy tax reform. He had more important things to do. Anyway, tax neutrality is not a phrase which trips easily from his lips.

After the political uproar over VAT on fuel he had to find ways to raise money that would minimise the potential for yet another Tory revolt. Increases in the key rates of income tax were ruled out; so, too, a bit later was any further extension of VAT, even though Mr Clarke remains committed in the medium term to the switch from direct to indirect taxation.

Instead, the chancellor chose well from the rest of the items on the Treasury's misery menu. Taken together, his tax increases will raise another Pounds 6bn or so by 1996-97. But each one has been selected to minimise Conservative opposition on the backbenches and among party activists.

Many Tory MPs are fed up with the steep increases in petrol prices. The insurance and airline lobbies will ensure others grumble about the new airport and insurance taxes. But these are not issues worth going to the political stake for.

Of course, the size of the reductions in public spending which allowed Mr Clarke to claim his Budget would knock another Pounds 18bn off the borrowing requirement by 1997 was partly fortuitous.

His cabinet colleagues in the spending committee, known as EDX, were just as frightened of the implications of borrowing running at Pounds 1bn a week. They decided for once to behave responsibly.

Another windfall came from the heroic assumption that some 5m public service workers would stand meekly by while increases in their pay are held below 2 per cent a year until the general election due by 1997.

Mr Clark is standing by the spending figures, but the politician who took on the ambulancemen and very nearly lost is ready to admit that next year could see a bout of serious industrial unrest.

He has moved swiftly to counter the idea that his Budget's planned cuts in benefits for the unemployed and the sick are the beginning of an assault on the welfare state.

Messrs Michael Portillo, the chief secretary, and Peter Lilley, the social services secretary, have been powerful advocates in recent months of a fundamental shift in the burden of welfare provision from the state to individuals. Mr Lilley last week coined the clever phrase 'welfare society'. It is no accident that, after being slapped down by Mr Clarke, he has started to refer anew to the welfare state.

On Wednesday the chancellor praised Mr Portillo's undoubted skill in co-ordinating the public spending round but then tilted at those on the Tory right who wanted to encourage old-fashioned family values. The chancellor seemed to be enjoying himself. But what next?

Like the rest of us, Mr Clarke is not at all sure. He thinks that the Tory party will keep its nerve. Economists at the Treasury (and he does get on with them) say that the recovery is robust enough to withstand in the short term the dent to confidence caused by higher taxes and a squeeze on public spending.

Inflation may be low enough now to get the government through the first year of the public sector pay freeze. But next April will be rough as the voters look at their pay packets and realise that the party which promised them tax cuts at the last election has done quite the reverse.

And once or twice recently the Treasury's economists have been known to get it wrong. If the recovery falters then Mr Clarke's fine arithmetic for spending and borrowing will end up, with many other recent forecasts, in a Treasury waste bin. It is hardly a secure background for the local elections in May and the European elections a month later. For all their delight this week, Tory MPs fear heavy defeats in those elections might yet derail the government strategy for political recovery.

But all that is for the future. This week Mr Clarke confirmed his standing as the cabinet's accomplished heavyweight. He has succeeded where the prime minister has failed in uniting, for a moment at least, the right and left of the Tory party. He insists that he has not thrown away his fundamental commitment to centre-left one-nation Toryism. But he has found a way to accommodate those who still grieve for Lady Thatcher. Mr Portillo confirmed himself as the cabinet's fastest-rising star, but if the bus which Mr Major has dodged so many times this past year were finally to actually hit the prime minister, then Mr Clarke would be the one who replaced him.

Welfare services, such as the National Health Service, escaped punishment in this week's Budget squeeze on public spending. But many of the workers who deliver such services are now asking whether it will be at the expense of their pay packets. At the same time, Mr Kenneth Clarke's decision to leave some flexibility in his three-year public sector wage bill freeze will make it more difficult for unions to campaign against the clampdown.

There remains uncertainty about precisely how the squeeze on public-sector pay will work and also about its consequences: for instance, will the drive to increase efficiency in the delivery of services be affected, and will public sector employment drop sharply?

The initial reaction from important union leaders such as Mr John Edmonds of the GMB general union was sanguine. Picking up on ministerial hints that workers with political muscle such as policemen and nurses would get special treatment, Mr Edmonds said: 'At one level this is power-bargaining at its most naked. Yet there was also a pragmatic style to the announcement that we can exploit.'

He warned that grandiose plans for national industrial action were likely to prove futile and that unions should concentrate on setting a 'going rate' in the public sector, allowing less powerful and less popular groups - such as local government workers and National Health Service manual workers - to piggy-back on more powerful groups. This strategy was followed by the unions in the early 1980s when the government's policy of cash-limits on pay bills was repeatedly broken.

The timetable on public sector pay may be heading in a similar direction. In January the five pay review bodies, which recommend pay rates for about 2m of the 5m public sector workers, will submit their reports for 1994-1995. The future of the review bodies is in doubt following the 1.5 per cent public sector pay limit imposed this year and the proposed pay bill freeze for the next three. Recent personnel changes on the review bodies may make them more friendly to the government. Yet they are still expected to produce independent recommendations.

The recommendations could be difficult for the government to reject, especially for groups such as nurses and teachers. If the union strategy proves succesful, the government would come under pressure to offer similar increases to civil servants and NHS manual workers, who start talks in April.

For some parts of the public sector, pay rises at about the level of inflation are still compatible with a pay bill freeze. The NHS, for example, has only just begun to exploit the savings that can be made by improving the efficiency of unskilled workers and the professions allied to medicine.

But the government's real target for such efficiency savings is its central government civil servants and, above all, white-collar local government employees, sheltered from job cuts to date.

The pay bill in local government, as in most of the public sector, is about 70 per cent of total costs. This year it will be frozen thanks to the 1.5 per cent pay limit and a 3 per cent reduction in staff. The total number of employees is now below 2m.

This is only slightly below the numbers employed in local government in 1979, despite the fact that local government blue-collar workers have been cut by one quarter thanks to compulsory competitive tendering.

Ministers believe there is fat to cut - car allowances in local government, for example, total Pounds 600m a year - and would relish a confrontation with Unison, the public services union, which has been flexing its muscles over cuts.

The drawback of the overall strategy, according to Mr Doug Henderson, Labour's local government spokesman, is that a three-year pay bill freeze would either increase unemployment steeply or create an unacceptably large pay gap between the public and private sector - damaging at a time when staff are being asked to change their working habits of a lifetime.

Unease among Conservative MPs and councillors intensified yesterday over the rise in council tax of about 7 per cent expected after this week's financial settlement for local authorities.

Some Conservatives in London fear that higher bills could undermine the party's electoral prospects in local elections next May, soon after the new council tax bills are delivered - several London boroughs have been subjected to steep cuts in the grant they receive.

One Conservative MP said London had been used as a 'milch cow' for the rest of the country in the new settlement, announced on Thursday.

Mr Jack Straw, shadow environment secretary, predicted disaster for the Conservatives in the local elections around the country.

Sir Rhodes Boyson, Tory MP for Brent North, whose local authority sustained the 10th greatest cut in standard spending assessment, said the expected rises were 'a very serious matter' when inflation was 1.7 per cent and the government was planning to freeze the public-sector pay bill.

'This is another way of raising taxes and it won't be popular in the run up to the elections,' he said.

Brent was captured by the Conservatives from Labour in the last local elections in 1990.

Wandsworth, a Conservative stronghold which suffered one of the sharpest cuts, was confident that its council tax would remain 'lower than average' thanks to the buffering grant given by the government to authorities which lost heavily. The borough would not rule out cuts in services.

Mrs Kathy Tracey, a Conservative councillor in Wandsworth, described the package as 'very worrying for Conservative boroughs'.

Finance experts for the local authority associations predicted that average council tax bills would be in line with government predictions, thanks to new measures for capping council budgets, which are tighter than ever.

Mr David Congdon, Conservative MP for Croydon North East, said that the decision to cut the budget for transitional relief from the poll tax to council tax from Pounds 380m to Pounds 130m next year could mean 'much higher bills'.

Other London boroughs expected swingeing cuts in services to meet government targets, with Hammersmith and Fulham predicting a cut of about Pounds 5m. After cuts of Pounds 40m over the past two years, the council suggested it would be difficult to make further cuts without job losses.

Leicester City Council, the largest non-metropolitan authority in England, suffered a severe cut in its spending assessment, and must cut its budget to stay within the government cap.

The city's SSA has been reduced by Pounds 6.4m. Mr Don Grant, director of resources, said that over the next two years Leicester would have to reduce spending by 12.5 per cent and this would cost jobs 'in hundreds rather than tens'.

------------------------------------------------------------------------ LOCAL GOVERNMENT GRANTS (UNADJUSTED INCREASE %) ------------------------------------------------------------------------ TOP WINNERS TOP LOSERS Brentwood 35.93 Slough -13.74 Tewkesbury 29.63 Leicester -13.73 South Bucks 28.30 Blackburn -11.52 NE Derbys 25.83 Luton -10.18 Ashfield 24.83 Burnley -9.54 East Dorset 23.43 Wandsworth -9.26 Three Rivers 23.35 Ipswich -8.97 Blyth Valley 22.56 Hammersmith -8.88 Basildon 22.33 Hyndburn -8.64 ------------------------------------------------------------------------ Figures show change in government's estimated total standard spending, 1993-94 to 1994-95 ------------------------------------------------------------------------ Source: AMA ------------------------------------------------------------------------

Engineers yesterday inspected one of the last dry sections of the Pounds 250m London water ring main, at Kempton to the west of the capital, to clear it for the taps to be turned on. The 80km tunnel, 40 metres underground, will be fully in use next year.

Householders could receive insufficient compensation if they suffer mining subsidence following the privatisation of the coal industry, the Royal Institute of Chartered Surveyors said yesterday.

Measures for dealing with subsidence in the Coal Privatisation Bill, published on Thursday, are unclear, the institute said. 'We are not confident that the Pounds 35m to Pounds 40m a year estimate for subsidence in the bill will prove sufficient.'

The institute said its measures gave householders little protection if a private operator should become insolvent or deny responsibility for damage.

Instead of having one clearly responsible statutory authority, British Coal, householders would have to deal with the new coal authority and possibly one or more private operators, the institute said.

British Coal announced separately that it aims to reach agreement as soon as possible with Edwards Energy on the resumption of mining at Trentham in Staffordshire.

This takes to three the number of closed pits where British Coal has indicated mining can be resumed by private operators. Edwards is also in negotiations for Coventry colliery and British Coal has agreed in principle to lease Clipston colliery in the Yorkshire region to RJB Mining.

Meanwhile British Coal yesterday ceased production at three pits, Bentley and Hatfield in the Yorkshire region, and Silverdale in Staffordshire, as part of its closures programme. Miners at Littleton in Staffordshire have agreed to stop production next Friday. By Christmas, British Coal will have only 22 pits left in production.

In a further development, the coal industry's two pension funds reinforced British Coal's concerns about the government's plans for pensions after privatisation.

Concerns centre on the extent of the trade secretary's powers over the trustees and the omission from the bill of government guarantees for post-privatisation benefit improvements above the inflation rate.

Although the government has promised that benefits will rise in line with the retail prices index, the trustees are concerned about the allocations of future surpluses and a clause in the bill giving the trade secretary powers of 'national interest'.

Mrs Rhoslyn Roberts, secretary of the staff scheme, said that the government's proposals did 'not yet meet the objectives of the trustees'.

Public investment will fall dramatically as a result of the first Budget delivered by Mr Kenneth Clarke, the chancellor, Mr Gordon Brown, the shadow chancellor, said yesterday.

Mr Brown told a post-Budget seminar in London that general government investment would fall by 3 per cent next year and 3.5 per cent in 1995-96.

He said a Labour analysis of the Budget Red Book, which outlines tax changes and public spending plans, showed that net public capital expenditure would fall from Pounds 13.5bn this year to Pounds 10.25bn by 1997.

'This means a 25 per cent fall in the value of public investment, one of the biggest cuts we have seen,' he said.

Mr Brown said the March Budget, delivered by Mr Norman Lamont, had also failed to live up to its billing as a Budget for investment.

Mr John Smith, the Labour leader, told a party meeting in Edinburgh that the gloss was 'fast fading' from the Budget. 'The truth about the Budget is sinking in and the country is not impressed,' he said.

Mr Smith said the Budget - the 'biggest tax hike in history' - was the direct responsibility of Mr John Major, the prime minister, who was earlier chief secretary to the Treasury and chancellor.

'He has held the three jobs which give him immediate responsibility for the catastrophic decline. The buck stops very firmly with him.'

In another attack on the Budget Mrs Margaret Beckett, Labour's deputy leader, said Mr Clarke had made 'the clearest declaration imaginable that the Tories are the party of high taxation, just as they are the party of high crime'.

Mr Robin Cook, shadow trade and industry secretary, said many of Britain's 10,000 rural post offices were at risk of closure because of a 76 per cent increase in Post Office payments to the government.

Unions should not mount a national campaign of action against the government's planned three-year freeze of public-sector wages, Mr John Edmonds, head of the GMB general union, said yesterday.

Instead, he said, unions should use workers with political muscle to set a fair 'going rate' for others to follow.

'In the early 1980s cash limits were made unworkable thanks to an effective going-rate strategy,' he said.

He said the freeze, with flexibility for special groups, was 'power bargaining at its most naked'. But he also said he detected a pragmatic, opportunistic stance in the way it was likely to be implemented.

TUC officials say that a sector-by-sector approach is likely to be more fruitful than a national campaign. However Unison, the biggest public-service union, may still push for co-ordinated action between local-government workers and civil servants, especially in the light of the relatively successful one-day stoppage against market testing on November 5.

The unions will be hoping for a lead from the independent pay review bodies, covering 2m public-sector work-ers, due to report in January.

The government's own evidence to the nurses review body calls for a phasing-out of the right of workers in hospital trusts to hold their nationally negotiated pay terms.

'The intention is to enable trusts to implement schemes for all their staff irrespective of whether they had opted for new locally determined employment contracts,' the Department of Health said.

Mr Kenneth Clarke has told rightwing cabinet colleagues to tone down their rhetoric about the future of the welfare state to minimise the political backlash against planned cuts in unemployment and invalidity benefits.

The chancellor's warning that ministers must speak with one voice on the future of welfare provision was endorsed by the full cabinet this week. It was followed by Mr Clarke's public declarations that the government was committed to reforming, not dismantling, the welfare state. Mr Clarke also won cabinet backing for his public statements that the government was committed to maintaining the state pension as a basic building block for retirement. He dismissed the idea floated by Mr Peter Lilley, social security secretary, and by Mr Michael Portillo, chief secretary to the Treasury, that people might be encouraged to opt out of state pensions.

In Mr Clarke's view the government's drive to persuade people to make greater private provision for old age must not undermine the notion of the state pension as a bulwark against poverty. He told colleagues that many relatively poor and disadvantaged people could not find suitable substitutes for a basic state scheme.

The chancellor has also rejected the idea that the government should aim for a permanent reduction in the size of the welfare state, which at present takes about 45 per cent of national income. He believes that his planned reduction in that share to about 40 per cent would leave it at the level necessary to sustain the welfare state over the long term.

In spite of the determination of those on the right of the Tory party to promote family values, Mr Clarke has also given a clear signal that his future Budgets could see the disappearance of the married man's income tax allowance.

The allowance, with mortgage interest relief, was cut to 15 per cent with effect from April 1995 in this week's Budget. Mr Clarke acknowledged that the Tories' manifesto pledge meant that mortgage interest relief would survive to the next parliament. He has pointed out that no similar pledge exists on the married man's allowance. He regards this as an anomaly left from the wish not to create 'losers' when independent taxation of husbands and wives was introduced.

Sega Channel, the computer games channel due to launch in the US in the spring, is considering a move into Europe, starting with the UK in 1995.

The channel, owned by the games manufacturer Sega of Japan, Time Warner and TCI, the American cable operator, has been talking to cable and satellite television operators across Europe, according to New Media Markets, the Financial Times newsletter.

The channel is expected to launch on cable first although the company has also been talking to British Sky Broadcasting, the satellite broadcaster in which Pearson, owner of the Financial Times, has a stake.

The UK is Sega's main priority because of the estimated installed base of 1.4m Megadrive games consoles. Through a decoder owners of consoles will be able to get access to a range of games, including previews of new games.

The games company hopes the channel will both stimulate the sale of consoles and games cartridges and at the same time create an additional stream of revenue.

The admission that a substantial bureaucratic blunder was made in the handling of documents relating to the prosecution of Mr Asil Nadir could not have come at a worse time for the Serious Fraud Office.

In a Commons written answer Sir Nicholas Lyell, the attorney general, admitted that the SFO had twice circulated copies of documents it was not entitled either to see or to distribute to others.

The details are embarrassing to Sir Nicholas, who admitted his previous statement to the Commons in June that the documents were not circulated was 'incomplete' and 'misleading'. But the details are even more damaging to the SFO.

They come just days after criticism of its legal judgment following the outcome of its prosecution of Mr Roger Levitt, the disgraced financial salesman, who was sentenced to just 180 hours of community service after a plea bargain.

The latest revelations connected to Mr Nadir cast doubt over the SFO's managerial and administrative competence, and are highlighted in the exchange of correspondence between Mr George Staple, head of the SFO, and Mr Peter Knight, a partner with Vizards, the law firm which acted for Mr Nadir until his bankruptcy.

In his letter to Mr Staple in July Mr Knight suggested that 'no workable system existed' in the SFO for handling privileged documents. The allegation was strongly rejected by Mr Staple in his response in a letter written on Thursday.

The letters focus on at least five bags of correspondence seized in two police raids - one in October 1990 on the offices of Polly Peck International, the company controlled by Mr Nadir, and the other on Mr Nadir's Mayfair home at the time of his arrest in December that year.

The exact content of the letters is unclear, but Mr Nadir's lawyers at that time claimed that they contained correspondence between him and them which was covered by privilege.

The SFO initially contested the status of these documents but an independent barrister gave an opinion largely supporting Vizards' case.

Yesterday's further admission was prompted by a letter in July from Mr Knight to Mr Staple that the previous statement did not fully explain the position. It says that some of these documents were passed on both to the SFO's lawyers prosecuting Mr Nadir, and to the Polly Peck administrators.

It was on this point that Sir Nicholas had to admit that he had misled the Commons in his earlier statement. In June Sir Nicholas had told the Commons that the bags of correspondence had been opened but that nothing more had been done with the documents.

Mr Knight protested to the SFO over the circulation of these documents. The failure of the SFO to react properly to his protests forced both the attorney general and Mr Staple to apologise yesterday.

Sir Nicholas said: 'I regret that the fact that copies of privileged documents had been circulated was not acknowledged by the then case controller to Mr Nadir's solicitor, and that no attempt was made to retrieve them until December 1991, despite Vizards' frequently expressed concern about the matter and the fact that the then case controller appears to have recognised at least by January 1991 that copies of potentially privileged documents had been circulated.'

The case controller in charge of the Nadir case, Ms Lorna Harris, was the only SFO officer mentioned specifically in the statements made by Mr Staple and Sir Nicholas. However, an SFO spokes-man insisted nobody was being singled out for the errors.

Ms Harris, who has since left the SFO but remains a civil servant, yesterday refused to comment. Her solicitor, Mr John Clitheroe of Kingsley Napley, issued a statement saying: 'She has taken legal advice because she is very unhappy about what has been said about her by the attorney general. She is considering her position.'

A soft-drinks company based in Izmir, Turkey, which holds Coca Cola's local bottling franchise, is bidding to buy Meyna, the fruit and packaging business once thought to be the main contributor to the Pounds 107m reported profit of Polly Peck International's Middle East businesses, John Murray Brown writes.

Mr Cemal Ozgorkey, head of the privately owned Ozgorkey Group, confirmed that he was in talks with the administrators to PPI. Meyna made net losses in 1990, 1991 and the first nine months of last year, according to internal management figures in a sales prospectus sent by the administrators to potential buyers.

A primary school teacher who persuaded a life insurance company to buy her out of a personal pension and back into an employer's scheme at a cost of Pounds 21,000 is one of about 500,000 similar cases to be investigated by securities regulators.

Through the efforts of her union, the Association of Teachers and Lecturers, Mrs Jennifer Brown, 33, persuaded Abbey Life, the life insurance company which had persuaded her out of her scheme and into a personal pension, to buy her back in.

Mrs Brown, from Dudley in the West Midlands, transferred out of the teachers' pension scheme four years ago. She said: 'When you sit down in the cold light of day and think about it, you wonder why you did it.'

'I can't believe I would sign all those benefits away without even investigating it,' she added.

Securities regulators are preparing to investigate the cases of up to 500,000 people like Mrs Brown, who transferred out of employers' pension schemes into personal pension plans. They estimate that as much as Pounds 7bn has come out of employers' schemes into private plans. An initial review of files has shown that in too many cases agents failed to obtain enough information.

Mrs Brown's action cost Abbey Life about Pounds 21,000, enough to repay both the transfer value of her contributions when she left the scheme with eight years of service and to compensate for the four years when she was a personal pension holder.

Mr Peter Hood of the Teachers Superannuation Scheme said nearly 27,000 teachers had transferred to a personal pension or had opted not to join the scheme at the start of their employment.

The teachers' scheme offers fully-indexed retirement benefits and death in service benefits of up to 18 months salary. Also, their employer contributes an additional 8 per cent of their salary for the 6 per cent of gross salary contributed by each teacher.

Mr Hood said: 'We face the difficulty that the salesman is there and can influence the teacher. They can cast aspersions on our scheme.' By the time the scheme has tried to explain to members what they are giving up, they have already been talked into a personal pension by a seasoned sales agent.

Because personal pensions are rarely bolstered by a contribution from the employer, offer no survivors' benefits in the event of death and do not offer indexed benefits on retirement it is difficult for them ever to be as attractive as an employer's scheme.

But Mr Stewart Ritchie, director of pensions at Scottish Equitable, a leading private pensions provider, said individuals did not necessarily make decisions based on numbers.

Nevertheless Lautro, the self-regulating body for the life insurance industry, last year issued guidance to sales agents telling them that there were almost no circumstances in which it was best advice to switch from an employer's scheme to a personal pension.

Irish persistence paid off at yesterday's Anglo-Irish summit in Dublin, with the British delegation being persuaded to work intensively on the joint declaration being sought by Dublin aimed at a permanent halt to IRA violence.

Considerable differences remain over its phrasing, which will be discussed in subsequent summits scheduled for later in the month. Agreement is by no means assured. But the Irish government can derive some satisfaction in having convinced Mr John Major to tackle the peace process before moving on to British concerns over constitutional issues, in particular the Irish republic's territorial claim to Northern Ireland.

The Irish proposal, contained in a document tabled last July, has been back and forth between the two governments since, and disagreement over its focus on the issue of Irish self-determination has been the principal stumbling block to progress on the peace initiative.

Self-determination is viewed as a loaded term by the British and by Northern Ireland's unionists, who see it as implying a veto by the republic over constitutional changes in the north. The Irish insist that this is not so.

Mr Noel Dempsey, the Irish government chief whip, said: 'There seems to be some confusion in the British government's mind as to what we mean by self-determination.'

He added: 'What we are talking about is separate referenda, north and south, where both peoples in both parts of the island can make their views known. If consent is freely given, if a majority in both parts of the island decide that they want a united Ireland, of whatever form, then we will abide by that. We are not talking about collective self-determination.'

In Belfast, Sinn Fein, the political wing of the IRA, last night said that hopes for an immediate unilateral ceasefire by the IRA was 'unrealistic'.

Mr Richard Macaulay, Sinn Fein official spokesman, said: 'It is unrealistic to expect that the IRA will unilaterally end their actions without political progress.'

Mr Jim Rodgers, deputy leader of the official Unionist Party on Belfast City Council, warned that loyalist paramilitaries were preparing a backlash if the London-Dublin peace process led to big concessions to the nationalist community.

While the talks were taking place the army discovered a 1,000lb IRA bomb intended for an army patrol. The device was planted on the outskirts of Belfast near a primary school.

The nationalist goal of a united Ireland does not seem to be as crucial to Catholics in Northern Ireland as many have believed. An opinion poll in yesterday's Irish Times indicated that only 32 per cent of Catholics in Ulster favour a united Ireland, although 65 per cent favour a constitutional change involving a greater role for Dublin.

The government yesterday risked further friction with fellow members of the European Union by pledging to fight for an end to state subsidies for inefficient Continental steel producers.

Mr Tim Sainsbury, industry minister, said subsidies were at the heart of the steel sector's difficulties.

'The continued operation of inefficient companies propped up by massive state aid is directly responsible for the excess capacity and uneconomic pricing,' he told the British Iron and Steel Producers Association in London.

'The UK steel industry has had to take necessary but painful decisions. It is time for others to play by the rules and, if necessary, to suffer the pain of restructuring.'

Mr Sainsbury's tough stance on the European Commission's controversial restructuring plans for the steel industry has irritated Germany, whose plan to subsidise Ekostahl, the troubled east German producer, is strongly opposed by the UK.

Mr Sainsbury upset the commission last month when he told European counterparts in Brussels that 'no agreement would be better than a bad agreement' on subsidies. Agreement on the subsidies issue has to be unanimous.

The November meeting of industry ministers ended in disarray after Italy rejected a commission compromise on cuts in subsidies and capacity at Ilva, the loss-making state steelmaker.

Another industry ministers' meeting will probably be called for December 17, but Mr Sainsbury said yesterday that it would not be an easy meeting. 'I may be unpopular with some of my ministerial colleagues but I am determined personally to get us a much more level playing field,' he said.

Mr Sainsbury received support from Mr David Stone, the association's outgoing president. He said that political decisions by national or regional governments to subsidise steel-related activities must be fought by the UK through every political means.

'Soft compromises brought about through ministerial fatigue, or from a sense of isolation, or in the theoretical interests of a 'greater Europe' must be resisted,' Mr Stone told the association's annual meeting.

State operating subsidies to some Continental steelworks were being paid to ensure that other private-sector plants closed instead of 'politically sensitive' ones, he said.

The first two schools to be branded 'failures' by Ofsted, the new government inspection service, must draw up urgent action plans if they are to avoid being placed under the direct control of the education department.

From next month Mr John Patten, education secretary, will have the power to appoint 'education associations' to take over the running of schools in England and Wales from governors and local education authorities.

He will make a decision on whether to do so after seeing the schools' action plans, which they have until February to prepare.

According to Ofsted the quality of learning at the Crook Primary School in Durham was unsatisfactory, there were 'major weaknesses in the leadership, management and administration'. Governors rejected the finding, saying: 'We have difficulty in recognising Crook Primary School as we know it in much of what it (Ofsted) has to say.'

Brookside Special School in Derby was found not to meet curriculum requirements and lacked effective policies on assessment admissions.

Derbyshire County Council responded by freezing admissions and introducing a range of improvements to registration and health and safety measures.

Mr Dave Wilcox, the council's education chairman, said: 'The authority had already identified a range of problems at the school following our own inspection. It is disappointing that many of our recommendations have not been implemented.'

Labour accepted Ofsted's reports, but questioned the response which could be made by Mr Patten. Mrs Ann Taylor, Labour's education spokesman, said: 'The hit squad approach is not going to be the most effective way of tackling difficulties.'

If Sinn Fein had claimed three weeks ago that it had been briefed on sensitive cabinet discussions and last year's failed three-stranded talks by a British government representative, the suggestion would have been widely ridiculed.

But when the allegation was made by senior figures in the IRA's political wing on Thursday it had enough credibility to be carried prominently by the British and Irish press - and to exacerbate tension between the two governments on the eve of yesterday's meeting between Mr John Major and Mr Albert Reynolds.

One Irish minister - Mr Noel Dempsey - even suggested that the allegation would influence the agenda of the meeting as London would need to clear the air before substantive issues were discussed.

'The initial difficulty will be the revelations and allegations that have been made,' said Mr Dempsey, speaking with the full approval of the Irish government. 'They have to be got out of the way . . . before substantial negotiations can continue.'

Sinn Fein's enhanced credibility is the direct result of its successes in the 'document war' that it has been waging with London. Time and again the British government's version of events has been shown up as less accurate than the Republican version. Put bluntly, London is on the defensive.

This was underlined yesterday when officials would not be drawn on Sinn Fein's latest claims.

Since admitting at the start of this week that it had been in prolonged contact with Republican leaders the British government has also had to own up to errors in the record it published of the messages the two sides exchanged.

By conceding 11 mistakes in one key paper the government has accepted that Sinn Fein's version of the document was accurate in virtually every detail.

Sinn Fein's propaganda coup is all the more noteworthy since its own record of reliability is not untarnished. For example, it has now belatedly made clear that its 11-paragraph response to the British conditions was not passed on until July - as the government stated - rather than April as was implied by Sinn Fein documents.

Mr Martin McGuinness, Sinn Fein chief of staff, said on Thursday that this response was 'prepared' in April but not 'lodged with the contact to be passed to the British' until July.

In addition, fresh documents released by Sinn Fein on Thursday appear to modify its position over a panicky message received by the government on November 2, shortly after the Greysteel shootings, warning that the country 'could be at the point of no return'.

Having denied the message Sinn Fein now appears to acknowledge that a communication was issued, but says it was 'without our authority or knowledge'.

A newspaper interview with Mr McGuinness published in September provides a further caution against automatically treating Sinn Fein's public statements with credulity. Asked whether there had been feelers from the government to Sinn Fein, Mr McGuinness is reported to have replied: 'No, there haven't been.'

An intermediary who passed messages between the IRA and the UK government talked to Jimmy Burns yesterday.

Channels of communication between Sinn Fein and the government have involved a range of so-called 'floaters' - intermediaries drawn from the church, local government, community politics and serving and retired civil servants.

The government has said that serious contact got under way only in February after the IRA sent a message: 'The conflict is over but we need your advice on how to bring it to a close.'

However, one of the floaters said that by then both sides had acknowledged that 'no side could win (the war)'.

In private contacts it had been understood that if an agreement was announced it would have to be phrased so as not to suggest that either side was victor or loser.

'This explains the pique of Sinn Fein over the last few days,' said the floater. 'What they were trying to do was to get off the hook with dignity, but Sir Patrick Mayhew . . . put them in a very difficult situation with . . . supporters.'

The floater said there had been more communication in the last two years than before, and it had become particularly intense by the start of this year. At an early stage of the talks Sinn Fein officials were uncertain whether the people who put themselves forward as 'government representatives' were really reflecting government policy.

Some of the mediators involved in the early stages of the Hume-Adams talks are believed to have been priests from the Clonard monastery in west Belfast.

Most British shoppers believe 'own brand' groceries sold by supermarket chains offer at least as good value as branded products from leading manufacturers, a survey shows.

The survey, by retail consultancy Verdict Research, says the popularity of own-brand lines and their growing use by retailers to spearhead price-cutting campaigns pose a serious threat to branded manufacturers, which may have to lower prices further to avoid losing sales.

Almost two thirds of consumers said the quality of own brands was equal to or better than leading branded equivalents. Almost three-quarters said own-brand prices were about the same or cheaper.

J. Sainsbury's own brands scored highest on quality. Almost two-thirds of consumers also said they rated the quality of 'no-frills' own-brand products at Kwik Save, the discount chain, superior or equal to manufacturer brands.

About a third of consumers said they were likely to choose own-brand versions of biscuits, cakes, canned groceries and dairy products over manufacturers' brands. Less than 10 per cent said they preferred own-brand beer and pet food.

Verdict says Tesco was using own brands more aggressively than any other large supermarket chain as a price-cutting weapon. Tesco brands were being displayed much more prominently and stocked in larger quantities.

The cheapest supermarket was Kwik Save, where a basket of groceries cost Pounds 29.18, while the same goods at Tesco cost Pounds 35.12. Waitrose was dearest, at Pounds 39.58, followed by Safeway and Sainsbury's.

The research into shelf-space and pricing was carried out in late October, shortly before Sainsbury's cut prices on 300 own-brand lines.

Cross-channel shoppers are spending about Pounds 400m a year on personal imports of beer, wine and spirits.

A report yesterday by Verdict says that increased allowances of personal imports of duty-paid drinks this year have had 'a dramatic impact'.

Although the chancellor did not increase the duty on beer or spirits in the Budget, the outlook for UK off-licences is not bright, Verdict says. Price competition has intensified in the Pounds 6.5bn take-home market and profit margins of specialist shops are wafer thin.

Supermarkets have benefited most from growth in the take-home trade and now claim 56 per cent of sales. Off-licences are attempting to match prices but only the biggest chains, Thresher and Victoria Wine, have the buying power to compete on price for a prolonged period, the report says.

Verdict on Grocery Brands, Pounds 850. Verdict on Off-Licences 1993, Pounds 725. Verdict Research, 112 High Holborn, London WC1V 6JS.

Equatorial Bank, the small Asian-owned bank which was placed into administration in March, has voluntarily surrendered its Bank of England banking licence after various attempts to rescue it failed.

Mr Gareth Hughes, the administrator from Ernst & Young, said that the bank had surrendered its banking licence because there was 'no prospect of rescue'.

The Bank of England said that Equatorial was one of two companies deleted from its list of authorised institutions under the 1987 Banking Act. The other was Bunge Finance.

Mr Hughes said that an interim payment of 25p in the pound had already been made to Equatorial's creditors. He expected that further payments would be made in the next few months as loans were reallocated to other institutions.

Dr Geoffrey Robinson, chief adviser on science and technology at the Department of Trade and Industry since June 1992, is to return to IBM to be director of its Hursley Laboratories.

Vodafone's mobile telephone network now has more than 1m customers, taking the number of mobile phone subscribers in the UK to more than 1.8m. Vodafone, founded in 1984, took four years to gain its first 250,000 customers. The last 250,000 came in 14 months.

Mr Richard Price, deputy director-general of the Confederation of British Industry, has died aged 49. He joined the CBI in 1970 as an economic adviser and held a succession of posts.

Sir Michael Angus, CBI president, said Mr Price's influence on European policy would be especially missed. Mr Price leaves a widow and three sons.

The Fraud Squad investigation into the business affairs of Mr Derek Hatton, former Liverpool City Council deputy leader, is over, his solicitors said yesterday.

They have received a fax from the Crown Prosecution Service saying all documentation was being returned and Merseyside Police had destroyed the photograph and fingerprints taken when Mr Hatton was arrested.

Mr Hatton stood trial with businessmen and Liverpool councillors at Mold Crown Court earlier this year charged with conspiracy to defraud the council. All were acquitted.

Liverpool and Manchester airports yesterday made applications for expansion. The airports are less than 30 miles apart and it is expected that only one plan will be approved.

Manchester wants a second runway to double its capacity of 15m passengers a year. Liverpool, with fewer than 750,000 passengers a year, wants to expand to 6m passengers by 2010 and 12m by 2030.

Customers of four investment firms have been invited by the Investors Compensation Scheme to see if they qualify for compensation.

The firms are former members of Fimbra, the self-regulating organisation for financial advisers. They are: APAL Financial Services of Barking, Essex; Chartered Financial Services (in liquidation) of Southampton; MS Insurance Services of Northwood, Middlesex; and Special Needs Consultancy of Torquay, Devon. The ICS said yesterday that the cases involved fewer than 50 clients and about Pounds 1m of investments.

An investment broker who cheated clients out of Pounds 645,000 to prop up his ailing business was jailed for four years yesterday, John Mason writes.

Mr Kenneth Renton, the former chairman of Wentworth Asset Management, pleaded guilty last month to 14 charges of theft and four of obtaining property by deception.

Passing sentence at Inner London Crown Court Judge Fingret said Mr Renton's actions amounted to 'persistent and blatant misuse of clients' money'.

Mr Renton was also disqualified from being a company director for 10 years. He had denied a further 20 charges of theft and deception involving Pounds 1m. These charges have been laid on the file.

Legislation clarifying prison officers' trade union rights and preventing them from taking strike action is to be introduced by the government in the current parliamentary session.

Last month Mr Michael Howard, home secretary, won a High Court injunction against the Prison Officers' Association establishing that, since prison officers had the status of constable, they could not withdraw their labour. The union plans to contest in court the loss of the right to strike. It appears that, even if it won, the victory would be short-lived because the proposed legislation would overturn it.

Mr Howard said yesterday: 'I intend to introduce legislation this session which, while maintaining the position that it is unlawful for them to call industrial action, also extends normal trade union status to organisations representing staff who currently have the powers of a constable.'

This would give the POA and its members access to industrial tribunals, pay bargaining procedures and other trade union activities.

The government further strengthened its legal grip on the POA yesterday with a separate injunction against officers at Preston prison who had refused to accept new admissions.

Mr John Bartell, POA chairman, told a special delegate conference earlier this week that constables had a duty to prevent breaches of the peace, and said officers would be within their rights to refuse admissions if they believed disruption or disturbances were likely.

Officers at Preston turned prisoners away on Thursday but Mr Howard yesterday obtained an injunction against six POA representatives who, the Prison Service said, had contravened the instructions of their governor.

Similar action had been proposed by officers at Hull prison on Monday.

Mr Howard yesterday issued the first set of key objectives for police forces. The police bill in the present parliamentary session provides for the annual setting of key objectives to measure and enhance police performance, and the 1994-95 exercise will be a trial run before the bill becomes law.

The objectives will require forces to seek to increase detection rates for violent crime and household burglaries, to provide high visibility policing, to respond promptly to emergency calls, and to target and prevent particular local problem crimes in partnership with other agencies and the public.

Success will be measured by a series of performance indicators including the number of crimes detected per 100 officers, public satisfaction with levels of foot and mobile patrols and the percentage of responses to incidents achieved within target times.

Equatorial Bank, the small Asian-owned bank which was placed into administration in March, has voluntarily surrendered its Bank of England banking licence after various attempts to rescue it failed, it was disclosed yesterday.

Mr Gareth Hughes, the administrator from Ernst & Young, said that the bank had surrendered its banking licence because there was 'no prospect of rescue'. The bank's liabilities and assets were being worked out.

The Bank of England said that Equatorial was one of two companies deleted from its list of authorised institutions under the 1987 Banking Act. The other was Bunge Finance.

Mr Hughes said that an interim payment of 25p in the pound had already been made to Equatorial's creditors. He expected that further payments would be made in the next few months as loans were reallocated to other institutions.

Equatorial was one of three Asian banks in London to close since last October, prompting concern about the supply of finance to Asian businesses. They lost liquidity after the closure of Bank of Credit and Commerce International.

Among those who expressed an interest in rescuing Equatorial was a group headed by Mr Ketan Somaia, a Kenyan Asian businessman.

A think-tank linked to the African National Congress yesterday published proposals to revive the South African economy which stress the central role of the state, rather than the private sector, in triggering growth from now until the end of the century.

Introducing the proposals from the Macroeconomic Research Group, Mr Trevor Manuel, head of the ANC economics department, said they did not represent ANC policy. But ANC economists were involved in drawing them up, and they could have a significant influence over policy formulation. One ANC official said that some of the proposals were 'too conservative'.

The research group, which includes members of the radical trade union movement, Cosatu, as well as members of the ANC and academics from local and foreign universities, drew up an economic model in which the state's role is central - in direct contradiction to the government's model, which focuses on private sector investment to revive growth.

'To achieve the goals of economic growth and redistribution, the state. . . must play a strong and active role in leading development,' the group said. Growth would rise from 1.1 per cent in 1994 to nearly 5 per cent annually within the first years of the next century, it said. This year's growth is expected to total 1 per cent.

The model focuses on job creation, as well as improving access to and quality of health, housing, and electricity. It calls for a minimum wage to be set, but rules out any early recourse to a wealth tax.

The think-tank said a post-apartheid government should resist raising personal and corporate tax rates, but the tax system should be restructured and should include a multiple-rate indirect value added tax favouring the poor.

The Angolan government and Unita rebels said yesterday they had cleared the last obstacles to a ceasefire agreement at talks in Lusaka, agencies report.

They said they would report details, probably today, to United Nations mediators who have been trying to bring an end to the long-running conflict in Angola.

'All conditions are now complete for the ceasefire,' said a rebel negotiator.

The key dispute had been over arrangements for disarming rebel forces. This issue threatened to derail the peace talks which opened in the Zambian capital of Lusaka on November 15 under the chairmanship of UN envoy Alioune Blondin Beye. But the disagreement appeared now to have been settled.

The UN has been seeking a ceasefire for the whole country, allowing free movement of goods and people.

The UN envoy was due to fly to Angola's capital Luanda today for consultations. One diplomat said he believed the envoy would press on with outstanding political questions which the rebels wanted resolved. These related to what role Unita would play in a future government.

The government and Unita have battled each other since Angola's independence from Portugal in 1975.

The war halted after a peace accord in May 1991 but Unita, led by Mr Jonas Savimbi, took up arms again after disputing its defeat in UN-supervised elections in September 1992.

At least 16 people were killed when Malawian soldiers stormed into action yesterday to disarm the country's Young Pioneers, the paramilitary wing of the ruling Malawi Congress Party.

Troops assaulted the national headquarters and district offices of the Young Pioneers. National offices of the Congress Party were also strafed with gunfire, ransacked and looted by soldiers.

Thousands of civilians took to the streets of the capital, Lilongwe, cheering the army.

They shouted: 'No more Banda, no more Tembo, no more Chakauamba' - referring to former 'president for life' Dr Hastings Kamuzu Banda and two members of a presidential council that has shared power since Dr Banda's collapse with a stroke in October.

The military strike against the Pioneers came after opposition politicians had complained of a delay in disarming the paramilitary group.

A call to disarm the 2,000-strong Pioneers came two months ago from a National Consultative Council, comprising government and opposition representatives. The council was charged with overseeing Malawi's transition to democracy following a referendum in June, when Malawians voted to switch to a multi-party system of politics.

There has been long-running tension between the Pioneers, the police and the politically neutral army. The government has pleaded the case for integrating the Pioneers into the national security forces.

It was not immediately clear how far up the army hierarchy the order to attack originated.

The operation began when 200 soldiers assaulted Youth House, the Pioneers' headquarters in Lilongwe. Armed Pioneers initially returned fire but resistance collapsed within minutes.

Two army helicopters circled low overhead, apparently in support of the attack.

Army units then moved on to the Kamuzu Youth Institute, a training centre for Pioneers, and to urban district offices. The institute was soon ablaze, with civilians braving the fire to loot the premises.

Gunfire had died down in the city by late afternoon, although civilian looting of commercial and government premises had begun. At the national headquarters of the Malawi Congress Party, soldiers were systematically removing anything of value.

Jewish settlers went on a shooting spree yesterday in the occupied West Bank town of Hebron, firing indiscriminately at people, cars and houses, Reuter reports from Hebron.

Hospitals and witnesses said at least three Arabs were shot and wounded by settlers or soldiers in stone-throwing clashes. One, shot in the head, was in a serious condition.

It was the second straight day of riots in the town. The attacks started after Palestinians stoned a settler's car.

Indian industrialists yesterday urged the government to safeguard the interests of domestic companies when opening up the economy to foreign investors.

Import duties should be cut 'gradually' to protect domestic industry and special temporary duties should be introduced to insulate Indian companies from violent swings in international prices, says the Federation of Indian Chambers of Commerce and Industry, a national employers' organisation, in a formal pre-budget report to the government.

The federation says Indian groups should not be obliged to compete at a disadvantage to foreign groups and need a 'level playing-ground'.

The federation's call echoes the fears expressed by an informal group of conservative industrialists called the Bombay Club, who have already conveyed their worries to the government.

The industrialists' concerns have surfaced at a time when multinational groups have started making high-profile investments in India in the wake of the government's economic reforms. The purchase by Coca Cola, the US soft drinks group, of Parle, India's leading cola maker, prompted suggestions from some critics that Indian industry faces a mass takeover.

The federation's report carries proposals for changes in tax, trade and financial regulations which Indian companies feel discriminate against domestic groups.

In its most controversial, protectionist-sounding suggestion, the report demands planned cuts in import duties should continue but should be 'gradual keeping in view the interests of the indigenous industries.' It also wants duties to be lowest on raw materials and highest on finished goods to give 'the requisite support to the domestic industry.'

The federation calls for stronger anti-dumping measures and a new 'regulatory duty' which would be imposed for limited periods on imports when international prices fell sharply to allow Indian industry to adjust.

The report says corporate tax rates in India, which range between 51.75 per cent and 57.5 per cent, are higher than rates in other countries. Foreign financial institutions investing in India enjoy special low rates of capital gains tax of 10 per cent on long-term gains (against 40 per cent for domestic companies) and of 25-30 per cent on short-term gains (compared with 51.75 per cent.)

The federation says interest rates should be cut from the current range of 17-22 per cent to 10 per cent, nearer international levels. It wants an end to restrictions on inter-company loans and investments and on the use of shares as security for loans.

The report said: 'Unless the reform measures are properly sequenced and a level playing-ground is provided to the domestic industry, the national economy will face serious adverse impact.'

Exports in October grew 15.2 per cent to Dollars 1.7bn, extending a surge which started at the beginning of the financial year in April, according to figures published yesterday. But the pace of growth has fallen from an average of 21 per cent in the six months to September. Imports remained flat due to continued stagnation in Indian industry.

Mr Ichiro Isoda, former chairman of Sumitomo Bank who was forced to resign following an illegal loan scandal and his involvement with stock and property speculators, died yesterday. He was 80.

Better known as the 'Emperor' of Sumitomo, he fell from grace in 1990 after six years as president and seven years as chairman. He was personally responsible for Sumitomo's emergence as Japan's top profit making bank in the late 1980s, aggressively expanding operations using cheap credit. However, Mr Isoda was also widely believed to be the force behind the bank's involvement with real estate and stock speculators. Sumitomo made large loans to Itoman, a trading company turned property developer and art collector, which was linked to underworld figures.

Mr Isoda took Itoman under his wing after a financial rescue in the 1970s and sent in employees as presidents and board members. Itoman faced near bankruptcy due to mounting bad loans and was taken over by a Sumitomo group company earlier this year.

An arrest of a former Sumitomo manager on alleged illegal loans to Mitsuhiro Kotani, a prominent stock speculator, was the trigger for his resignation, bringing a sad end to Mr Isoda's otherwise distinguished career. Mr Isoda first came to prominence in the 1970s by arranging the rescue of Ataka, a troubled trading house, and then persuading Ford Motor of the US to participate in the refinancing of Mazda Motor which faced financial difficulties.

Mr Isoda later oversaw the rehabilitation of Daishowa Paper and Asahi Breweries, both heavily indebted groups.

Under Mr Isoda, Sumitomo aggressively expanded overseas.

The bank invested Dollars 500m in a non-voting stake in Goldman Sachs, the US securities company. The deal failed to bring in benefits the bank had originally hoped, as the US Federal Reserve banned the bank from building direct business links with Goldman.

South Korea's foreign minister said yesterday North Korea would be given more time to solve its dispute over nuclear inspections, even if the International Atomic Energy Agency (IAEA) declares that Pyongyang is in violation of nuclear safeguards, writes John Burton in Seoul.

The US and South Korea have previously stated that the North Korean nuclear issue would be transferred to the United Nations Security Council once the IAEA declared that the continuity of its inspections of the North's nuclear facilities had been broken. The UN would then consider imposing economic sanctions on Pyongyang.

Mr Hans Blix, the IAEA director general, said on Thursday that the continuity of the inspection regime was close to being broken. He is expected to deliver a report on North Korean nuclear issue to the Security Council next week.

Mr Han Sung-joo, the South Korean foreign minister, said the timing of the UN involvement depended not only on technical factors, such as an IAEA declaration that its safeguards on North Korean are broken, but also on diplomatic developments.

North Korea is now blocking routine IAEA inspections of its nuclear facilities at Yongbyon.

A think-tank linked to the African National Congress yesterday published proposals to revive the South African economy which stress the central role of the state, rather than the private sector, in triggering growth from now until the end of the century.

Introducing the proposals from the Macroeconomic Research Group, Mr Trevor Manuel, head of the ANC economics department, said they did not represent ANC policy. However, ANC economists were involved in drawing them up, and they could have a significant influence over policy formulation. One ANC official said that some of the proposals were 'too conservative' though he gave no details.

The research group, which includes members of the radical trade union movement, Cosatu, as well as members of the ANC and academics from local and foreign universities, drew up an economic model in which the role of the state is central - in direct contradiction to the government's economic model, which focuses on private sector investment to revive growth.

'To achieve the goals of economic growth and redistribution, the state . . . must play a strong and active role in leading development,' the group said. Growth would rise from 1.1 per cent in 1994 to nearly 5 per cent annually within the first years of the next century, it said. This year's growth is expected to total 1 per cent.

The model focuses on job creation, as well as improving access to and quality of health, housing, and electricity. It calls for a minimum wage to be set, but rules out any early recourse to a wealth tax, a controversial proposal favoured by some ANC economists.

It proposes that state spending on social needs such as housing, education, health and job creation should, using 1985 currency values as a benchmark, nearly double from R14bn (Pounds 2.81bn) in 1992 to R26bn (Pounds 5.3bn) in 2004.

The think-tank stressed the need to maintain macro-economic balance, arguing for prudent fiscal, monetary and balance of payments goals. It said a post-apartheid government should resist raising personal and corporate tax rates, but the tax system should be restructured, and should include a multiple-rate indirect value added tax favouring the poor.

King Norodom Sihanouk has withdrawn an offer to give cabinet posts to the Khmer Rouge in return for a ceasefire. His decision abruptly ended hopes that the offer could lead to peace talks between the radical faction and the government, Iain Simpson writes from Phnom Penh.

It also means that renewed fighting in the central province of Kompong Thom is likely to spread to other areas. In the past week, Khmer Rouge troops have attacked government positions and villages in the province, retaking positions which the government captured last year. Reports from other provinces in the west indicate that both sides are preparing for offensives - a dry season pattern likely to be repeated this year.

Earlier in the week, King Sihanouk held talks in China with the nominal leader of the Khmer Rouge, Khieu Samphan. The king is in hospital in Beijing, receiving treatment for cancer. They discussed the king's proposal to give the Khmer Rouge senior government positions in return for agreeing to a ceasefire, giving up its army and handing over the territory it controls.

The state-owned Nigerian National Petroleum Corporation paid out Dollars 64m for an unnecessary oil storage facility it commissioned and subsequently cancelled, according to Chief Philip Asiodu, the country's former oil minister.

The scheme was 'a scandal of major proportions', Chief Asiodu said in an interview in London, in which he quoted extensively from copies of minutes and documents exchanged with NNPC and other officials.

In August a confidential government report expressed concern about 'leakages' in the accounts of NNPC. Nigeria exports about 1.3m barrels of oil a day.

Chief Asiodu, a respected former permanent secretary in the oil ministry in the 1970s who became a leading Lagos-based businessman, was appointed oil minister at the beginning of January. He declined a further term in office in August, when the country's interim cabinet was reshuffled and military rule extended.

In December 1992, shortly before Chief Asiodu took office, the government approved a proposal to hire oil tankers which would be anchored off Lagos and hold up to 1m tons of petroleum products as a strategic reserve.

In a series of minutes to NNPC officials and to President Ibrahim Babangida, who stepped down as Nigeria's military leader in August, Mr Asiodu called for the cancellation of the scheme which, had it been followed through, would have cost nearly Dollars 300m.

Chief Asiodu told NNPC officials that they had used 'bogus economics' and argued that even if the project were to go ahead, it need not cost more than Dollars 45m.

But he strongly recommended its cancellation, pointing out that it would not resolve Nigeria's fuel shortages.

These, he said, were caused by internal distribution problems rather than supply shortages.

In a minute dated May 21 and sent to Gen Babangida, Mr Asiodu wrote: 'The matter raises. . . serious doubts about rationality, integrity and honesty in the conduct of NNPC management.'

Mr Asiodu sent a further detailed criticism of the project to the president, who in a minute dated June 10 agreed that it should be cancelled.

On July 30, a senior NNPC official said that, although the contract had been terminated on July 9, NNPC was contractually committed to payments totalling Dollars 64m to the charter company providing the tankers and handling the project.

This included charter charges of Dollars 25m for the period December 23, 1992 to July 9, 1993, 'damages' amounting to Dollars 33m and further obligations of Dollars 6m.

On August 9, Chief Asiodu told NNPC officials that the legality of the contract was questionable, and warned: 'Please make it clear to all concerned that the top management of NNPC are dealing with a scandal of major proportions in this matter.'

Further correspondence exchanged between NNPC and Mr Asiodu suggests that company officials ignored his directives, and had already authorised payments totalling Dollars 16.5m to the contractors in January and February 1993.

Mr Asiodu left office on August 26.

In the interview in London Mr Asiodu also re-jected criticism of decisions he had taken while minister on oil lifting contracts and the award of exploration licences.

In both areas he was dealing with a backlog of claims and applications inherited from his predecessor, said Mr Asiodu.

'If I had any skeletons to hide in the ministry, I would have chosen to remain there,' he said.

Growth in Japan's politically controversial current account surplus is near an end, the finance ministry said yesterday.

Annual growth in the surplus slowed to 1.4 per cent in October to Dollars 11.25bn, after a 10.2 per cent rise the previous month, the ministry announced. That represented a 6.9 per cent decline from September's Dollars 13.3bn surplus.

Exports were stagnant or slightly down - depending on the sector - while imports rose. 'It appears that the yen-based surplus is now in a shrinking trend and the dollar-based surplus is likely to hit a ceiling,' said an official.

Overall, exports rose slightly from Dollars 30.1bn from October 1992 to Dollars 30.32bn in the same month this year, while imports increased more strongly from Dollars 17.16bn to Dollars 17.89bn.

This could help to reduce the yen's value, given the depth of Japan's recession, so easing the pressure on the country's exporters, said economists.

That would be welcome news for prime minister Morihiro Hosokawa as his government works overtime to put together another economic stimulus package.

Coalition members are aiming to finalise details of such a package by early next week. However, Mr Hirohisa Fujii, the finance minister, yesterday cast uncertainty over the timing by saying that the government must first pass a supplementary budget, to fund the previous package.

A senior official of the government's Economic Planning Agency yesterday admitted that the economy could shrink this year. Mr Tsutomu Tanaka, the agency's vice minister, expected something between a slight decline and 1 per cent growth in gross national product.

Middle East peace talks at an impasse, violence in the occupied territories, Jewish settlers on the rampage, and Mr Warren Christopher, the US secretary of state, damping hopes for his visit to the region which began last night. It all strikes a depressingly familiar note, coming so soon after the euphoria created by Israel and the Palestine Liberation Organisation when they signed their declaration of principles in Washington on September 13.

But although the danger is growing that the two sides will fail to meet their first deadline, a week on Monday, for implementing the initial stage of the outline peace accord, the appearances are probably worse than the reality.

By December 13, Israel and the PLO are supposed to have agreed a range of issues which would permit the start of an Israeli troop withdrawal from much of the Gaza Strip and an area around the West Bank town of Jericho. 'It is a sacred date. They must respect it, or the whole peace process will be affected,' Mr Yassir Arafat, the PLO chairman, said in Copenhagen this week. From his headquarters in Tunis came the warning that negotiations over the extent of the Israel withdrawal had reached an impasse, and US help was needed to rescue the process.

Mr Yitzhak Rabin, Israel's prime minister, appears less concerned, probably because he understands Mr Arafat's negotiating techniques and realises how little room the PLO leader has for manoeuvre. In London on Thursday, Mr Rabin said he would like to meet the deadline, but preferred to let it slip by a few weeks if that meant they would achieve a precisely defined deal. Israel, he said, would stick by its commitment to complete the first stage of withdrawal by the next target date of April 13.

Time, however, has always been a luxury for peacemakers in the Middle East. Fifteen Israelis and 31 Palestinians have died violently since Mr Rabin and Mr Arafat shook hands on the south lawn of the White House, and many more have been wounded. Opponents of the agreement will be encouraged by the latest difficulties, and suspicions among Palestinians in the territories about Israel's true intentions are bound to increase if the troop withdrawal does not begin on schedule.

The danger was clear from the outset. Mr Arafat and Mr Rabin both gambled on being able to carry with them the biggest part of their domestic constituencies. The Israeli leader's calculations were the more finely honed. He wrong-footed his right-wing opponents, achieved swift parliamentary endorsement for his actions, and retains public credibility for his determination to stand firm on security issues. Even so, the latest poll in Israel shows support for the peace process down to 43 per cent, a fall of over 20 per cent since September, and opposition rising at 47 per cent.

Mr Arafat was meanwhile busy embellishing his already well-practised impersonation of Houdini by not only escaping from the consultative chains with which fellow Palestinians sought to bind him, but also simultaneously ignoring the agreement with the Syrians, Jordanians and Lebanese that no one Arab partner would do a separate deal with the Israelis.

For several months before September 13, Palestinian discontent with Mr Arafat had been approaching a crescendo, not least among those representing the PLO at the Washington negotiations. Resignations were in the air and the accusations were myriad. Mr Arafat was said, not for the first time, to be alternately autocratic and indecisive, and unwilling to consult with any but his closest colleagues. He stood accused of bringing the PLO to the verge of financial ruin, and of coming close to wrecking the entire organisation. Those accusations are still rife today.

But just as his leadership looked to be tottering, he made his dramatic deal with Israel, appeared in Washington, was praised by President Clinton, welcomed on Capitol Hill, and promised Palestinians a future state with Arab east Jerusalem as its eternal capital. It was gripping theatre, but the plot had only a beginning, followed by an ill-defined series of subsequent acts, and an ending on which the authors, not to mention the other actors, profoundly disagreed.

Getting from the starting point to the conclusion of an interim five-year period of Palestinian self-rule, during which the final status of the territories would be agreed, was always going to be a Herculean task. Mr Yossi Beilin, Israel's deputy foreign minister and a central figure in the process, speculated last month that it might have been easier to have started with an agreement on how the drama would end, and then work backwards to the White House lawn.

There is weight to his argument, more so from the Palestinian perspective. Rifts within the wider Palestinian community have been widened by the long wait for tangible results of the peace accord to be seen in the territories, and by the still uncertain conclusion of the process.

While the peripatetic Mr Arafat continues to be feted in world capitals (yesterday it was Gabon), the skilled negotiators needed to do the difficult, detailed work have tended to be ill-prepared and poorly briefed. The assumption of PLO headquarters in Tunis that it knows best is causing increasing resentment among those in the territories whose leadership role grew during the five-year uprising against Israeli occupation.

Those concerns have been exacerbated by fears Israel is seeking to dominate the economic future of the Palestinians. In the short term there is resentment at Israel's efforts to play a key role in the disbursement of the Dollars 2bn in aid pledged by the international community towards rebuilding the infrastructure of the occupied territories, and in the longer term by its statements on the inevitability of a dependent Palestinian role.

Palestinian commentators, an increasing number of whom have turned against Mr Arafat, delight in mocking his dilemma. 'Can a warrior negotiate as he surrenders?' wrote one this week, suggesting that Mr Arafat can only meet the December 13 deadline by giving way to Israeli demands. Mr Rabin has to decide in the next few days how much of a lifeline, if any, he needs to throw Mr Arafat to prevent a further erosion of Palestinian and, ultimately, Israeli support for their joint initiative.

Reformist parties fighting Russia's parliamentary elections on December 12 are seriously concerned that a late surge by extremists will give a large share of seats to communist and neo-fascist deputies.

Mr Anatoly Sobchak, mayor of St Petersburg and the veteran democrat who now leads the Movement for Democratic Reform - one of the four reformist parties - said yesterday there was now a 'very grave threat' from the communists and even more from the neo-fascist Liberal Democratic Party, led by Mr Vladimir Zhirinovsky.

Mr Sobchak, who was campaigning in Krasnoyarsk, said the communists might take 10 per cent of the seats.

He said an agreement had been reached between the four reformist parties - Russia's Choice, the Party of Unity and Consent, the 'Yabloko' group and his own - to withdraw candidates where it was clear one of the four was leading. This followed a call for co-operation made by Mr Yegor Gaidar, leader of Russia's Choice.

However, it is far from clear that the democratic blocs can reach an effective agreement not to split their votes, and Mr Sobchak said the leadership of the four parties would meet early next week to attempt to impose discipline on their often independent-minded and inexperienced local organisations.

The Russian Communist Party yesterday took part in a convention of centrist and far-left and right-wing groups held to oppose the draft Russian constitution, which will be voted on in a referendum at the same time as the parliamentary elections. The communist party is consistently scoring around 8 per cent in the polls and the Liberal Democrats have surged from under 2 per cent to around the same levels.

The polls all show as much as half of the electorate still undecided, while party leaders touring the country have consistently remarked on the strength of feeling for Mr Zhirinovsky, whose populist style has gone down well on TV.

A spokesman for the 'Yabloko' group said last night that the four-party agreement was only at regional level and no decision had been taken to agree a share-out of constituencies at national level.

Mr Arkady Murashov, one of the leaders of Russia's Choice, confirmed that the four parties would meet next week.

THE death of Pablo Escobar, chief of the Medellin cartel, does not mean drug trafficking has ended in Colombia, though it marks a big step forward, President Cesar Gaviria said yesterday, Sarita Kendall reports from Bogota. 'The fight against terrorism has not finished, an enormous challenge lies ahead,' he said.

But Escobar's killing in a big police raid should hasten surrender of rival traffickers, and representatives of some of the top Cali smugglers, rivals to the Medellin cartel, have apparently contacted the prosecutor general's office to discuss terms. Legislation passed recently makes surrender more attractive, with the possibility of minimal sentences under house arrest.

Escobar was buried yesterday at a chaotic funeral punctuated by the chants of thousands of slum-dwelling mourners who considered him a Robin Hood figure.

Nervousness in the financial markets over the outcome of Sunday's run-offs in local elections put the lira under pressure again yesterday.

The lira has been unsettled throughout the week because of continuing political uncertainties and doubts about the Ciampi government's ability to push the 1994 budget through parliament.

Yesterday the lira was being traded below the pyschological barrier of L1,000 to the D-Mark; but then recovered to L998.

The slight improvement was attributed to signs that the government had agreed how to tackle the 2,500 amendments tabled to the budget. This has increased the likelihood that the legislation, reducing the public sector deficit in 1994 to 8.7 per cent of gross domestic product, would be approved before Christmas.

However, the likely result in Sunday's local elections remained far from clear yesterday as the campaign closed. Opinion polls suggested candidates backed by alliances sponsored by the former communist Party of the Democratic Left (PDS) would do well. But in Naples and Rome they are being closely challenged by the neo-fascist MSI.

In either event the result will provide a further big shake-up in Italy's political landscape against the backdrop of early elections next spring. The first round on November 21 saw the collapse of the vote for the long ruling Christian Democrats and their allies.

Sunday's elections cover almost 450 towns and cities and involve 11m voters, nearly a quarter of the electorate.

The focus has been on Naples and Rome where the neo-fascist MSI has run a strong campaign picking up votes from the centre parties - especially the Christian Democrats and Socialists.

Rome magistrates yesterday notified 22 journalists and technicians working for the RAI, the state-run television network, that there were under investigation for alleged fraud for L250m (Pounds 100,880).

The move follows detailed inspection of expenses claims submitted by television crews covering trouble-spot news in former Yugoslavia and Somalia. It came on the day when the new RAI management unveiled unpopular news that the traditional Christmas bonus of an extra month's pay, due in early December, would be held over until the end of January to save L40bn to pay suppliers.

The RAI is likely to lose L500bn this year and is in danger of being put into liquidation.

Oil prices tumbled to new five-year lows yesterday as markets took fright at reports that Iraqi oil exports could resume earlier than expected.

The price of the benchmark Brent Blend broke through the psychological barrier of Dollars 14 a barrel, to touch a low of Dollars 13.65 a barrel. It later recovered in late London trading to Dollars 13.85, but sentiment remained bearish, according to traders.

The price slide was exacerbated by news that the main Russian Black Sea oil export terminal at Novorossiisk had reopened after being closed for three weeks by bad weather. Its closure had been one of the few factors underpinning prices. The main reason for yesterday's fall, however, was a report that Iraq had shown greater flexibility in accepting UN terms for lifting, at least partly, the embargo on oil exports.

The possibility of resumed Iraqi exports at a time of plentiful supplies and weak prices has been a factor behind the 25 per cent slide in oil prices over the past year.

One Gulf Arab official complained that none of the recent reports about the return of Iraqi exports has proved true. 'The market appears to be reacting to headlines rather than hard information,' he said.

The UN Special Commission (Unscom) said last week that by accepting its weapons monitoring programme Iraq had removed the 'major remaining obstacle' on weapons requirements which are linked to the oil embargo in force since Iraq's 1990 invasion of Kuwait.

But it gave no indication how long Unscom will take to finish its work, and inspectors have not precluded the possibility of turning up new evidence. The next inspection team is unlikely to visit Iraq before February and Mr Rolf Ekeus, who heads the commission, has suggested it would take at least another six months from then to complete its work.

Even then there would be powerful opposition to lifting oil sanctions while President Saddam Hussein retains power. President Clinton is opposed to such a move in the near future and the US could be expected to cite other examples of Iraq's aggressive intentions to justify keeping sanctions. Gulf countries, such as Saudi Arabia and Kuwait, argue that lifting the embargo would reward an unrepentant Iraq.

Venezuela's 1993 presidential campaign ended yesterday amid rumours of a military uprising and a warning from the Clinton administration that a coup would bring serious consequences.

The country is to vote tomorrow for a new president, the 235 members of congress and 362 state legislators.

The US, concerned at the coup rumours and a recent wave of terrorist bombings, sent its assistant secretary of state for inter-American affairs, Mr Alexander Watson, to Caracas to warn that any non-democratic government would face an economic embargo and other sanctions. Venezuela depends heavily on oil exports to the US.

The leading presidential contender is Mr Rafael Caldera, 77, who was president from 1969 to 1974.

Mr Caldera, who is running as an independent, has been a strong critic of free market reforms and privatisation.

Last year saw two failed coups and hostility to free market reforms.

The Clinton administration is nearing completion of its welfare reform plan but already faces controversy over how to pay for the changes.

While officials believe the plan will eventually save money by encouraging people out of the welfare system and into the workplace, it will require considerable government spending to provide training, job schemes, childcare and medical coverage.

Proposals to pay for these measures by cutting other programmes have already drawn scepticism from members of Congress who feel there is little fat left to be used in the system, but the administration is nervous about any semblance of a tax increase to pay for the reforms.

President Bill Clinton said yesterday he was encouraged to believe that a bipartisan welfare reform plan could be achieved by a counter-proposal from Republicans in Congress.

'I don't agree with all of it, but there are some very good ideas in it,' he said. 'We are moving toward making welfare a second chance, not a way of life.'

Mr Clinton's plan, like the Republican proposal, would require welfare recipients who have spent more than two years on the welfare rolls to work in return for their benefits.

But debates have been vigorous on how severely the cut-off of benefits should be applied, how the work requirement should be enforced, and how long people could remain in government-run job schemes before being abandoned altogether.

Frustration among central European countries over Nato's approach to enlargement surfaced at a meeting of the 38-member North Atlantic Co-operation Council in Brussels yesterday.

Mr Andrzej Olechowsky, the Polish foreign minister, sought to link Nato proposals for military co-operation to a progressive expansion of the alliance.

Poland, Hungary and the Czech Republic said the 'partnership for peace' agreements proposed by Nato would not be an acceptable substitute for membership.

They also sought to broaden the scope of the agreement beyond peacekeeping missions to cover full co-operation in areas such as military doctrine and planning.

Nato envisages that the agreements, to be formally proposed at a summit next month, would be applicable to all former Warsaw Pact countries and some other European nations, but they would lead to differing degrees of co-operation, in some cases as a prelude to membership.

The central European countries are anxious that their membership prospects are not held back by problems with other countries, including Russia. Divergences between them and Moscow emerged over Russian proposals for the future of the NACC, which serves as a forum for Nato to talk to its former Warsaw Pact adversaries.

Mr Andrei Kozyrev, Russian foreign minister, proposed making the NACC into an institution separate from Nato, acting as a defence arm for the Conference on Security and Co-operation in Europe.

Aspiring Nato members, to the contrary, want to strengthen the NACC's ties with the alliance.

Ministers yesterday agreed to extend NACC discussions to the topics of air defence and arms procurement. However, Polish officials complained that the scope of its work was still too restricted.

The US and its allies meanwhile failed to make apparent progress on the elimination of nuclear weapons on Ukrainian territory. But Mr Anatoly Zlenko, Ukraine's foreign minister, raised the prospect of tripartite talks between the US, Ukraine and Russia.

Top international trade negotiators in Geneva yesterday voiced concern over delays by the US and European Union in settling long-standing disagreements on opening their markets to farm and manufactured goods.

There was also frustration among developing country negotiators over poor offers to open markets to their exports. Negotiators from the 116 countries in the Uruguay Round welcomed signals from the US and the EU that talks in Brussels this week have brought the two to the brink of agreement on a bilateral market access deal. But several warned that a failure to finalise the deal by Monday 'would be very serious for the round'.

Next week is the last full week of negotiation if the deadline of December 15 is to be met. Leaders elsewhere were encouraged by the week's developments. President Francois Mitterrand of France said during a visit to Switzerland that indications for the US-EU talks were 'optimistic'.

In Germany, which has worked hard to broker disagreements between the US and France, Mr Klaus Kinkel, the foreign minister, said he was 'cautiously optimistic for the first time' over prospects for a successful Uruguay Round outcome.

In Copenhagen, Mr Henning Christophersen, EU finance commissioner, said the Commission expected to meet on Monday evening to study a draft US-EU deal. Meanwhile, most Gatt negotiators remained in the dark on details of the prospective US-EU deal, which is expected to be unveiled after further meetings in Brussels on Monday between Mr Mickey Kantor, the US trade representative, and Sir Leon Brittan, his EU counterpart.

Both trade negotiators adjourned on Thursday after 30 hours of almost continuous negotiation, Mr Kantor for consultations in Washington with President Bill Clinton, and Sir Leon to meet EU ministers. After a four-hour Gatt discussion on the impact of the round on developing countries, Mr Balkrishan Zutshi, India's veteran Gatt ambassador, reflected concerns of many developing countries when he complained of 'a deep imbalance in the exchange of concessions in areas of interest to developing countries.'

He was particularly concerned about improved market-opening offers for textiles and clothing, and farm products - key disputed sectors in the US-EU negotiations. He hoped the coming days would bring 'some rectification'.

The Spanish cabinet yesterday approved controversial legislation that seeks to create employment by promoting apprenticeship schemes and to stimulate industrial investment by removing labour market rigidities.

The initiative received a boost from the Bank of Spain which cut its benchmark lending rate by a quarter of a percentage point to 9 per cent, but it prompted strong hostility from trade union leaders who are planning a general strike against the measures next month. There was only a lukewarm reception from employer representatives, who say the reform does not go far enough.

Hailed by the government as a breakthrough in its attempt to restore Spain's competitiveness, the legislation comes at the end of a fruitless three-month attempt to establish a consensus between employers and unions over labour market reforms.

Yesterday's decision allows companies, from Monday, to hire unqualified under-25-year-olds as apprentices for up to three years. These new employees will earn 70 per cent of the minimum wage during their first working year and incur minimal social security costs to the employers. The cabinet, under the same decree law, also removed legal impediments to part-time work.

The government hopes these measures will have a major impact on unemployment which stood at 3.5m, or 23 per cent of the labour force, at the end of September according to the national statistics office. The largest group among the unemployed total is formed by first time job seekers and, under the former rulings, part-time workers were not counted as employees by the statistics office.

The unions accuse the government of introducing 'junk jobs' and say that employees on fixed contracts will be replaced by low-paid apprentices and by part-time workers.

The main body of yesterday's legislation is formed by a draft bill that will go before parliament early next year and which alters fundamental guidelines on working practices and on dismissal procedures. Essentially the bill makes redundancies in Spain, which are held to be the costliest in Europe, easier and cheaper by broadening the terms of justifiable dismissals and by shortening compensation from 25 to 20 days per year worked.

The draft bill also removes existing rigid statutory rules concerning the extent of working days and holidays, overtime, job classifications and geographical mobility for company employees.

Germany, Denmark and the Netherlands were yesterday given a fresh chance to reach a compromise on new European Union rules for dealing with packaging waste or risk having their ambitious recycling goals voted down by their partners.

Environment ministers of the 12 failed to reach agreement in 21 hours of negotiations. Now, a special council to resolve the issue has been called for December 13, and senior EU officials warned that the 'green' trio will be defeated under a weighted majority voting system if they cannot come to terms with the other nine.

These nine take as their yardstick what they see as the failure of Germany's national recycling targets. These so exceed local reprocessing capacity that Germany is exporting huge quantities of used paper, board and plastic, with a subsidy, to be handled in other member states.

Eight of Germany's partners complain their own efforts to build up recycling industries are being overwhelmed by this dumping. France has threatened an import ban, a possibility also raised by the UK House of Commons select committee on the environment.

Because of the German programme's distortion of the single market, the Belgian presidency of the EU, allied with the European Commission, has lowered the recovery and recycling targets to levels Bonn and its allies consider regressive.

But they are being offered the opportunity to stick to their more ambitious goals if they can prove they will not be distorting trans-European flows of waste for recycling.

Meanwhile, ministers decided on new targets to reduce car emissions by 1996, and to speed up the phasing out of ozone layer-depleting HCFCs and methyl bromide, used for soil fumigation.

Carbon monoxide emissions from new cars will have to fall a further 30 per cent in petrol engines and 68 per cent in diesel engines; hydrocarbons and nitrogen oxide emissions by 55 and 38 per cent respectively; and particle emissons from diesel engines by a further 55 per cent. Incentives will be allowed for those countries seeking to reach these targets before 1996.

HCFCs do far less damage to the ozone layer than the chlorofluorocarbons (CFCs) they are replacing in aerosols and refigerators but are now due for total phase-out by 2015.

The UK is to ratify the Climate Change Convention, one of the key instruments from last year's Rio Earth Summit aimed at combating global warming, David Lascelles reports. Mr Tim Yeo, environment minister, said a programme to reduce emissions of carbon dioxide to 1990 levels by the year 2000 would be published early in the new year.

This week's UK budget also included measures to combat gas emissions by increasing taxes on fuel consumption, and encouraging energy efficiency.

Lower trade barriers resulting from the Uruguay Round of Gatt talks in Geneva would spur an extra Dollars 745bn a year in world trade in goods by 2005, a 12 per cent increase, and raise world income by at least Dollars 230bn, according to economists at the General Agreement on Tariffs and Trade.

This income gain, which is close to other recent estimates by the OECD and World Bank, would be broadly spread among the 116 nations taking part in the round.

Gatt's calculations, in a report prepared for yesterday's evaluation of the results of the round, relate only to cuts in tariff and non-tariff barriers for goods. They 'substantially underestimate' the likely full effects of the round, the study maintains, because they ignore the stimulus to world trade in services, the benefits from strengthened trade rules generally and the dynamic gains from improved business confidence and hence increased investment and growth.

The report shows that even without the mooted tariff-cutting deal between the US and EU due to be unveiled on Monday the market-opening package for goods is already sizeable. Developed countries have offered to cut import tariffs for industrial goods by 38 per cent on a trade-weighted basis. For farm products the average reduction (after converting all trade barriers to tariff equivalents) is 36 per cent.

The proportion of industrial goods imports entering developed countries duty-free would more than double from 20 to 43 per cent, and rise from 22 to 45 per cent for goods from the Third World.

The Gatt report also spells out in detail the prospective gains for the 88 developing countries taking part in the Uruguay Round. It notes that rich nations are extending lower tariff cuts on products of special interest to poorer countries, giving an overall tariff cut on industrial goods of 32 per cent for Third World exporters (other than the least developed) and just 19 per cent for the very poorest.

This largely reflects below-average cuts in tariffs on textiles and clothing and on fish and fish products. Textiles and clothing is the most important single export category for developing countries accounting for 22 per cent of exports.

However, Gatt points out that textile exporters will benefit from the proposed phase-out of the restrictive Multi-Fibre Arrangement governing their exports to the west. Importers are offering to cut high textiles tariffs, now averaging 15 per cent, by 20 per cent.

Tariffs on tropical products, an important earner for many poor countries, are being reduced by 42 per cent.

Britain said yesterday it would contribute Pounds 50m to the next phase of the Enhanced Structural Adjustment Facility (ESAF) through which the International Monetary Fund provides concessionary lending to the poorest developing countries.

The money, which will come from the Overseas Development Administration budget, will go towards a subsidy account which enables the countries that borrow from the facility to pay interest of only 0.5 per cent to the IMF.

The British contribution is expected to give a boost to negotiations in Washington on a successor facility to replace the original ESAF. The Pounds 50m will provide an estimated 3 to 4 per cent of the cash needed for interest subsidies in the new account. Taking the old and the new facilities together, Britain will provide about one ninth of the funds to subsidise interest payments.

In September, Mr Kenneth Clarke, the UK chancellor, cast doubt on Britain's ability to provide funds for the new ESAF because of tight budget constraints. However, the ODA was able to provide the cash by using aid funds earmarked for spending through the EC in 1991-92 but unused.

Chancellor Helmut Kohl last night rejected rumours of the imminent collapse of his coalition in Bonn, denied that he wanted to become the next German president, and insisted he would fight next year's general elections.

Galvanised by signs of revolt from within his own Christian Democratic Union (CDU), and reports of rebellion from his coalition partners, the Free Democratic Party (FDP), Mr Kohl turned on his critics in a hastily arranged television interview.

'This coalition will survive,' he declared. 'It will do its job, and produce an impressive record.'

He drily dismissed his long-standing rival in the CDU, Mr Kurt Biedenkopf, the premier of the eastern state of Saxony, who had forecast a victory for the opposition Social Democrats (SPD) in the general election.

'Even Professor Biedenkopf cannot predict the outcome,' he said, although 'he expresses himself very cleverly.' As for Mr Jurgen Mollemann, the former economics minister, and alleged architect of an FDP revolt, he was simply 'peeved' because he was no longer a member of the government, Mr Kohl said.

His interview - a clear indication of how seriously Mr Kohl is taking the rumours of rebellion - came as the latest unemployment figures showed a new record jobless total in west Germany in November of more than 2.4m, an increase of almost 28 per cent over the past year.

At the same time, industrial order figures showed continuing stagnation in the economy, in spite of a more optimistic assessment of growth next year by the Economics Ministry.

Mr Kohl admitted in his interview with SAT-1, the private television channel, that the coalition was going through a turbulent patch, and that the embarrassing withdrawal of Mr Steffen Heitmann, his hand-picked candidate to be the next German president, had damaged him politically.

He denied rumours, however, that he was considering standing for the presidency, saying he did not need any 'follow-on job', and had no intention of quitting as chancellor.

He rejected calls for a round table of government, opposition, employers and trade unions to resolve the economic crisis, just repeated by Mr Helmut Schmidt, his predecessor as chancellor, as well as Mr Rudolf Scharping, leader of the SPD.

There are no signs, however, that the economic and political crisis which has severely dented the government's popularity is set to abate.

On the economic front, the latest unemployment figures show a jobless rate of 7.8 per cent in west Germany, 1.6 percentage points higher than in November 1992, and virtual stagnation in east Germany, with an unemployment rate of 15.1 per cent.

Orders in west German manufacturing industry, which showed a recovery in September, were down again by 0.5 per cent in October, according to the Economics Ministry, in spite of a 4.5 per cent increase in orders from abroad.

The ministry remains rather more optimistic on the prospects for 1994 than the government's independent economic advisers, the so-called five wise men, who expect zero growth.

Mr Johann Eekhoff, the state secretary for economics, told the finance planning committee on Thursday that he expected an average growth rate of 0.5 to 1.0 per cent next year.

Canada's newly-elected Liberal government has cancelled a CDollars 700m contract to privatise Toronto's international airport, the country's busiest, writes Bernard Simon in Toronto.

The deal, which involved a long-term lease over two of the airport's three terminals, was signed with a property development and construction consortium in the last days of the previous Progressive Conservative government.

But the contract has been strongly criticised on both commercial and political grounds.

The French franc strengthened yesterday following the announcement that the Bank of France will cut its leading interest rates by a quarter of a percentage point on Monday.

The announcement, which will reduce the Bank of France's intervention rate to 6.2 per cent and its 5-to-10 day rate to 7.25 per cent, followed the news on Thursday of a similar cut in the Bundesbank's repurchase rate.

It represents a continuation of the cautious policy pursued by the French authorities since last summer's exchange rate mechanism crisis of protecting the value of the franc by shadowing Germany on interest rates.

The French currency, which has rallied in recent weeks, was bolstered by the news to close at FFr3.437 against the D-Mark compared with FFr3.446 the previous day. This leaves the franc close to its old ERM floor of FFr3.4305.

The Paris stock market was boosted by the news. The CAC 40 Index, which has faltered recently on concern about the slow progress of interest rate reduction and fears of an impasse over the Gatt negotiations, rose by 1.29 per cent during the day to close at 2,188.4.

The Royal Navy's last sea-going wooden vessel, the minesweeper HMS Nurton, sailed into Portsmouth for decommissioning. HMS Nurton was constructed with a teak hull to minimise the danger from magnetic mines.

The Princess of Wales said she was all but quitting public life by drastically scaling down her number of official duties. She made the announcement at a charity lunch (left) in London, asking to be given 'time and space' and laying the blame for the decision partly at the door of the media. She will retain links with units of the armed services and a small number of charities.

Mr Jacques Delors, president of the European Commission, will present plans at next week's EU summit to spend more than Ecu100bn (Pounds 76bn) over the next five years on job-creating rail, road and telecommunications projects.

The plans are expected to include a request to raise 'Brussels bonds' on the international capital markets, with the Commission playing a lead co-ordinating role.

The aim is to raise cheap loans using the EU's favourable credit rating. It may provoke opposition from the UK and Germany, which remain wary of such 'off-budget' financing.

It may also provoke hostility from the European Investment Bank, which has consistently rejected Brussels' arguments that plans for high-speed trains, roads and bridges are being starved of funds.

Mr Delors, though, is said to be determined to press the case for annual investment of Ecu20bn-30bn in trans-European networks. Some of the money has already been earmarked within existing budgets, but officials said a new financial instrument was required to make Europe more competitive, forge common European actions under the Maastricht treaty and tackle mass unemployment.

Those themes will feature in Mr Delors' white paper on employment, growth and competitiveness, which will be submitted to a special meeting of the Commission tomorrow before being presented to European leaders at the two-day Brussels summit starting on Friday.

EU finance ministers have amended or blocked Mr Delors' proposals for creating soft-loan facilities to help small businesses, stimulate private-sector investment in infrastructure and create 15m new jobs by the year 2000.

Now the Commission president plans a direct appeal to European leaders. He will point to Article 129 in the Maastricht treaty, which provides for interest rate subsidies to fund trans-European networks, and urge a joint approach.

At this week's Franco-German summit, President Francois Mitterrand said he had agreed with Chancellor Helmut Kohl on the principle of an EU-wide borrowing plan. Mr Kohl however, said any proposal needed to be carefully studied.

He noted that only half of an Ecu7bn fund created by the European Investment Bank had been allocated this year for trans-European networks. It was important not to create a 'new pot' into which money would be poured just for show.

Commission officials were confident of defeating UK opposition to heavy capital investment. They noted the campaign of Mr Kenneth Clarke, the chancellor of the exchequer, against the 1991 Urban Waste Water directive, which he claimed would cost Pounds 10bn. 'If you had this money available, you could mobilise private finance and help to reduce risk,' one official said.

EIB experts argue that Brussels is underestimating the power of Green pressure groups to delay big road and rail projects.

Packaging directive, Page 2

Call for competitiveness council, Page 24

The British and Irish prime ministers last night revived their stalled Northern Ireland peace initiative with a plan for a joint declaration of principles designed to persuade the IRA to halt its campaign of violence.

Nevertheless, intense talks between Mr John Major and Mr Albert Reynolds at the Dublin summit still left the two governments without a detailed formula to bridge the gap between the aspirations of Irish nationalists and Britain's guarantee to Ulster Unionists of a veto over a united Ireland.

After what both leaders admitted had been a 'frank' exchange over Britain's contacts this year with Sinn Fein, the political wing of the IRA, they acknowledged that it might eventually prove impossible to bridge differences over the future of the province. 'We cannot be certain we will resolve those difficulties,' Mr Major said.

He and Mr Reynolds discussed different texts in detail, and said they remained committed to further talks. That raised hopes that a joint statement could be agreed when they meet in Brussels next week or during a session in London pencilled in before Christmas.

Balancing the two leaders' caution, Mr Reynolds said: 'We got through quite a lot of very serious work, very productive work.'

The Irish prime minister insisted during the talks that agreement on the joint declaration was essential to secure an end to violence by the IRA and set the stage for detailed talks with the political parties in Northern Ireland.

He said afterwards: 'At the end of the day, peace is paramount.'

It is understood that the draft of the declaration includes a renewed offer to Sinn Fein of a place in negotiations in return for an end to terrorism. Mr Major also refused to dismiss the possibility of further bilateral contacts with Republican leaders. But he insisted that the IRA could not dictate the terms of any agreement. 'There is no question of bargaining for an end to violence,' he said.

Earlier Mr Major had faced sharp criticism from Mr Reynolds over the London government's covert contacts with Sinn Fein for much of this year. The Irish leader said their sharp exchanges on the issue had 'cleared the air' and paved the way for further negotiations.

At the heart of the day-long talks was an attempt, so far unsuccessful, to find language that would recognise both the right of the Irish people to determine their own future and the insistence of the Ulster Unionists that nothing should be done to undercut Northern Ireland's place in the United Kingdom.

Mr Reynolds repeated his pledge that the Republic accepted that the consent of the Unionist majority was essential to any change in the constitutional status of the province. He confirmed that he wanted referendums in both the north and south of Ireland to endorse any agreement reached by the two governments.

Mr Major will now seek to reassure Unionist leaders that he has not agreed anything to undermine Ulster's place in the UK. Mr Reynolds appeared determined to maintain the pressure on Mr Major to agree language that would give the IRA an excuse to call a permanent end to violence. The Irish leader believes that such a cessation could transform the atmosphere in both north and south and pave the way for a durable political settlement.

Major shifts position in Ulster talks, Page 6

------------------------------------------------------------- STOCK MARKET INDICES ------------------------------------------------------------- FT-SE 100: 3,234.2 (+10.3) Yield 3.68 FT-SE Eurotrack 100 1,387.12 (+12.94) FT-A All-Share 1,589.72 (+0.2%) FT-A World Index 164.6 (+0.5%) Nikkei 17,459.35 (+0.6) New York: Dow Jones Ind Ave 3,704.07 (+1.96) S&P Composite 464.89 (+1.78) ------------------------------------------------------------- US RATES ------------------------------------------------------------- Federal Funds: 2 15/16% (3 1/16%) 3-mo Treas Bills: Yld 3.168% (same) Long Bond 100 1/32 (99) Yield 6.242% (6.268%) ------------------------------------------------------------- LONDON MONEY -------------------------------------------------------------

3-mo Interbank 5 1/4% (5 5/16%) Liffe long gilt future: Dec 118 1/16 (Dec 117 1/2) ------------------------------------------------------------- NORTH SEA OIL (Argus) ------------------------------------------------------------- Brent 15-day (Jan) dollars 13.87 (14.15) ------------------------------------------------------------- Gold ------------------------------------------------------------- New York Comex (Dec) dollars 376.8 (373.8) London dollars 376.0 (374.95) ------------------------------------------------------------- STERLING ------------------------------------------------------------- New York: Dollar 1.4905 (1.48385) London: Dollar 1.4905 (1.4825) DM 2.565 (2.5525) FFr 8.8175 (8.7975) SFr 2.22 (2.2175)

Y 161.5 (161.25) Pound Index 82.1 (81.7) ------------------------------------------------------------- DOLLAR ------------------------------------------------------------- New York: DM 1.72 (1.7225) FFr 5.912 (5.9365) SFr 1.49 (1.498) Y 108.55 (108.8) London: DM 1.7205 (1.7215) FFr 5.915 (5.935) SFr 1.4895 (1.4965) Y 108.4 (108.75) Dollar Index 67.0 (67.3) Tokyo close Y 108.85 -------------------------------------------------------------

The sharpest fall in the US unemployment rate for a decade yesterday prompted claims that the US recovery, after stuttering for two years, is finally entering a benign phase of robust, non- inflationary growth.

The Labour Department said the jobless rate fell from 6.8 per cent in October to 6.4 per cent last month, the lowest level for three years. The figures - the latest in a string of buoyant economic statistics - surprised Wall Street analysts who expected a decline of only 0.1 or 0.2 percentage points.

Bond and share prices, however, were little changed as the figures confirmed recent signs of accelerating growth.

'We are moving in the right direction,' President Bill Clinton told supporters in Washington. 'We have unemployment down, investment up, no inflation and low interest rates.'

Ms Laura Tyson, White House chief economist, said the pace of growth had picked up and was sustainable. Gross domestic product was likely to grow at an annual rate of more than 3 per cent this quarter. The faster recovery would continue next year, without putting upward pressure on inflation, now just under 3 per cent. Oil prices were down, commodity prices were soft and wage pressure was mild. 'The evidence is compelling that inflation won't increase,' she said.

Yesterday's figures were uniformly encouraging. Non-farm payroll employment was reported up 208,000 last month, against projections of an increase of about 170,000. Manufacturing employment was up 30,000, the second monthly increase after declines earlier this year. Hours worked rose to a record level, suggesting a strong gain in industrial production. But there was little sign of upward pressure on wages.

The Commerce Department said the official index of leading indicators - a guide to future trends - rose 0.5 per cent in October after solid gains in the two preceding months. Factory orders rose 1.2 per cent in October to register their third consecutive monthly gain.

Many Wall Street analysts share the White House's confidence. The consensus is that the economy will grow at an annual rate of 4-5 per cent this quarter from 2.7 per cent in the third quarter. Growth is expected to moderate early next year but then regain momentum. Real gross domestic product is expected to rise by 3 per cent or slightly more over the year.

Views diverge on the Federal Reserve's likely response. If inflation figures remain subdued, many analysts expect the Fed to postpone an increase in short-term rates, now 3 per cent, until well into next year. Others believe the Fed will begin nudging rates higher on the grounds that inflation-adjusted rates are too low.

Currencies, Page 13

Wall Street report, Page 21

The world's 290m disabled people suffer appalling discrimination, abuse and neglect and in developing countries only 3 per cent of those in need receive conventional rehabilitation services, according a United Nations report published today*.

The report, timed to coincide with the first UN International Day of Disabled Persons, says the number of people with severe or moderate disabilities is expected to double to 573m by the year 2025 because of rising population and increasing numbers of old people, from 5.5 per cent of the total population to 6.7 per cent.

Of these, 435m will live in developing countries, compared with 200m today. Every fourth family in a developing country has a disabled family member, the report estimates. In some countries babies born with a disability are put to death. Disabled children often die early from neglect.

Providing professional rehabilitation services for all who need them in developing countries would even now cost Dollars 60bn or Dollars 1,000 per person, the report notes. Providing home helps for the increased number of elderly in rich nations could cost 13 per cent of total national income by 2025.

Dr Einar Helander, the report's author, argues instead for a 'common-sense' community-based approach within a national framework. 'We have to create a caring society,' he says. 'The family and the community are the best resource.'

*Prejudice and dignity: An introduction to community-based rehabilitation, by Einar Helander. Available from UN Development Programme, Interregional Programme for Disabled People, Palais des Nations, 1211 Geneva 10, Dollars 20.

The French government has earmarked a subsidy of FFr20m (Dollars 3.3m) for the troubled five-language Euronews television news channel in its supplementary budget for this year, Reuter reports.

The Bundesbank surprised European financial markets yesterday by announcing a quarter of a percentage point cut in the securities repurchase agreement, the 'repo' rate which determines money market interest rates, without delivering cuts in the 'official' Lombard and discount rates.

Meeting for the penultimate time this year, the bank's policy-making council fixed the repo rate at 6 per cent for the next five weeks, down from 6.25 per cent.

Although markets were initially disappointed at the decision not to trim the internationally sensitive discount rate, the repo rate cut was enough to trigger easing in other European countries.

The Dutch and Belgian central banks announced they would cut rates from today. Dutch official rates will be cut by a quarter of a point and Belgian rates by between a quarter and half a point.

In Germany, economists said the move to maintain the repo rate at 6 per cent over the five weeks to January 5 maintained the momentum of cuts in German interest rates while still signalling caution about the pace of monetary easing.

'It shows very clearly that the will to cut interest rates further is very strong,' said Mr Adolf Rosenstock, chief economist of the German arm of the Industrial Bank of Japan. 'On the other hand it indicates that they have no wish to endanger their credibility as they may have done with a large cut in the discount rate.'

Mr Kermit Schoenholtz, at Salomon Brothers International in London, said the move 'sets the stage for another official rate cut, most likely in early 1994 if not before'.

The move comes against a background of slowing inflation and economic stagnation in Germany, conditions conducive to further rate cuts. The rate of growth in broad money, the M3 indicator watched as an indicator of inflationary developments, is slowing but is still outside the target range.

The Bundesbank's policy-making council will set its target for M3 growth at its meeting on December 16. In November, M3 grew at an annualised, seasonally adjusted rate of 6.8 per cent, above the central bank's 6.5 per cent ceiling.

See currencies and money page

Uproar among the four countries negotiating entry to the European Union over the Commission's plans to deal with their higher farm subsidies is obscuring the benefits of the proposed scheme for both sides - as Brussels officials anticipated and some negotiators for the four applicants are coming to realise.

The Commission last week said it wanted to align farm prices in Austria, Sweden, Finland and Norway with EU levels immediately they enter the Union. Agriculture subsidies among the four applicants range from 25 per cent higher than EU prices in Austria, to nearly 100 per cent more in Norway. The difference would be paid through direct compensation to farmers, with the bill picked up by the applicant countries, the Commission says.

The sensitive farm issue could make or break the accession negotiations, especially for Finland, Austria and Norway. All the applicants insist on special treatment for their Arctic and Alpine farmers for a mixture of social, national security, cultural and environmental reasons as much as for economic considerations. The Nordic countries, in particular, are determined to keep as much of their population as possible in their empty and inhospitable northern territories, through lavish farm and regional subsidies.

With the partial exception of Sweden, which has already brought its farm subsidy regime closer to EU levels, the applicants reject EU suggestions that alignment should be immediate and that they alone should pay their farmers the difference without help from the Union budget.

The row has already swung Finnish public opinion marginally against EU entry (41 per cent opposed, 36 per cent for and 23 per cent undecided) for the first time since the Danes rejected the Maastricht treaty at their first referendum on it in June 1992. This turnaround is particularly alarming because Finland is the only one of the four countries which EU negotiators were practically certain would get entry past its voters.

Yet negotiators on both sides in Brussels seem hardly fussed by the controversy, and there are good reasons why.

Neither the Commission nor the Council of Ministers of the Twelve could have been expected to go into a negotiation essentially about money by proffering a cheque up-front. Senior EU officials know full well that the Brussels budget will have to pick up a portion of the farm compensation costs - estimated at Ecu2.2bn (Pounds 1.7bn) for the four countries as a whole. The only question is how much, and that will be for negotiation, in relation to how much the four rich applicants put into the EU budget.

As things stand, taxpayers and consumers in the applicant countries foot the entire bill for their expensive food. Under the Commission proposal, consumers stand to gain from lower prices, and treasuries will gain from an EU subvention, however much it is.

The four applicants and the Twelve had nothing to gain from the alternative scheme, used in all previous European enlargements. This was to iron out all price differences through levies raised at the border until alignment was completed. But that route, defended by DG6, the Brussels agriculture directorate, requires the retention of borders for the new entrants, and would compromise the EU's single market.

Moreover, if the Uruguay Round is concluded this month, the four applicants will have to cut their level of farm subsidy by about a third over the next six years. The Commission's proposal for direct compensation payments to farmers - exempted from the Gatt cuts under last year's EU-US Blair House accord - would by contrast protect Nordic and Alpine farmers' incomes from the cuts, Brussels officials say.

These arguments, in the Brussels view, should be saleable to the applicant countries' electorates. In presentational terms, a persistent worry throughout the accession negotiations has been that applicant governments would be seen as selling out their national interests if they fell in too readily with EU requirements.

The way the farm subsidy controversy has now been set up should suit their purposes: not only will they almost certainly win tangible concessions, but they will be seen to have given battle and to have won.

A fire broke out at Bulgaria's Kozloduy nuclear power plant but was put out and did not cause a radiation leak, the interior ministry said.

World oil prices fell on signs of a milder than expected northern winter and revived fears of a glut if the United Nations eases its Gulf war embargo on the petroleum exports of Iraq. London January futures for the world benchmark Brent Blend of crude oil fell as low as Dollars 14.06 per barrel - close to last week's five-year low of Dollars 13.97 - before trying to rally. Commodities, Page 24

FOR 1993

NEW HIGHS (245)

BRITISH FUNDS (31) OTHER FIXED INTEREST (12) AMERICANS (2) Ingersoll-Rand, Varity, BANKS (8) Abbey Natl., Bk of Scot, Barclays, Lloyds, NatWest., Royal Bk of Scot, Stand Chartd, TSB, BREWERS (2) Matthew Clark, Scot & Newc, BLDG MATLS (13) BPB, Blue Circle, Do. Pf., Br. Dredging, CRH, Heywood Wllms, Do. Pf., Marshalls, Meyer Intl., Redland, Rugby, Travis Perkins, Wolseley, BUSINESS SERVS (3) Christies, Chubb Sec, Serco, CHEMS (3) Bayer, ICI, Wolstenholme Rink, CONGLOMERATES (2) Hanson, Do. 9 1/2 pc Bd., CONTG & CONSTRCN (4) Banner Homes, Brandon Hire, Bryant, Westbury, ELECTRICALS (3) BICC 10 3/4 pc Bds., Dewhurst A, Oxford Insts., ELECTRICITY (3) Nthn Ireland, Norweb, Sth. Wales, ELECTRONICS (2) Electrocomps, Farnell, ENG GEN (4) Carclo, Dobson Park, Sterling, TI, FOOD MANUF (4) Assoc. Br. Foods, Devro, Grand Central, Linton Park, HEALTH & HSEHOLD (2) Amersham, Quality Care Hms, HOTELS & LEIS (5) Airtours, Do. Pf., Barr & Wallace Arnold A, Castle Comms., Compass, INV TRUSTS (81) MEDIA (7) Capital Radio, Carlton Comms., Daily Mail A, EMAP, Intl Bus Comms, Metro Radio, Radio Clyde, MERCHANT BANKS (1) Close Bros, MTL & MTL FORMING (1) Clayhithe 9 1/2 pc Ln 2000-1, MISC (6) McLeod Russel, Minmet, Osborne & Little, Portmeirion Potts., Tams, Wood (A), MOTORS (4) ABI Leis, Dixons Mtrs, Henlys, Lex Serv, OIL & GAS (1) Command, OTHER FINCL (1) Perpetual, OTHER INDLS (2) Norcros, OMI, PACKG, PAPER & PRINTG (5) Arjo Wiggins, De La Rue, Ferry Pickering, Filofax, Kymmene, PROP (8) Derwent Valley, Ests. & Agency, Etonbrook, Gt. Port. Ests. 9 1/2 pc Ln. 2002, Hemingway 7 1/2 pc Ln. 2027, Lon Merchant 7 3/4 pc Ln. 2000-05, Savills, Warner, STORES (6) Argos, Courts, Kingfisher, Kleeneze, Marks & Spencer, Sears, TEXTS (4) Alexandra Workwear, Dewhirst, Forminster, Yorklyde, TRANSPORT (5) Assoc. Br. Ports, BAA, Br. Airways, Do. 9 3/4 pc Cv., IoM Steam, WATER (4) Northumbrian, Severn Trent, Southern, Yorkshire, SOUTH AFRICANS (1) OK Bazaars, MINES (5) Bakyrchik, CRA, Nth. Broken Hill Peko, Ovoca, RTZ.

NEW LOWS (21)

BRITISH FUNDS (2) Exch. 13 1/2 pc 1994, Treas. 14 1/2 pc 1994, AMERICANS (1) Decora, BREWERS (1) Whitbread, ELECTRICALS (2) Clark (T), Maddox, ELECTRONICS (2) Micro Focus, Racal, ENG GEN (1) Wellman, FOOD MANUF (1) Nthn Foods, FOOD RETAILING (2) Geest, Kwik Save, HEALTH & HSEHOLD (1) Cantab, HOTELS & LEIS (1) Ladbroke, MTL & MTL FORMING (1) Apollo, MISC (2) Beckenham, Shanks & McEwan, OIL & GAS (1) Evergreen, PROP (2) Raglan, YRM, TEXTS (1) Dawson.

Data based on those Companies quoted on the London Share Service.

Conglomerate Hanson recorded its biggest turnover since the UK general election after announcing disappointing full-year results which prompted a rash of forecast cuts. The shares retreated from their all-time high to finish 16 lower at 268 1/2 p on 52m turnover after the conglomerate revealed a fall in earnings per share and profits down to Pounds 1.016bn, from Pounds 1.286bn previously. Analysts' forecasts ranged between Pounds 1.05bn and Pounds 1.15bn.

Hanson's decision not to raise its dividend for the first quarter of the current financial year came as a particular shock to the market. There was also surprise over the loss prompted by currency shifts, which was about Pounds 100m greater than expected, and the damage caused by the Peabody coal strike, around Pounds 15m worse than forecast.

Analysts pointed out that the group failed to benefit from Wednesday's surge in share prices so the stock was down about 8 per cent against the market over two days. Forecasts were cut by around Pounds 100m to Pounds 1.1bn for the current year, although conglomerates specialists said that with a yield of 5.3 per cent the stock offered some value.

Racal Electronics delivered the second big blow to the electronics sector this week, shocking the market with a Pounds 400,000 loss at the half way stage, against a comparable Pounds 23.2m profit and market expectations of profits which had ranged from around Pounds 16m to Pounds 22m. The interim dividend was held at 1.5p; analysts had expected an increase to around 1.7p.

The shares plunged on the news to a year's low of 158p before stabilising and closing a net 29 down at 160p. Turnover of 20m was the stock's highest single day's activity since August 1992.

Dealers said the market had begun to factor in full-year underlying profits forecasts of around Pounds 45m, but warned that Racal's once large fan club was waning by the minute.

Results from Grand Metropolitan, the food and drinks giant, came safely within market expectations and helped the shares advance 13 to 430p in busy turnover of 10m.

Analysts said that in addition to a positive results meeting, the group's dramatic turnround of its cash position had done much to improve investor confidence.

Boddington added 10 at 275p on vague talk that Bass might be in a predatory mood. The latter stayed at 537p.

Ladbroke remained friendless, declining 7 to 144p in a second consecutive day's huge turnover of 20m. Ladbroke attempted to mend fences yesterday over the share sale by one director and worries over the dividend.

However, leisure analysts said investors remain nervous over what is perceived as the group's 'bunker mentality'.

Granada improved 14 to 489p on speculation that LWT, a rumoured bid target of the north-west broadcaster, may be lining up a bid for Yorkshire-Tyne Tees TV (YTT). Such a move would mean Granada would not need to tap shareholders for its predicted move on LWT, which slipped 12 to 581p. YTT moved up 4 to 183p.

Disappointment with the net asset value at MEPC shook the shares, which tumbled 27 to 523p, the biggest faller in the FT-SE 100 Index, in busy volume of 4.8m.

MEPC came in with an nav of 416p, compared with one bullish broker's 485p and the market range clustered around 450p. However, Mr Graham Stanley at NatWest Securities blamed the low nav on the timing of the group's valuation, which was done too early to benefit fully from the recovery in the sector and the improvement in property yields.

Food manufacturers wilted in the wake of the poor results from Argyll Group on Wednesday, with which the supermarket operator hinted at wringing keener prices out of its suppliers. Booker retreated 8 to 396p and United Biscuits 7 1/2 to 332 1/2 p, both seemingly subject to Hoare Govett downgrades. Stock overhangs were said to have added further pressure to Northern Foods, off 11 at 212p, and Tate & Lyle, 5 adrift at 401p.

Argyll's decision to depreciate its store values hit other supermarket groups. Asda lost 2 at 50p, Tesco 5 at 193 1/2 p and J. Sainsbury the same at 404p.

A top slice recommendation, believed to be by Smith New Court, was said to be behind a 17 fall in P&O to 610p.

Heavy buying pushed Abbey National up 13 to 437p on 9.5m traded, while TSB, the next of the big banks to report, closed 7 higher at 228p with turnover reaching a very heavy 17m. Standard Chartered jumped 33 to 1110p, although there were hints that a big sell note on the stock was imminent.

Fine china group Royal Doulton began trading in the market following the demerger from Pearson, and some 23m shares changed hands. Dealers said the shares were initially offered at around 212p, commenced trading at 193p and closed at 207p.

Pearson was marked down by 21p as, under the terms of the demerger, each shareholder receives one Royal Doulton share for every 10 Pearson shares. Ex Doulton the shares closed 3 higher at 597p.

Heywood Williams climbed 40 to a peak 384p on the back of a US acquisition, financed by a Pounds 55m rights issue.

Other statistics, Page 25

News that Mr Peter Wood, a director of Royal Bank of Scotland and one of the founders of the bank's hugely successful Direct Line telephone insurance business, had bought more than 2m shares in the bank set the seal on a scintillating performance by RBOS shares.

They were easily the best performer in the FT-SE 100, racing up to a peak 435p before reacting to close 33 higher at 428p, a rise of almost 8.5 per cent. Turnover in the stock reached 16m, by far the highest in a single trading session since last August when Scottish Equitable sold a block of 20m shares at 286p.

Earlier the market had lifted the shares substantially after RBOS announced preliminary profits of Pounds 265m and a 25 per cent increase in the dividend, both figures being well in excess of the most optimistic analysts' forecasts, which ranged up to around Pounds 230m. Earnings predictions for the current year were quickly hoisted to above the Pounds 450m mark, with dividend estimates being lifted to around 13p.

Bank specialists focused on RBOS's rapidly improving bad debt situation, and its successful cost control moves. They also pointed to the huge benefits to the banks of a low interest rate climate in the UK.

Futures continued to show very high turnover and a healthy premium to the cash market in spite of yesterday's retrenchment in financial markets, writes Peter John.

The December Footsie futures contract opened at 3,262, some 3 points above the previous close, and leapt to a high of 3,277.

Dealers said much of the rise sprang from a Pounds 300m investment last week in equities following the launch of new Lloyd investment trusts. They said one securities house had bought futures to hedge the deal and that had combined with the general rush to get into the market.

Yesterday, the buying pressure eased and, also, institutions reversed put option deals made earlier in the month as protection against the possibility of a hit from changes in advance corporation tax. The December contract closed near the day's low at 3,243.

However, turnover of 19,822 contracts was exceptionally high once again and December traded well above estimated fair value. The premium is estimated to be at par with the cash market or even a small discount during the current account and it was 20 points over by the close.

Equally, volume of more than 66,000 lots in traded options was down on Wednesday's level but still well above average. Hanson, which announced disappointing full-year results yesterday topped the list of stock options with 4,332 lots dealt.

Banks were also in demand as the underlying stocks moved higher. The largest single deal was in Barclays, where 2,000 March 600 put options were sold at the equivalent of 21p a share, a bullish trade.

The six-day bull run on the London stock market met its expected check yesterday, but not until it had scaled new trading peaks early in the session as it continued its positive response to this week's Budget speech from the UK chancellor of the exchequer. With government bonds in retreat and pressures from stock index futures reduced somewhat, profit-taking in the stock market was no great surprise. But trading volume remained high and the tone positive.

The FT-SE 100 Index was 25.1 points up at a new intraday peak of 3,258.3 within the first half-hour of official trading. Although the December futures contract maintained a good premium over the cash market, it exercised less pressure because a severe squeeze on futures positions came to an end.

The Bundesbank's decision to leave its chief lending rates unchanged, although it cut its repo rate, was no surprise, but London traders took the welcome opportunity to mark share prices down in an attempt to attract stock and replenish trading books which have been depleted over the past week.

As the City's optimistic reception for the Budget was consolidated in the stock market, attention turned back to the company news front. Trading results from Hanson, Racal, and MEPC brought a heavy reaction from the respective share prices. However, the banking sector blossomed after Royal Bank of Scotland increased its dividend payment.

The battle weariness of the London market prevented it from sharing in the continued advance across other European bourses, and a weak opening on Wall Street gave no help. After drifting steadily down through the second half of the session, the FT-SE 100 finished a net 9.3 off at the day's low point of 3,223.9.

The weight of profit-taking was indicated by another heavy volume of shares through the Seaq electronic trading system; the total of 1.0484bn shares remained among this year's highest, closely trailing Wednesday's 1.2533bn.

On Wednesday, when the market was making its considered response to the chancellor's measures, retail, or customer, business in equities jumped to Pounds 2.8bn, a daily total not seen since sterling's unexpected departure from the European exchange rate mechanism in September 1992; the next comparisons would be with the heady days of the market crash of October 1987.

Demand for the second line issues, which are slower to feel the effects of a change of direction in the market, remained good and the FT-SE Mid 250 Index, although off the top at the close, was 0.3 up at a new peak of 3,565.9.

Confidence that UK base rates will be reduced again early in the new year remained unshaken, although it was left to the bank stocks to shine among the interest rate-related issues. The international blue chips had a relatively calm session, with investors content to take profits here and there. There was little activity in oil shares as the market continued to show caution towards weak crude oil prices. However, some US interest in oil issues was reported late in the London session.

Equity strategists remained bullish in their assessment of prospects for the post-Budget stock market. The Footsie has gained more than 6 per cent since investors turned bullish just a few days before the Budget speech, and investors now appear well satisfied with the measures announced by the chancellor.

A market registering a 50 per cent gain this year was always likely to hit a rocky patch, so there should be little surprise at what has happened in Sweden during the last month. Shares have fallen by 6 per cent with daily trading showing considerable volatility, although the Affarsvarlden index picked up 3.5 yesterday to 1,345.5.

For many observers this is an overdue consolidation, after a year of steadily rising share prices. Others believe it could be a sign of a more fundamental weakening which could last well into next year.

The turbulence indicates that Stockholm will have to get used to greater volatility, now that the proportion of shares held by foreign owners has risen to around 25 per cent, from just 10 per cent at the end of 1991.

As many Swedish institutions are long term holders, selling and buying of Swedish shares by foreigners has become a key to whether prices rise or fall.

The weight of foreign buying and the fall in interest rates are the main factors to have driven equity prices higher this year. In the first 10 months foreigners were net buyers of SKr28.2bn (Dollars 3.3bn) worth of Swedish shares and they accounted for 28 per cent of the trading volume in Stockholm. In the same 1992 period, foreign net buying amounted to just SKr9.4bn and the foreign element of turnover was 18.5 per cent.

Clear evidence that foreigners are now steering the price of Swedish shares to a much greater extent came several weeks ago, after a collapse in the price of Ericsson, the telecommunications group.

The fall was triggered by heavy selling in New York, when it emerged that full-year profits would not reach the dizzy heights expected by some analysts.

Since then, Ericsson, which accounts for some 10 per cent of the stock exchange value, has seen its shares fall by 15 per cent to SKr355 at yesterday's close.

According to Mr Leif Vindevag, head of research at the Stockholm exchange: 'Ericsson was the trigger for a broader reappraisal of the Swedish market, where many felt that prices had risen too much.' However, the market's turbulent performance also reflects broader international concerns, particularly the outlook for US interest rates, as well as specifically domestic issues such as Volvo's controversial plans to merge its car and truck operations with Renault.

Volvo's shares rose by a cumulative 17.1 per cent over the last three trading days as opposition to the merger grew and institutional investors began to throw their weight against it. The shares, traded as ADRs in the US, surged by 11.9 per cent in early trading last night in immediate reaction to news that Mr Pehr Gyllenhammar and four other board members had quit, and that the merger was off, before slipping back to finish the session a net Dollars 2 7/8 higher at Dollars 55 3/8 .

But in the broad shake-out afflicting Swedish stocks, the engineering sector has fallen by 11 per cent, forestry by 3 per cent, pharmaceuticals by 7 per cent and the banks and insurance sector by 8 per cent.

A number of factors suggest the downturn may be short-lived. They include the likelihood that short-term interest rates will continue to fall, and the prospects for much improved profitability among the big exporters during 1994. Domestic buyers at least should be in plentiful supply as a result of changes to individual pensions legislation and reforms which will halve the capital gains tax on equities and scrap taxes on dividends from Swedish companies for domestic residents from January.

Analysts, however, are divided over where the market is heading. Mr Joe Rooney, European equity strategist at Lehman Brothers in London, expects the market to pick up momentum again, against a background of a continuing fall in short-term interest rates and a likely strengthening of the krona.

But Mr Richard Davidson, European equity strategist at Morgan Stanley in London, is bearish. He cites political worries linked to next year's election, which may well see the return of a Social Democrat government, and concern over the size of the country's borrowing requirement, which is close to 16 per cent of GNP. Mr Davidson also believes the market is overvalued on fundamentals.

He predicts a further 10 per cent drop in the market over the next three months and a flat performance over the coming year.

Wall Street

US stocks edged higher yesterday after meandering in a narrow range ahead of today's eagerly awaited report on November employment, writes Frank McGurty in New York.

The Dow Jones Industrial Average closed 5.03 firmer at 3,702.11 and the Standard & Poor's 500 put on 1.22 at 463.11. The Nasdaq composite again outperformed other indices, adding 2.92 at 766.73. NYSE volume came to 256.4m shares.

A batch of second-tier economic figures, which were generally in line with forecasts, set a positive tone for early trading. The Commerce Department said that personal income had risen 0.6 per cent from September to October on a seasonally adjusted basis, while personal consumption climbed 0.8 per cent. Initial claims for state unemployment benefit last week showed a modest decline.

Conversely, sales of new homes in October dipped 6.5 per cent from the previous month. However, the fresh economic data left little impression. Instead, stocks reacted to a mid-morning downturn in the US Treasury market, where apprehension about today's report on November employment was in evidence. A surprisingly strong showing is likely to send bond prices sharply lower.

In late trading the benchmark 30-year government issue recovered somewhat and equities inched back into positive territory in the final hour of a subdued session.

With the release of November sales figures by the big store groups, retailing stocks were among the most actively traded. Analysts found little encouragement for the Christmas season in their overall performance. Among the big losers was The Limited, which posted a 7 per cent decline in same-store sales. The stock plunged Dollars 3 3/8 to Dollars 18 as its rating was lowered by at least two securities houses. Sears Roebuck shed Dollars 7/8 to Dollars 54 1/8 in spite of reporting good sales figures. Dillard was down Dollars 1 1/8 at Dollars 39 1/2 .

JC Penney was unchanged at Dollars 54 1/4 despite a 13 per cent gain in same-store sales. Talbots, a newly listed stock, stayed at Dollars 26 5/8 even though its comparable-store sales were up 16.1 per cent.

Semiconductor issues were hit by concern over a slowdown in orders. Texas Instruments lost Dollars 1 to Dollars 64, and National Semiconductor fell Dollars 1 1/4 to Dollars 15 3/8 in heavy trading.

Canada

Toronto also managed just a minor gain after Wednesday's sharp rise. The TSE 300 index was finally 5.9 ahead at 4,226.3, with advances narrowly leading declines by 394 to 366. Volume amounted to 61.1m shares valued at CDollars 670.9m.

Industrial products recorded the day's biggest change, adding 1.31 per cent.

Mitel, CDollars 3/4 higher at CDollars 8 1/2 , said it has received a multi-million dollar order for its call controller product from Diana Corp.

Shares surged in the morning on reports of an additional stimulus package, but later lost half their gain on profit-taking and position squaring, and the Nikkei average closed 1.9 per cent up, writes Emiko Terazono in Tokyo.

The 225-issue average added 333.44 at 17,458.75. The Topix index put on 21.25, or 1.5 per cent, at 1,465.12, but in London the ISE/Nikkei 50 index eased 0.25 to 1,180.12.

The Nikkei declined to a low for the day of 17,073.81 in early trading, but later jumped to a high of 17,887.29 on reports that the government would announce an emergency stimulus package containing an income tax cut and relaxation of land transaction taxes. Reports that Mr Masayoshi Takemura, the chief cabinet secretary, had hinted on a cut in the official discount rate also encouraged investors.

Investment trust funds and companies were seen actively buying shares. However, the rally lost steam as Mr Takemura later denied that he had mentioned a rate cut, and a fall in the futures market in the afternoon prompted arbitrage selling and profit-taking.

Volume expanded to 470m shares from 368m, while rises led falls by 952 to 120, with 62 issues unchanged.

Mr Jiro Saito, vice-minister of finance, denied that the government had played a role in the rebound of stock prices. Local newspapers have been suggesting that the government was trying to prop up the market by ordering life assurers to buy shares.

An official meeting between Mr Setsuya Tabuchi, former chairman of Nomura Securities, and Mr Morihiro Hosokawa, the prime minister, on Tuesday, when the Nikkei plunged to a year's low, is also believed to have been staged by government officials in order to revive confidence.

In spite of the overall rise, some bank shares were weak. The Nikkei banking index rose only 1.3 per cent, with Industrial bank of Japan down Y40 to Y2,820 and Dai-Ichi Kangyo Bank off Y30 at Y1,940. Gainers included Fuji Bank, up Y50 at Y1,950, and Sakura Bank, Y20 ahead at Y1,480.

East Japan Railway firmed Y8,000 to Y435,000 and Nippon Telegraph and Telephone gained Y12,000 at Y741,000.

In Osaka, the OSE average advanced 479.59 to 19,456.59 in volume of 32.7m shares. Roundup

The Pacific Basin region was generally firmer yesterday.

HONG KONG finished slightly lower as sharp early gains were erased after Governor Chris Patten announced the introduction of a partial bill on his controversial electoral reform package.

The Hang Seng index closed 15.83 easier at 9,238.20, having been 113 points ahead in the morning and 88 points up at midsession. Turnover dipped to HKDollars 5.14bn from Wednesday's HKDollars 5.32bn.

December futures slid to a low for the day of 9,150 after the Patten speech, but recovered slightly to finish a net 170 down at 9,170.

TAIWAN was lifted by a wave of strong buying just before the close, and the market ended 2.5 per cent higher after hectic trade, extending Wednesday's gain of 2.6 per cent.

The market index moved ahead 110.90 to end at its intraday peak of 4,579.24, the highest finish since May 13. Turnover increased to TDollars 60.53bn, the heaviest since April.

Pulp and paper stocks led the advance on expectations that the industry, which slumped this year, will recover on firmer product prices next year. Chung Hwa Pulp closed the day's limit up at TDollars 21.40.

KUALA LUMPUR saw the day's highs eroded by late profit-taking, although the composite index still ended 2.09 ahead at a new closing peak of 1,017.51. Volume rose to 693.3m shares from the previous day's 601.5m.

SINGAPORE was spurred to a record close by foreign institutional buying, the Straits Times Industrial index adding 25.24 at 2,131.25.

Early Japanese institutional buying set the mood for the market's advance in the morning, but later trading was subdued by profit-taking.

AUSTRALIA rose strongly, encouraged by gains elsewhere in the region. The All Ordinaries index climbed 41.9, or 2.1 per cent, to 2,047.3. Turnover amounted to ADollars 557.4m.

More heavy trading in the shares of Goodman Fielder, the food group, led to speculation that someone may be amassing a stake, writes Nikki Tait in Sydney. The stock closed 6 cents higher at ADollars 1.68 in volume of 11m shares and has now gained almost 10 per cent during the past fortnight.

SEOUL closed near to the 800 level on across the board selling. The composite index shed 7.58 to 801.17. Turnover totalled Won682.9bn.

Posco, the steel group, saw the day's heaviest volume with 2.2m shares changing hands, and rose to a day's high of Won37,800 before closing unchanged at Won36,500.

MANILA advanced strongly, with the composite index rising 72.13 to 2,395.89 in turnover of 1.1bn pesos.

Philippine Long Distance Telephone appreciated 20 pesos to 1,755 pesos and PT & T 1 peso to 9.40 pesos.

NEW ZEALAND was again boosted by demand for forestry issues, which left the NZSE-40 capital index 38.78, or 1.9 per cent, higher at 2.079.30 in strong turnover.

Germany and Switzerland were in record territory, writes Our Markets Staff.

FRANKFURT slipped back after the Bundesbank announced that it was not making a cut in the discount rate but, supported by other factors including the stronger dollar, ended the day at a record high.

The DAX index closed 20.66 higher at 2,110.53 after a high of 2,115.64 and a low of 2,104.05. Turnover was strong at DM11.5bn.

Mr Patrick Shields at NatWest Securities commented that the Bundesbank had signalled, by setting the repo rate at 6 per cent until January, that there would be no further move on interest rates until the new year.

In the market he noted activity in RWE, the shares adding DM11 to DM488, with some institutions taking positions ahead of the group's dividend payment next week.

The strength of the dollar helped Daimler make DM9.50 to DM743.50, together with rumours that Airbus might be in the running to win a US contract.

The banking sector continued to make ground with Dresdner showing a 16 per cent increase in 10 month profits, the shares gaining DM1 to DM445; but Hypobank, which also announced good figures, slipped 30 pfg to DM480.50. Commerzbank added DM2.50 to DM370.50.

ZURICH remained firm, although off its best levels, and the SMI index added 12.9 to a second consecutive record high of 2,787.2, with Wednesday's better than expected economic data continuing to provide support.

CS Holding, the most expansive of the Swiss banks, shed SFr65 to SFr3,600 as it declined comment on market rumours that it planned to take a stake in Commerzbank. Analysts were divided over the logic of such a move: they were cautious about dismissing such a market rumour, but one commented that it would be a move away from the Swiss bank's core business.

Elektrowatt, part of the CS Holding group, rose SFr25 to SFr3,775, befiting from analysts' recommendations.

Drug issues put in a strong performance. Ciba-Geigy advanced SFr10 to SFr837 and Sandoz put on SFr40 to SFr3,910. Roche certificates firmed SFr70 to SFr6,140 after the recent consolidation.

Jelmoli, the retail group, added SFr20 to SFr910 for a two day rise of 7.9 per cent. The shares have found favour after Wednesday's GDP figures indicated a pick-up in domestic consumption.

PARIS ended modestly firmer, with the CAC-40 index picking up 6.47 to 2,160.45, after a day's high of 2,170.49 and a low of 2,146.92. Turnover was estimated at some FFr4bn.

Carrefour shot ahead FFr32 to FFr3,882 on news that it had sold its 30 per cent stake in But, a furniture retailer, under terms worth about FFr536m.

Canal Plus took an opposite direction, shedding FFr46 to FFr1,250, on news that a decision on its licence renewal had been put back: a decision was expected to have been made early next week.

Further disappointing car sales news knocked FFr6 off Peugeot's shares, closing at FFr715.

AMSTERDAM added 0.1 in the CBS Tendency index to close at 138.3. Better than expected results from ING helped the insurer gain 50 cents to Fl 85.90, while elsewhere in the sector Aegon lost Fl 1.60 to Fl 101.20. ABN Amro added 50 cents to Fl 71.00.

MILAN was higher, the Comit index adding 4.28 to 548.94, with volume inflated by Fiat switching its savings and privileged shares to a wholly owned subsidiary. The savings stock rose L22 to L2,020 in volume of 43m shares while the ordinary shares were L37 higher at L3,953.

Credito Italiano advanced L18 to L2,319: the privatisation price is scheduled to be announced tomorrow ahead of the start of the sale next week.

MADRID saw further solid gains before some late sell orders took prices off their best levels. The general index aded 2.27 to 300.81 in heavy turnover of Pta32.5bn.

Banks continued their recovery with BBV Pta100 higher at Pta3,200 and Santander Pta190 ahead at Pta6,580. Among electricals, Iberdrola put on Pta14 to Pta950 in volume of 3.7m.

Written and edited by John Pitt and Michael Morgan.

---------------------------------------------------------------------- FT-SE Actuaries Share Indices ---------------------------------------------------------------------- Dec. 2 THE EUROPEAN SERIES Hourly changes Open 10.30 11.00 12.00 ---------------------------------------------------------------------- FT-SE Eurotrack 100 1375.05 1376.27 1375.79 1376.91 FT-SE Eurotrack 200 1456.77 1456.16 1457.60 1459.63 ---------------------------------------------------------------------- Hourly changes 13.00 14.00 15.00 Close ---------------------------------------------------------------------- FT-SE Eurotrack 100 1375.13 1372.30 1373.40 1374.18 FT-SE Eurotrack 200 1456.60 1454.63 1455.35 1456.67 ---------------------------------------------------------------------- Dec. 1 Nov. 30 Nov. 29 Nov. 26 Nov. 25 ---------------------------------------------------------------------- FT-SE Eurotrack 100 1365.54 1343.12 1344.70 1346.66 1343.06 FT-SE Eurotrack 200 1452.41 1420.82 1417.23 1412.67 1410.14 ---------------------------------------------------------------------- Base value 1000 (26/10/90); High/day: 100 - 1377.53; 200 - 1462.96 Low/day: 100 - 1371.70 200 - 1453.64. ----------------------------------------------------------------------

Gold stocks continued their advance, with the index closing 79 points stronger at 1,937. The industrial index added 59 at 4,926 and the overall index 64 at 4,273. South African Breweries was actively traded, rising R3 to R79.

The Bundesbank set off a round of minor interest rate cuts around Europe yesterday by setting its repurchase rate at 6 per cent for the next five weeks, writes Rachel Johnson.

It cut the repo rate by 25 basis points after its regular fortnightly council meeting but left its two main rates, the Lombard and the discount, unchanged at 6.75 per cent and 5.75 per cent respectively.

Central bank officials indicated this could be the first time that the Bundesbank has announced ahead of time it would offer fixed interest rate repos to the market for such a long period.

The move was acclaimed by economists as cleverly defusing pressure from other countries - France in particular - to cut rates. For it sent enough of a trigger to the markets to allow the authorities to shave rates even though the Germans had left their main rates unchanged. As the bank tends to leave a differential of around 30 to 40 basis points between the discount and repo rates, yesterday's cut narrows this gap to only 25 basis points, making a reduction in the discount rate more likely than a further cut in the repo rate.

Although France had not moved its own rates in response yesterday, this was largely because its next tender was not until Monday. Economists generally expected the high yielders such as Italy and Spain to be the last to move.

Miss Alison Cottrell, currency analyst at Midland Global Markets, the securities house, greeted the bank's operations as 'psychologically beneficial for all sides'.

'This move will allow other 'core' Europeans to ease their own market - and in some cases - interest rates,' she said.

The Dutch central bank cut its official interest rates by 25 basis points and its special advances rate by 20 basis points, citing falling interest rates and the strength of the guilder.

The Belgian central bank said it had cut all of its leading interest rates in line with rate cuts in other European countries. It lowered the central rate to 8 per cent from 8.30 per cent, the discount rate to 5 1/4 per cent from 5 1/2 per cent and the emergency lending rate to 11 1/2 per cent from 12 per cent.

Market reaction to the moves centred on speculation as to whether the Bundesbank would be more or less likely to cut rates on December 16, its next council meeting. Miss Cottrell believes that if the M3 number shows ample slowdown in the growth of broad money, this will encourage the bank to take the bull by the horns on December 16.

After all, she pointed out, if the fundamentals had not supported a rate cut the authorities would not have acted today. The bank risked a 'speculative hell' on January 6 when normal meetings resumed unless it did something earlier, she said.

The only risk to this plan, however, is on the large scale. If the world trade talks collapse or fail to conclude successfully by the December 15 deadline, then currencies would be dancing to a very different tune than they are now.

The talks have reached a delicate stage. The major players are both stressing the need for one more heave and taking criticism from their counterparts for holding up progress and refusing to compromise.

In Bonn, Mr Helmut Kohl, the German chancellor, and Mr Francois Mitterrand, the French president, said they were taking great pains to achieve a world trade deal under the General Agreement on Tariffs and Trade by the deadline.

Currencies had a quiet day in spite of the moves. There was a lull between the UK Budget on Tuesday and today's US non-farm payroll figures for December, on which the dollar's strength is expected to hinge. Mr Jim O'Neill, chief currency strategist at Swiss Bank Corporation, said it was a classic December week. 'Virtually all the data have been supportive of the dollar, but the currency has not done much more than creep higher over the last 48 hours,' he said.

The big tussle on the currency markets was one of 'domination' between the Swiss franc - which has benefited from strong evidence of the Swiss emergence from deep recession - and the dollar. The Swiss franc ended a touch firmer against the D-Mark. In London the dollar rose to DM1.7215, after a previous close of DM1.7175, and ended a little higher against the Swiss franc at SFr1.4965, after a previous SFr1.4960. In New York the dollar finished at DM1.7225.

For after a short burst of strength following the European rate cuts, the dollar fell back to wait for the employment data. The market is expecting a jump of about 177,000 in the non-farm payrolls in November to add to mounting evidence of a broad-based consumer-led recovery.

A sharp increase in US consumer spending in October was consistent with a double-digit increase in consumer confidence last month, and there are rising hopes for a 4 per cent to 5 per cent GDP number for the fourth quarter.

On the London money market, the Bank of England predicted a sizeable shortage of Pounds 2.65bn, which it relieved almost fully during the day's operations with total help of Pounds 2.52bn.

The escudo is unlikely to react to yesterday's government reshuffle, in which Mr Eduardo Catroga replaced Mr Jorge Braga de Macedo as finance minister. Dealers are attributing the stronger escudo to slack end-of-year activity in the foreign exchange market.

Japan's big machine tool producers - Yamazaki Mazak, Amada, Toyoda, Okuma, Hitachi Seiki - are rightly seen by European and US rivals as formidable worldwide competitors, but not even they have remained immune from the industry's global recession.

The Japanese industry is the largest in the world, accounting for about a quarter of total machine tool production worth Dollars 34.6bn last year, according to statistics from American Machinist. But consumption of machine tools in Japan, which was also the world's largest market, fell 32 per cent to Dollars 5.7bn last year, says the magazine.

Last month, the Japan Machine Tool Builders Association said orders received by the Japanese producers this year were likely to fall short of Y600bn for the first time since 1983. Total orders last year were Y710.2bn, down 37 per cent from 1991 and only just over half the Y1,412.1bn achieved in the boom year of 1990.

And the recession is still continuing - machine tool orders in September were down 31.5 per cent from a year earlier at Y42.3bn due to weak private sector demand amid continued economic stagnation, the association said.

Mr Teruyuki Yamazaki, chairman and president of privately-held Yamazaki Mazak, points out that in some respects, Japanese producers are suffering in the same way as their German counterparts.

'For the machine tool industry in Europe, volumes are about 50 per cent down, compared with the peak time (two to three years ago),' he says. 'Japan has seen about the same fall.'

Up to a point, there are similarities in the longer-term structural changes going on in both the German and Japanese domestic markets for machine tools. In Japan, one of the reasons for the rapid fall in demand for machine tools has been the excess capacity in the automotive and other industries built in the expectation that growth rates in domestic sales and exports would continue.

As in Germany, the high costs of domestic manufacturing are encouraging the machine tool industry's customers to move manufacturing, or at least the supply of components, overseas. Investments by the Japanese automotive industry in the US and the UK represent machine tool orders that might once have been domestic business but are now either export orders or supplied by Japanese or rival machine tool builders manufacturing elsewhere.

It is in the export business that Mr Yamazaki sees further similarities between the Japanese industry's predicament and that of the German industry. 'Japanese exporters are facing heavy competition in the European market because the yen is too strong,' he says.

This is a disadvantage for Yamazaki in respect of the machines it exports from Japan, but Mr Yamazaki notes that German producers are facing similar problems exporting to countries with weak currencies.

Some might argue that the key difference between the two leading machine tool producing countries is that the Japanese have a much tighter grip on their home market where imports accounted for 10 per cent of consumption last year, compared with 36 per cent in Germany.

But while many believe that the present recession has seriously weakened the European machine tool industry's competitiveness vis-a-vis its Japanese rivals, Mr Yamazaki does not believe this is the case. 'In Germany the machine tool industry has suffered, and so have we, so the competitive balance has not changed much.'

In spite of the global recession, the strong yen, and the more fundamental changes in the Japanese market, though, Yamazaki Mazak is in a powerful position competitively, when compared not only with non-Japanese producers but also with domestic rivals.

With overseas manufacturing at Florence in Kentucky, Worcester in the UK, Les Ulis in France, and Singapore its production base is more international than is the case generally in the machine tool industry.

The Worcester plant began producing machine tools in 1987 and was intended mainly as a manufacturing base for Europe. It was then considered that the investment would foreshadow many more by Japanese producers in Europe - 'We were a step ahead,' says Mr Yamazaki.

That this has not happened is due partly to recent market conditions. But Mr Yamazaki believes it has also been much more difficult for the Japanese producers to invest in one European country than in the US, because of the many different cultures, markets, languages and tax systems in Europe. 'Some of the Japanese wanted to invest in Europe, but they could not do it,' he says.

The Worcester plant, along with other UK-based machine tool producers, has seen its home market hit by the recession - first in the UK and then in continental Europe. But lower costs and the recent devaluation of sterling mean that, according to Mr Yamazaki, 'we have good competitiveness from our UK machines.'

The company is now expanding exports from the Worcester plant to markets outside Europe, and is also gradually increasing the number of machine tool types made there.

No one in the machine tool industry is predicting a return to the heady days of 1990, when sales were being buoyed by factors such as the 'bubble economy' in Japan. But Mr Yamazaki is confident about the long-term need for machine tools, especially in Europe and the US. 'If you look at European and US customers of the machine tool industry,' he says, 'you will see that many of their production facilities are older than those used in Japan. So these customers will have to make more investment in equipment.'

He is also keeping a close eye on Asia, where cheap labour and booming markets have encouraged many traditional Yamazaki customers to begin manufacturing. Machine tool producers such as Yamazaki are following their customers into Asia, but also want to be there to take advantage of the region's overall market opportunities.

The company began producing machine tool parts in Singapore last year, and also has a technical co-operation agreement with a Chinese machine tool builder, Shenyang No 1 Machine Tool Works. This is not yet a joint venture, but Mr Yamazaki says the co-operation has good potential for further development.

Japan's general contractors have earned a lot of recognition in recent years with the development of construction site robots. These mechanical wonders can roam construction sites spraying fireproofing and finishing concrete floors. There is only one problem.

'They have not proven very cost effective,' says Mr Yasuo Fujinami, deputy general manager for technology at Taisei Corporation.

Undaunted by a false start, the industry is taking a new approach to mechanising construction sites. Rather than automate individual tasks, the focus is now on systems that attempt to turn construction sites into factories for the assembly of prefabricated components. Rather than showcase the latest in robots, the systems are designed to optimise the mix of computer control, automation, mechanical innovations and plain old manual labour.

Shimizu's Smart System, for example, is now in use for the first time on a 20-story, 20,665 sq m office building in Nagoya. After completing the foundations, what will become the top floor and roof of the building were erected on top of four jacking towers. Suspended from this structure is a network of rail cranes and trolley hoists that can deliver a load to any point on the floor below. The hoists also travel on a vertical lift erected alongside the building to bring material from ground level.

A computer housed on the top floor controls all these hoists and cranes and can place steel beams and columns, precast floor sections, wall panels and other building components following programmed instructions. As the building is erected, the four jacking towers push up the top floor and then lift their own bases from floor to floor.

Rather than rely on sensors for precise positioning, joints have ingeniously detailed slots and plates that mechanically guide beams and columns into final position. Once in place, clamps on the hoist cables release automatically. This all means that once a human rigger attaches the cables to a steel member at ground level, the system can erect it without further human help. In actual practice, however, a control room operator using video monitors and a spotter on the working level watch the hoists as they position their loads.

The closest thing to an actual robot is a welding machine, but even this is not fully automated. An operator must set it in place and start it manually. But then it uses sensors and programmed instructions to make the correct weld. Shimizu figures that one operator can tend two machines.

Yasuyoshi Miyatake, who led the development of the system for Shimizu, says the system allowed them to cut their erection crew from 20 to 13. With additional labour savings from prefabrication, they figure a 30 per cent reduction in the man hours needed to complete the building. 'Eventually, we think we can make that 50 per cent,' Mr Miyatake says.

Virtually all of Japan's leading contractors have their own systems, either in their first use or under development. They all follow the same theme but have individual variations. In Taisei's T-Up system, the staging platform surrounds and hangs from the steel for the central core of the building. Two cranes on top of the platform erect the core steel while two cranes suspended beneath the platform erect the surrounding steel. Taisei figures running four cranes simultaneously will allow them to cut the construction period of a 33-story 111,000 sq m office tower it is building in Yokohama from 30 to 24 months.

The increased productivity and shorter construction periods have not shown up on the bottom line. Shimizu and Taisei both say use of the systems did not result in lower contract prices for owners. For one thing they have to recover their development costs. Shimizu figures the hardware alone, developed in co-operation with Mitsubishi Heavy Industries, cost Y1,000m.

More importantly, the focus of the industry's automation efforts is not reducing costs but cutting labour requirements. Although less of a crisis with the current recession, the industry still faces a labour shortage, with young workers, especially, avoiding the construction trades.

The industry first attempted to counter this by automating hard or dangerous tasks. Mr Yukio Hasegawa, who heads a construction robot research programme at Waseda University, says the industry was naive, dreaming up robots far more sophisticated than anything developed for manufacturing. He says contractors and equipment makers have developed more than 100 types of construction robots. 'But very few of them are actually used,' he says. They have proven difficult to adapt to the variety of conditions on construction sites.

A similar challenge faces the new systems. So far, the systems have only been applied to buildings that are tall and relatively square in plan. To be practical, the gains from the increased productivity and speed have to offset the time and effort required to set the systems in place.

Mr Takanobu Kumano, a manager in Taisei's technology division, says the lower limit for their system is probably about 30 stories. This means that out of the hundreds of buildings the company takes on each year, there are only seven or eight that could use their system.

Despite present limitations, Roozbeh Kangari, associate professor of civil engineering at Georgia Institute of Technology, believes the industry is now taking the right approach: looking at the overall process to see where mechanisation makes sense and where it doesn't. Mr Kangari spent a year in Japan studying Shimizu's mechanisation efforts.

Mr Takayoshi Sato, a general manager for Tokyo-based Futaba Quantity Surveying, says that rather than concentrating high-tech systems on a few projects, greater gains could come from spreading the use of standardised and prefabricated components throughout the industry. Mr Sato says the widespread use of such components in the US and Europe makes site labour there more productive, despite generally higher wage rates.

The contractors recognise the need to extend the systems to a wider range of buildings. Shimizu's Mr Miyatake says their next challenge is to apply the concept to low-rise offices. And in typical Japanese fashion, they are already improving system performance. After erecting a couple of floors of steel, they modified the control software, cutting from 400 seconds to 200 seconds the time it takes for a hoist to traverse the rail crane network.

When Mr Yukio Higuchi set up his first discount liquor store in Tokyo 25 years ago, he had to endure numerous anonymous death threats. He spent most of his time fending off the thugs loitering around his store while trying to convince wholesalers to sell him goods.

Years later, however, supported by a change in consumer attitudes and a prolonged economic downturn, his Kawachiya liquor chain is thriving. 'During the weekends, the stores get so crowded I have to close the shutters to keep people out,' he says.

During the 'bubble' economy of the late 1980s, ordinary Japanese did not think twice about spending on highly-priced household goods, food and drink. However the sharp fall in corporate profits and the consequent restructurings have posed a threat to workers' real income, forcing consumers to go back to basics.

Boxes of beers and bottles of whisky at a 30 per cent discount to the normal retail price have an obvious attraction.

Kawachiya, which is unlisted, says its sales have grown by about 30 per cent for the past three years, and it expects annual sales to double this year to Y15bn due to the launch of new stores. The trend towards cheaper prices, however, does not stop at liquor. Consumers are turning to discount stores for their electronic goods, clothes, drugs and other everyday products.

Aoyama Trading, a manufacturer and retailer of office workers' blue suits, has seen profits surge during the past few years. For the first six months to September, the company posted a 34.5 per cent rise in pre-tax profits to Y12.1bn on a 38.7 per cent increase in sales to Y76.6bn.

To achieve these results, discount retailers are turning away from conventional methods of Japanese retailing, relying on the myriad of wholesalers for supplies and providing extensive service.

Japanese manufacturers set retail prices with profit margins high enough to support two levels of wholesalers and the retailer. In addition, domestic manufacturers cushion their retailers by offering rebates.

Until now those who tried to buck the system faced intimidation by retail associations, manufacturers and wholesalers. For retailers such as Kawachiya, securing a procurement route for merchandise has also been difficult.

By selling its products at a discount, Kawachiya is foregoing a bulk of the revenue that ordinary retailers see, but it manages to keep down costs by its no-frills approach. Most of the employees are hired part time, the merchandise is kept in boxes and its stores resemble old shacks. 'Consumers shouldn't have to pay extra to support distributors,' he says. In the case of Aoyama, and other men's suit discounters, they have turned to cheap production costs in south-east Asia and China, buying products directly from the manufacturers.

In sharp contrast to the discount stores, Japan's upmarket department stores have been suffering from the plunge in consumer spending. October sales at leading department stores in the greater Tokyo area fell 10.4 per cent to Y209.5bn, the 20th consecutive decline. At the same time, Mitsukoshi, the prestigious department store which has business ties with Harrods, announced its first interim pre-tax loss in nine years.

Mr Paul Heaton, retail analyst at Baring Securities in Tokyo, explains: 'Department stores have the most to lose from the rising popularity of discount retailers.'

Meanwhile, discount retailers have received a boost from stricter enforcement against price control by the country's Fair Trade Commission (FTC), the anti-monopoly watchdog.

Japanese manufacturers and wholesalers have often threatened to stop shipments if the retailer failed to apply the 'suggested retail price' set by the manufacturer. But manufacturers are now being forced to allow retailers to set their own prices.

Japanese beer companies announced in 1990 that retailers were free to set their own prices. Earlier this year, sales of subsidiaries of leading electronics companies, including Matsushita Electric Industrial and Sony, were warned about attempts to prevent retailers from discounting their products by threatening to withdraw contracts.

Mr Higuchi at Kawachiya says he has been actively informing the FTC of any unfair practice from manufacturers. Last year he took a pharmaceutical company, which cut shipments after Kawachiya started discounting its pep drink, to the commission.

In August, he lodged a complaint against leading cosmetics companies, including Shiseido. He claims Shiseido and other producers cancelled or decreased shipments after he had rejected pleas to stop discounting luxury cosmetic brands.

Japan's cosmetic makers distribute merchandise through small chain stores and have asserted pressure while providing large rebates at the same time, to prevent retailers from discounting. Following an investigation by the FTC, Shiseido recently announced that it would review its contracts and rebate practices with its chain store operators.

Analysts predict that changes in consumer spending patterns are here to stay, and even if the economy picks up, sales of high-priced merchandise at department stores will not recover. This may be the reason why the department stores are starting to sell cheaper products. To compete with the likes of Aoyama, one leading department store recently attracted customers by offering men's silk suits below Y30,000.

In Kamaishi, on the northern coast of Japan, steelmakers can see the future they fear. The town, site of the country's first blast furnace for pig iron, began rusting two decades ago when Nippon Steel announced a restructuring that meant job losses and a gradual reduction in steel output.

The Japanese government predicts that Kamaishi's population will be halved from the present 50,820 by the year 2010, and Kamaishi Shinkin Bank, the local bank, collapsed earlier this year under bad loans equivalent to about 60 per cent of its total loans outstanding.

Steelworkers in the town have turned to mushroom growing and the building materials industry, but they are struggling against the general downturn in the economy. The same is true for the Nippon Steel Kamaishi rugby team, the country's strongest side during the 1970s, which has slowly slipped down the national ladder.

Japan's steelmakers are concerned that they and the communities which depend on the industry for survival are facing not just recession, but a Kamaishi-like decline.

Mr Takashi Imai, Nippon Steel's president, said his company would have to change the structure of its management and workforce to ward off the rust.

He suggests that Japan faces an unemployment problem similar to that of the US, where jobs lost in manufacturing where not soaked up by the service sector. In the case of steelmakers, he says, traditional customers such as automotive and consumer electronics companies are selling to a mature domestic market after four decades of expansion.

'We are looking for some other industries that will replace these industries as a source of demand, but we haven't been able to find them,' Mr Imai said.

Steel companies can see their own diversification policies reflected in the Kamaishi government's unsuccessful attempts to create new industries. There was a plan for a marine theme park, and former steel workers now make office furniture, but the town is still losing younger workers to neighbouring regions and the main shopping centre is dotted with permanently shuttered shops.

The Japanese steel industry was inspired to diversify after the Plaza Accord in 1985 led to a rapid appreciation of the yen and a slowing of domestic demand. Steel production fell from 105m tonnes in 1985 to 98m tonnes a year later, and the leading makers slipped into the red during 1987.

Companies began to cut their workforces and expand into new business areas, in particular, computers and semiconductors, which were seen as the 'industrial rice' of the future. The shift was thought appropriate because steel companies have traditionally seen themselves as the suppliers of Japan's industrial staple.

But the speculative excess of the late 1980s led the steel industry off course. The workforce cuts slowed when domestic demand for steel bounced back to 105.6m tonnes in 1988, and the country became more concerned about a longer-term labour shortage than a short-term surplus of workers.

The cheap capital of that era, when money was easily raised through new issues of equity or equity-linked bonds, fuelled the industry's many diversifications, some of which were unwise. Sales projections were calculated when stock prices were climbing relentlessly and the Japanese economy was expanding at annual rate of 7 per cent.

Steel companies are feeling the cost of those miscalculations. In the first half to September, the five leading makers had pre-tax losses, including Y16.7bn at Nippon Steel and Y15.4bn at NKK, which both reported profits last year. The losses would have been more embarrassing if the companies had not reaped profits from the sale of equities.

For the full year to March, the leading five companies, which tend to move as a caravan in and out of loss, are expecting combined losses of about Y60bn, although Japanese steel industry specialists say the figure would be Y200bn, if the benefits of accounting changes and profits on securities sales were not counted.

The pressures to discard loss-making diversification projects are obvious, but the companies are still determined to restructure without dismissing workers. Sumitomo Metal Industries, which had an interim loss of Y9bn, said the change in market conditions had forced a broad review.

'As for the electronics, new materials and biomedical divisions, efforts shall be concentrated on examining profitability in each field and in identifying where profits can be improved as quickly as possible,' Sumitomo said.

Each of the companies concede that demand will remain weak into next year, with some growth expected in public works construction which has been undermined in recent months by political scandals. Local governments have delayed project awards, fearing that the successful company may be implicated in the scandal, but they will eventually have to make a decision.

Steel companies are also hoping that demand from China will strengthen in coming months. Kobe Steel noted in its summary of the first half, when it lost Y8.1bn, that exports to China early in the year had 'increased remarkably'.

Japanese steelmakers have co-operatively shared the profits of China demand, just as they collectively negotiate prices for imported materials.

But the present downturn has raised the question of whether the 'restructuring' described by Mr Imai will also mean an end to the very cosy relationship among the leading five companies.

Nippon Steel has been criticised in the past for not exploiting the advantages of its size and expertise, and being as concerned to represent the industry's interests as much as its own.

The next year will be a test of the company's will, and a measure of the relative importance of its shareholders and its industry friendships.

------------------------------------ Crude steel production (millions of tonnes) ------------------------------------ 1985 105.3 1986 98.3 1987 98.5 1988 105.7 1989 107.9 1990 110.3 1991 109.7 1992 98.1 ------------------------------------ Source: Yamaichi Research Institute ------------------------------------

Late last month, GM and Toyota, the world's largest and second-largest carmakers, signed a deal that highlights some of the big challenges facing the Japanese car industry.

The agreement calls for Toyota, Japan's largest carmaker, to sell 20,000 GM cars a year in Japan under the Toyota nameplate.

While the volume of GM cars Toyota has agreed to sell in Japan is miniscule, compared with the hundreds of thousands of cars Toyota sells in the US, it represents a significant victory for GM in opening up the Japanese car market to US competition.

The US carmaker not only won agreement from Toyota to open up its distribution network to sell a competitor's car, it even managed to set a target for average annual sales.

Whether they like it or not, Japanese carmakers are going to face greater competition than ever before from the US Big Three carmakers in their own market. And if the recent deal between Toyota and GM is any guide, the competition is likely to be dictated to a growing extent by political pressures that are not directly related to market competitiveness.

While GM and Toyota were negotiating their latest deal, US and Japanese government officials were bickering over a possible agreement to prise open the Japanese car and car parts market to greater foreign penetration.

One of the most contentious issue in these talks has been the US insistence on setting quantitative indicators which would show progress in opening up the Japanese markets for cars and car parts.

Although the Japanese government has refused to agree to such targets in what it calls the interests of free trade, the agreement between GM and Toyota leaves an uneasy feeling that the US side has won a small but significant concession to its aims even though there has been no apparent official prodding of a deal between the two companies.

The threat of US carmakers to the Japanese in their own market is by no means critical. But the timing of their onslaught could not have been worse.

For the past few years, Japan's car industry has been suffering under the impact of a consumer reaction to the high-spending years of the late 1980s.

During those years consumers went on a buying binge that led to overoptimistic assumptions in the industry about demand for cars and the necessary levels of production capacity.

Those assumptions in turn led to over-investment in facilities, a proliferation of models and options and bloated corporate structures. Nissan, for example, invested heavily in automation while Mazda built up an ambitious five-channel distribution strategy.

As the domestic slump has persisted, it has become apparent that the expansion in domestic demand on which they had based their future strategies, is no longer there.

The situation has forced Japanese carmakers to scale back their ambitions, cutting deeply into capital expenditure and other costs and trimming their corporate structures.

A moderate consolidation has been taking place as the increasingly crowded Japanese market for passenger cars has begun to put pressure on the weaker players. Isuzu, for example, has decided to pull out of car manufacture and rely on other makers to fill its product line-up. Companies such as Mazda and Honda have conceded that they can no longer expect to do everything themselves and, like Isuzu, are resorting to original equipment manufacture deals, to provide them with products they cannot justify developing on their own.

Meanwhile, the domestic market has continued its relentless slide, leading many carmakers to announce a downward revision of production plans. Nissan recently decided to extend the temporary closure of facilities for two more days in order to cut back on production as well as costs. Mazda has decided to introduce a temporary closure period that will affect production levels of all its models.

When they announced worsening business results for the half-year period to September last month, the carmakers remained cautious about the prospects for recovery in the near term.

Against this background of gloomy prospects at home, pressure on their overseas operations has been just as damaging. The yen's sharp appreciation against other leading currencies this year has undermined profits in overseas markets as well as reducing their competitiveness against local manufacturers.

The plunge in demand for cars in Europe's main markets has upset their plans for expansion in that market. Nissan has had to advertise for applicants for a voluntary retirement scheme at its UK plant as market conditions in Europe have failed to improve.

In the US, where the economic recovery has helped business improve somewhat, Japanese carmakers face growing competition from their US rivals which have begun to close the gap with them in manufacturing quality.

These changes which have created a business environment that is markedly different from the high growth days which Japanese carmakers had long grown accustomed to are forcing these companies to re-think their corporate strategies.

In the past, the aim of most Japanese carmakers was quite clearly to increase market share in key markets, and use that growth as the basis for the company's own expansion.

Once it has become difficult to expect growth in worldwide markets, companies have gradually been shifting the emphasis to improving profitability. They have been doing so not only through efforts to raise efficiency in both product development and manufacturing, but also through a company-wide review of the performance of white collar workers.

Toyota, Nissan and Honda have all introduced programmes aimed at getting better value out of their office workers. While Toyota aims to raise white collar efficiency by about 30 per cent, Nissan and Honda have introduced performance-related pay schemes.

Whether or not these initiatives pay off has yet to be seen. What is clear, however, is that the singleness of purpose - growth at all costs - that served Japanese carmakers so well in the past, is looking increasingly inappropriate in the changed market environment.

For Japanese carmakers, the US Big Three to which they provided their own manufacturing know-how not so long ago, may not seem likely role models in shaping their future corporate strategies. But given the recently improved performance of the US carmakers, Toyota may yet have something to learn in its part as GM salesman.

Until now, many ordinary Japanese have taken pride in the rising value of the yen as a sign of national strength, even though it could only be appreciated when they travelled abroad, buying cheaper handbags in Paris and extra cans of Fortnum and Mason tea in London.

However, this perception has shifted drastically as the sharp rise in the yen this year has eroded corporate profits and accelerated an exodus of manufacturing from Japan, raising fears of job security and declines in workers' real income.

After fluctuating around the Y125 to the dollar level during January this year, the yen rose to Y105 in June, and has remained around that level ever since. The Japanese manufacturing sector's high reliance on exports is damaging the economy, due to lower sales and profits from the sharp rise in the yen. Benefits from the stronger yen have been small because of low import levels - and sluggish demand.

According to Nomura Research Institute, research arm of Nomura Securities, the higher yen caused losses of Y45.2bn and profits of Y3.3bn during the first quarter of 1993, while the second quarter saw losses of Y925.3bn and profits of Y350.8bn.

NRI estimates that if the yen rate remains at about Y105 to the dollar in the second half of 1993, annual exchange losses incurred by exporters would total about Y4,000bn, while importers are expected to make about Y3,000bn in exchange gains for the full year, generating a net loss of Y1,000bn.

Earnings by export-oriented industries, especially electronics, cars, textiles and shipping, have been hit. Beneficiaries of the higher yen have been limited to power utility companies and some oil refiners, which rely on fuel imports. Foods and paper and pulp companies also import materials, but lower demand due to the prolonged economic slump have overshadowed the gains.

Although the export ratio of consumer electronics companies has fallen sharply during the past six to seven years, the ratio remains high, averaging 41.5 per cent last year. Companies in this sector which centre business on audio visual-related machines generated 60.1 per cent of their sales overseas. A Y1 rise against the dollar is said to cause losses of Y5bn at Sony and Y2bn at Matsushita Electric Industrial.

Sony which posts 65 per cent of its sales overseas, suffered a 53 per cent fall in parent pre-tax profits for the first half to September. Overall sales fell 11 per cent to Y852.6bn as the yen's rise cost the company Y74bn in sales.

The export ratio of six leading carmakers average around 51 per cent. According to Wako Research Institute, a rise of Y1 against the dollar would cause a 10.6 per cent fall in pre-tax profits. Nissan Motor, which posted pre-tax losses for the first half, has warned that it will not make a profit for the full year to March. During the first half, the impact of the yen's rise amounted to Y100bn. Some Y50bn was absorbed through forward exchange dealing and price rises, and the net impact on sales totalled Y50bn.

The high yen led to the 'Finland shock' in the shipbuilding industry earlier this year, when Kvaerner Masa of Finland captured an order from Abu Dhabi to supply tankers. The high yen is eroding the competitiveness of Japanese shipbuilders and a fall in prices based in dollars, due to increased competition, has led to sharp declines in yen-based profit margins.

According to brokers James Capel in Tokyo, during the six months to September, gross tonnage of approved new buildings increased by 6.5 per cent, but the total value of the orders declined by 18.9 per cent.

The high yen has cut into exports of the textile and chemicals sector while leading to increased import penetration. Inventories of polyester filament at textile makers have risen due to the increase in cheaper imports from south-east Asia and the fall in exports.

In the chemicals industry, net exports of resins were down by 31 per cent during the first six months of this year. On the other hand, Japan imported 3.8 times as much high-density polyethylene, accounting for almost 4 per cent of domestic demand, up 3 percentage points.

Meanwhile the higher yen lowered imported fuel and material costs for several industries. The gas companies saw a jump in interim profits thanks to a fall in fuel costs and a rise in demand for gas due to an unusually cold summer. However, gas and electric power companies have been ordered to pass on profits from the higher yen, and are expected to pass a total of Y265bn to the consumer this year by lowering rates.

Tokyo Gas saw interim pre-tax profits surge 211.2 per cent to Y14.4bn, thanks to higher demand and lower costs. The company saw fuel costs fall 3.8 per cent to Y54.8bn on lower fuel prices and a higher yen. However, it forecasts a 2 per cent fall in full-year pre-tax profits to Y35bn, due to the lowering of gas rates.

Although the higher yen reduced costs at electric power companies, a fall in demand amid the economic slump and the cold summer hurt profits. Tokyo Electric Power posted a decline in interim sales and profits for the first time in five years. Electricity rate cuts are expected to reduce the company's income by Y36bn for the year to March next year.

The past few years have been a period of corporate soul-searching for Japan's electronics companies.

Not only has the country's economic slowdown brought some of the world's largest and strongest electronic manufacturing companies a third year of falling profits, but the changes in the business environment have also, in many cases, derailed their plans for the future.

Consumer electronics makers have been weakened by a marked reversal in consumer sentiment. The lack of consumer interest is hurting their ability to promote the next generation of products they had been hoping would make up for the saturation of markets for their traditional profit earners, such as video tape recorders and CD players.

High definition TV sets, which many consumer electronics makers had hoped would take off as prices came down, have been a commercial flop in the face of a lack of programmes and a new-found penny-pinching trend among consumers.

New electronic gizmos, such as MiniDiscs - the miniature, recordable discs positioned as the latest-generation portable audio system - and digital compact cassettes, have not been the blockbusters they would need to be to make up for the fall in revenues from conventional audio-visual sales.

Mr Norio Ohga, president of Sony, points to strong demand for his company's navigation systems - which at more than Y200,000 a piece are not exactly a bargain - to illustrate the point that consumers are still buying products they really want. However, as one company after another reports huge falls in profits, it is difficult to shake off the perception that consumer electronics makers have lost touch with their market.

In response to a question about the most crucial tasks facing Matsushita, Mr Motoi Matsuda, a director and member of the board, conceded recently that the company needed to go back to its roots of providing consumers with products that they wanted.

'The fact that our profitability is falling is a sign that we are not contributing enough to society,' Mr Matsuda said. 'We are losing our raison d'etre.'

Meanwhile, Japan's computer makers are also facing a turning point.

After years of growing profits sustained by a protected domestic market, Japanese PC makers are facing serious foreign competition in their home territory for the first time.

The spread of a bilingual operating system called DOS-V that was developed by IBM, and the arrival of Compaq and Dell on the scene, have shaken the Japanese PC makers out of their cosy existence. This had allowed companies to cling on to a captive audience and carve up the domestic market among themselves by selling proprietary systems that were incompatible with each other and with any other systems outside of Japan.

The introduction of low-cost machines into Japan by US PC makers last autumn triggered a price war that damaged the profitability of high-cost Japanese makers and shattered the myth in Japan that computers were by necessity expensive products.

One year later, most Japanese PC makers have joined the IBM camp and introduced IBM-compatible machines, opening the door to fundamental change in the Japanese PC market.

As the consumer electronics and computer industries look to the future for growth, they share a common problem - income from traditional profit earners is on the downtrend.

At the same time, they have been hampered by a poor business environment in Japan from charging forth into what is expected to be the most promising new markets for the industries in future - portable communications and multimedia.

Historical and cultural circumstance, as well as bureaucratic regulation, have obstructed the development of conditions which are essential for the growth of those two markets.

For example, the market for mobile communications is still relatively small in Japan. Although Japan has the largest market after the US, with 1.7m subscribers, penetration is low with only one per cent of Japanese using mobile phones compared with 3 per cent in the UK.

The low penetration of mobile phones is attributed to circumstances such as the spread of public pay phones and the acute lack of airwaves in urban areas, as well as to obstructive regulatory moves by the authorities.

The high cost of subscribing to a mobile phone service, which is blamed for the slow penetration in Japan, is in part a result of the need to apply to the Post and Telecommunications Ministry for price reductions. So, while competition in the industry is severe, 'prices do not fall according to market forces,' says an official at DoCoMo, the mobile phones subsidiary of NTT.

Handset manufacturers in the electronics and consumer electronics industries have also been hampered - by the market's slow growth and by bureaucratic meddling - in the development of their handset businesses.

So far, handsets have only been allowed to be sold by the operators which buy their handsets from the manufacturers on an original equipment manufacture basis and sell them under their own brand. Next spring, when the sale of handsets is deregulated, competition among makers is expected to reduce prices and spur subscription to services.

Personal handyphones are another market that is expected to grow in future. But here again the regulatory grip of the Ministry of Posts and Telecommunications could have unfortunate consequences for the growth of the industry. The ministry is considering which companies to allow into the new market and could end up hampering competition as it did in the mobile phones market.

Meanwhile, in the area of multimedia, which is the convergence of computing power and telecommunications to bring a greater amount of information to more places more speedily, Japan lacks the advanced telecommunications infrastructure which is a precondition for the successful application of multimedia.

For one thing, cable TV, which is expected to be a big carrier of multimedia services, such as video on demand and interactive TV, has not been very successful in Japan. Again, circumstances such as the wide availability of terrestrial programming in Japan and bureaucratic regulation are blamed for the slow growth of cable TV.

Japanese company executives also confess to a lack of ideas about how the new technologies could be used by consumers. While US companies dream up information super-highways and 100-channel programming, Japanese electronics makers wonder out loud what use all the extra communications ability might serve. 'It is still not clear what multimedia is,' says Mr Tsuzo Murase, executive vice-president of Matsushita.

What is clear, nevertheless, is that if and when the golden age of mobile communications and multimedia do come, Japanese electronics companies have their eyes firmly set on providing the hardware and key technologies that will be crucial to make those services a practical reality.

To that end they are pumping their resources into key technologies such as liquid crystal displays, long-lasting batteries and advanced memory chips, which will play a growing part in portable communications and, eventually, multimedia as well.

Newcomers to Japan sometimes find it hard to understand why the country has such efficient manufacturing industries and yet such a primitive service sector.

This is precisely the problem that Mr Morihiro Hosokawa, the new prime minister, is seeking to tackle with his potentially wide-ranging programme to scrap or review more than 10,000 regulations that control an estimated 40 per cent of Japanese industry.

If Mr Hosokawa has his way, he will remove many of the unnecessary costs of complying with bureaucratic rules that provide such a drag on Japanese competitiveness, as exposed by the yen's steep rise. The upshot could be to improve Japanese industry's growth potential at a time when important international car and consumer electronics markets are becoming mature.

Foreign companies also have a stake in this. If successful, Mr Hosokawa's deregulation drive could ease the way for imports, by streamlining complex certification procedures and removing a layer or two of the Byzantine distribution system that drives up costs to the benefits of hordes of middle men.

Estimates of the general economic impact vary widely. At the conservative end, the Japan Research Institute, a private body, believes the programme could unleash a Y44,800bn rise in gross consumption, of which Y32,900bn would be increased imports and the remaining Y11,900bn would be supplied by domestic industry. At the optimistic end, one US economics expert believes that demand could rise by Y80,000bn, as a result.

But first, the new government has to overcome fierce entrenched opposition, which has ensured that previous attempts at cutting red tape by earlier governments have got nowhere. Traditionally protected industries such as distribution, rice and construction fear losing their privileges. Japan's powerful civil service, unsurprisingly, resents this attempt to reduce its bureaucratic influence.

That is why the deregulation drive has run into an intense backroom battle, as a result of which the first achievements are likely to be slight.

Perhaps it is just as well that initial progress will be slow, for US and European Union experience during the 1980s shows that deregulation tends to produce a short-term rise in unemployment, as inefficient businesses go bankrupt, before the reduction in costs works through to the economy at large. The last thing that Japan's economy needs in the middle of a recession is a dose of deflation, points out Mr Tom Hill, strategist at SG Warburg Securities in Tokyo.

Yet it is surprising that any progress has been possible, given the difficulty of obtaining agreement on anything in a seven-party coalition.

Just after taking office in early August, Mr Hosokawa asked government ministries to come up with a list of rules for the scrap heap. At the same time, he established a panel of 15 business leaders, economists and former officials, under Mr Gaishi Hiraiwa, chairman of the Keidanren business federation, to consider broader economic reforms centred on how to stimulate domestic demand.

A month later, the ministries produced 60 proposals, most of which had already been gathering dust for years or were likely to have little impact.

They included an easing of restrictions on the freight weight of trucks, an end to minimum production limits for brewers - which keep potential small producers out of the market - and fewer car roadworthiness inspections. The package also proposed a relaxation in regulations on new retail stores, although the details are vague.

Undeterred, Mr Hosokawa sent the ministries back to the drawing board, after which they produced 34 more proposals, announced in mid-September at the same time as a Y6,150bn economic pump-priming package.

The most radical new measure in the second round was to publish monthly lists of import cost prices for basic consumer goods, to exert moral pressure on high-priced retailers to trim profit margins and pass down some of the benefits of the yen's strength to customers.

The next stage, generally greeted as a disappointment, was last month's publication of the interim report of Mr Hiraiwa's panel.

The report, already once rewritten after Mr Hosokawa rejected a first draft as too vague, says there should be 'no sanctuaries' from deregulation. It singles out as urgent examples for review 500 rules, including the rice import ban and the resale price system, which requires some products to be sold at producers' recommended prices.

It also calls for the establishment next April of a central body, under the prime minister's direct control, to carry out a five-year deregulation plan.

Mr Hiraiwa promises more concrete proposals in his final report, due on December 15. That will provide the most revealing indicator to date of whether or not the new government will do any better than previous ones at overcoming bureaucratic attempts to block deregulation.

The signs are, however, that this will get further than previous attempts at cutting red tape, such as the 1986 Maekawa report, named after its author, a former governor of the Bank of Japan. That proposed a shift away from export-led growth, the traditional engine of Japan's post-war economy, to domestic growth, fuelled by consumer demand. None of its proposals were acted on and it is the Hiraiwa panel's job to turn the Maekawa principles into concrete proposals for action.

Mr Hosokawa has in his favour support from the top business lobbies, which see deregulation as an important way to reduce costs - on distribution, for example - and to help reduce the yen's value and assuage trade tension. Indeed, the Keidanren has criticised Mr Hosokawa for not going far enough and has persuaded the government to adopt some of its own deregulation ideas.

Added to this, Japan's political upheavals coincide with the arrival of a younger generation of men in national politics, keen to raise living standards and satisfy consumers' interests rather than pander to traditional vested interests.

A third force for deregulation comes from Japan's foreign trade partners. The US and the European Union are both increasing pressure on Japan to stimulate domestic demand as a way of cutting the trade surplus.

That is why all involved agree that Mr Hosokawa has started a process that, over years, will shake up Japan's industrial system.

'In the longer term, the direction set by these preliminary measures will impact the future shape of Japanese business, politics and ostensibly the social structure of the country,' argues a paper by Mr Geoffrey Barker, chief economist at Baring Securities in Tokyo.

Gathered around a table at the Mikasa Chamber of Commerce, small business owners in a small town in northern Japan described the pains of recession. For them, the speculative era of the late 1980s meant a slight rise in sales, but the following downturn is leaving more obvious scars.

Sales in local stores have fallen, components makers are being squeezed by their larger customers, and banks are selective about new lending. An example of the banks' new toughness, a Mikasa company owner explained, was that they were wary of accepting low-priced local land as collateral and many companies did not have much else to offer.

But Mikasa companies also have little immediate desire to expand shops or factories because demand is in decline and there is no need for new capacity. The corporate reluctance to invest and the banks' increased emphasis on risk management - in the wake of reckless lending during the speculative years - form a pattern seen throughout Japan.

Larger companies, which have more access to capital markets, soaked up the cheap money available during the late 1980s when new issues were easily digested on the Tokyo stock market. However, the cheapness of new finance led to a weakening of discipline, and investments in new plant or in diversification were made without enough concern for profitability, either on the part of the company or its banks.

One result of that investment binge is a continuing decline in return on equity for listed Japanese manufacturers, slipping from 8.3 per cent in 1989 to 3.1 per cent last year and an estimated 2.5 per cent or lower this year. The binge also left Japan's banks with a large pile of non-performing loans which they have only just begun to clear away.

At the end of March, the 11 leading commercial banks announced an average 70 per cent increase in loan loss reserves for the year, and wrote off Y72.8bn, an increase of 478 per cent on a year earlier, but a small share of their then official total of Y8,435bn in problem loans.

Smaller banks, such as the Shinkin, on the lowest rung of the banking ladder, are under pressure, partly from rash lending in the past but also because decline in regional areas has hurt their core customers. It is expected that the average fall in their first-half banking profits will be 30 per cent, while lending increased by a record low of 3 per cent.

The difficulty in estimating the bubble era damage, and in reading longer-term attitudes to fresh lending, is that the official problem loan figure does not include the lending of financial affiliates, used by banks for some of their more adventurous deals during the late 1980s. Banks also do not calculate the burden of loans to troubled clients on which interest rates have been delayed or shaved to almost zero as part of a restructuring package.

Bad loans are likely to be a burden until late in the 1990s and, in the meantime, Japanese companies will have to deal with banks which are changing their lending policies. For example, a leading steelmaker said its main bank had traditionally charged the same interest rate for all companies in the group, but was now making a distinction, charging higher rates for group members thought to be exposed to the property downturn.

The head of a publishing company in Tokyo complained that banks were willing to assist larger customers, but had been unsympathetic in dealing with smaller companies. The Bank of Japan has concerns about financial institutions becoming too risk-averse and starving a recovery of funds, although the bank tends to blame weak demand for the unusually low loan growth this year.

Banks say they are more than willing to assist good quality customers but the evidence is that new customers courted during the late 1980s, when financial institutions expanded rapidly, are receiving less assistance than the banks' traditional customers.

Ms Tomoko Fujii, economist at Salomon Brothers, said smaller Japanese companies had sharply increased their borrowing this year from three public institutions - the Japan Development Bank, the People's Finance Corporation and the Small Business Finance Corporation - which received an increase in funds as part of the government's attempts to stimulate growth.

Growth in loans outstanding at the three institutions was 13.7 per cent in the year to July, compared to the meagre 4.2 per cent growth in the year to September 1991. These institutions, which provide concessional rates, are more favoured sources than commercial banks, slow to pass on the benefits of the fall in official interest rates in the past year.

But Japan's leading life assurers, attempting to increase lending to industry and reduce the share of securities in their portfolios, say the demand for loans has been less than they expected. The largest eight life companies are reported have experienced a 0.1 per cent fall in the ratio of outstanding loans to total assets in the year to end March.

For much of the past year, Japanese banks were helped by the strength of Tokyo stock prices, which increased their unrealised gains on securities holdings. But the recent weakness in the Nikkei average has made the banks more aware of their vulnerability and puts more pressure on their corporate customers, also dependent on their equity portfolio as a buffer against the bad times.

The change in the stock market's mood could prompt Japanese banks to be even tougher, further undermining corporate confidence. Economic recovery could hang on the balance between the demand for new loans and the willingness of Japan's bruised banks to meet that demand.

------------------------------------------------------------------------ Borrowing costs for small and large non-financial companies (%) ------------------------------------------------------------------------ Year Small Large ------------------------------------------------------------------------ 1986 6.5 7.0 1987 5.7 5.9 1988 4.9 5.1 1989 4.9 4.8 1990 5.1 5.0 1991 7.1 5.9 1992 6.7 5.8 1993 5.4 5.0 ------------------------------------------------------------------------ Source: Ministry of Finance, Salomon Brothers ------------------------------------------------------------------------

------------------------------------------------------------------------ Net return on fixed investment for small and large non-financial companies (%) ------------------------------------------------------------------------ Year Small Large ------------------------------------------------------------------------ 1986 9.0 6.9 1987 8.6 5.6 1988 11.4 8.0 1989 13.4 9.5 1990 11.5 9.1 1991 10.1 7.7 1992 7.2 5.3 1993 4.0 3.4 ------------------------------------------------------------------------ Source: Ministry of Finance, Salomon Brothers ------------------------------------------------------------------------

When Mr Morihiro Hosokawa, Japan's prime minister, and his coalition took office this year, the party of industry, the Liberal Democratic party, lost power for the first time in four decades and politicians long cultivated by companies were sitting in the opposition benches for the first time.

The realignment has disoriented Japanese companies and prompted them to seek closer relations with the bureaucrats whose power Mr Hosokawa is attempting to limit through his deregulation drive. Meanwhile, companies are reassessing the worth of links to LDP politicians - traditionally seen as representing the construction or trucking industries as much as arguing the case of their local constituencies.

Within parliament, there are 'tribes' of politicians representing the interests of various sectors, and these have been dominated by LDP politicians. An unfolding construction industry scandal has highlighted the close links in the provinces between companies and the LDP, and similar ties are maintained with national politicians.

Not only the construction industry had influence. The natural gas industry, through an economic organisation, bought advertisement space in LDP publications, including Y230m for six ads last financial year. But the end of LDP rule does not mean that Japanese companies have no influence over policy - because they also have close links to the bureaucrats, many of whom later join companies in the industry they have regulated.

When Mr Hosokawa announced deregulation plans, the leaders of industry associations welcomed his plans but, at the same time, companies represented by those associations were queueing for employment 'adjustment subsidies' and industries were seeking bureaucratic help to cope with a deepening downturn.

Deregulation is meant to increase competition in Japan, but it would also mean a new relationship between the administrators and the administered, which have seen the traditional links with the bureaucracy as both restraining and reassuring. These links are particularly reassuring when industry's political influence has declined with the departure of the LDP.

Weaker corporate links with the ministries, which tend to deal with companies as an industry group rather than individually, would provide more freedom for aggressive companies to break from the orderly hierarchy that characterises some Japanese sectors and their courting of politicians.

Japan's leading steel companies all announced losses in the first half this year, each with an eye on the figures of Nippon Steel, the industry leader. By selling equities, the companies are able to reduce their losses and increase profits at will, ensuring that each keeps its acknowledged place in line.

The link between the regulators and the regulated is one thread in the complex pattern of relationships, but by tugging at that thread, Mr Hosokawa could change the shape of the whole in unexpected ways.

Some industries which have been particularly generous political sponsors - such as those in the transport and construction sectors - will find their influence on the wane if strict limits are imposed on corporate donations.

Japanese politicians have found ways in the past to get around restrictions on donations, and are likely to find new routes in the future. But the hotchpotch nature of the present coalition and its uncertain life has increased the difficulty for companies attempting to target future leaders for cultivation.

For example, the orderly queue for ministerial posts and even the prime ministership provided a guide for companies and industries. In investigating the construction scandal, prosecutors found that companies had ranked politicians according to influence, beginning with A+ for the very powerful and down to D for those hardly worth taking out to dinner.

In finance, the coming of the Hosokawa government has not quickened liberalisation, which is conducted at a pace directed by the bureaucracy. An official at one of the long-term credit banks allowed to establish a securities subsidiary earlier this year complained about the fresh list of restrictions introduced by the finance ministry, which was reacting to criticism from existing brokers that the banks would undermine their industry.

The new subsidiaries are forbidden to share the same office as the parent bank, their staff must wear a uniform that is distinctively different from that of the bank staff, and their staff are unable to accompany bank staff on a client call. In effect, the bank official said, many of the advantages of deregulation have been lost in the new regulations.

Banks are being allowed to enter new business in small groups, beginning with the long-term credit banks and ending with the commercial banks. Their access to new products is determined by the finance ministry, not by demand from customers, whose views are barely represented by politicians or bureaucrats.

Changing the regulations will not necessarily change the way Japanese companies are treated. Companies are wary of treading on ministerial toes, fearing that a licence for a new product or that recession-linked assistance could be delayed by the small group of bureaucrats responsible for approving these matters.

Japan's shipbuilders can testify to the power of the bureaucracy, as they were officially in recession until three years ago, following the downturn created by the yen's rise in the mid-1980s. As a result of technological improvements during that period, assisted by a range of government subsidies, the industry emerged from recession with a half share of the world market.

By the end of April this year, Japan's car companies and computer makers had joined a list of 138 sectors eligible for government assistance in 'employment adjustment', covering the transfer of workers within companies, retraining and early retirement schemes. None of the companies wants this type of government intervention to end.

This message will be passed on by political colleagues to Mr Hosokawa, now attempting to clear a path through the regulations holding back growth. He will find that many Japanese companies are reluctant to sever a network of ties among the bureaucracy, other companies in the same sector, and politicians that has served them well.

The truth is that there is no work left any more,' moans Mr Masao Saito, head of the International Technical Business Association, which is helping a group of small and medium-sized Japanese companies from Gumma prefecture to set up operations together in an industrial park in China.

The decision by these small companies to combine forces and move to China reflects the desperate situation they face as their traditional customers, the larger Japanese manufacturers, transfer more of their production overseas.

The sharp rise of the yen since the beginning of the year has meant that hardly a day goes by without one Japanese company or another announcing a new investment or expansion of already existing facilities abroad, particularly in Asia.

In the mid to late 1980s the move by Japanese manufacturers to set up operations overseas was considered a political necessity. Words such as globalisation and local procurement became corporate mantras and Japanese foreign investment reached Dollars 67.5bn in fiscal 1989 alone, according to Ministry of Finance statistics.

Overall, recent Japanese investment overseas has tailed off since then as most of the companies that needed to have established a presence in key markets outside of Japan and as the plunge in asset prices and slowdown of the Japanese economy has dented corporate profits.

The level of investment overseas declined to Dollars 34.1bn in the last fiscal year.

But with the yen's rise, overseas investment has once again become a necessity for the corporate survival of many manufacturing companies for economic rather than political reasons.

The moves to shift production overseas, coinciding this time with a recessionary environment and worries about rising unemployment at home, have raised concerns that Japan's industrial competitiveness will be undermined by the move of jobs and technologies overseas.

'If the yen continues at this level, we may have to move more production overseas,' warns Mr Tsuzo Murase, executive vice-president of Matsushita, the consumer electronics company.

But the company is considering its moves cautiously because of the need to maintain jobs at home, he notes.

Others, such as Aiwa, a medium-sized specialised audio company, have transferred the bulk of their manufacturing overseas in an attempt to survive the impact on its costs of the high yen.

The yen's rise is not just encouraging the shift of production to lower cost bases such as south-east Asia.

The need to reduce costs substantially in order to maintain cost competitiveness has also led to increased purchases of components from cheaper sources outside Japan.

As the yen climbed from an exchange rate of Y124 to the dollar at the beginning to the year to Y115 to the dollar by April, imports of major electronic components and equipment from Asia, including China, have surged.

In the first six months of the year, the dollar value of imports of office machinery from China tripled from the same period in the previous year while that of electronic components more than doubled, according to statistics from the Ministry of Finance.

From member countries of the Association of South East Asian Nations (Asean), then, office machinery imports rose 80 per cent while that of electronic devices increased 27 per cent and the picture is similar for imports from the newly industrialised countries.

Many Japanese computer makers have begun to procure some models in their PC line-up from lower cost sources overseas. Matsushita, for one, has set up a special unit to concentrate on procuring components from cheaper sources abroad.

These moves may help to maintain the competitiveness of the large manufacturers but the worry is that they are hurting the vast number of Japanese component makers which have been a crucial factor behind the country's industrial might.

As one Japanese manufacturer after another moves production overseas or looks outside of Japan for cheaper parts, Japan's small and medium-sized suppliers have been left behind to watch the industrial landscape at home being transformed by the manufacturing exodus.

Some, such as the electronic components maker Sanritsu, which has seen a large proportion of its business evaporate with the decision by its parent company to procure parts from cheaper sources in Asia, are being forced to close factories.

Even the more fortunate suppliers are being encouraged to diversify and reduce their traditional reliance on the parent company.

Nevertheless, despite growing signs of pressure on Japan's myriad suppliers, opinion is divided over whether the current trend will eventually lead to a hollowing out of Japanese industry.

The doomsayers who believe jobs and manufacturing technology are moving out of Japan, point out that the need for large manufacturers to shift production overseas in order to remain competitive means that their suppliers must also either move out of Japan or face consolidation.

Against those concerns, the optimists say that investment overseas by Japanese companies has not risen so dramatically as to warrant concern.

They also argue that Japanese industry has been shifting to more value-added products to make up for the gradual loss of commodity manufacturing to overseas industries.

'Japan has a high level of technology and education, so I am not worried about hollowing out,' says Mr Atsushi Kameno at the Ministry of Labour.

Japanese manufacturers - faced with the dilemma posed by, on the one hand pressure to shift more production overseas and, on the other, the need to maintain a strong manufacturing base at home - have generally kept to a policy of shifting low technology production overseas while gradually moving the emphasis of their businesses to higher value-added products.

They are also being forced, during the current squeeze on costs, to focus their energies and their R&D funds even more than before on areas which they have defined as key technologies.

Many electronics companies, for example, are increasing investments in liquid crystal displays and other key devices which are expected to see growing demand with advances in information technology.

If the current environment encourages such concentration on winning technologies it may help, rather than weaken, the ability of Japanese companies to come up with high value-added products to replace commodity manufacturing.

That in turn would help maintain Japan's industrial progress.

A salutary message has dawned on Japan's industrial companies as they face, in 1993, their fourth consecutive year of profits decline. The message is that this recession, the worst for 20 years, is wider and deeper than other downturns, for several reasons.

What used to be the two main growth sectors of Japan's industrial economy, cars and consumer electronics, are entering a probably longer-than-usual period of slow growth. Yet there is no obvious new growth industry to succeed them.

Secondly, this recession has exposed overcapacity that many leading companies suspected was there during the previous downturn in 1986, but which was then concealed by the fast rise in consumption - and industrial investment - at the end of the 1980s.

They already knew that Japanese-based manufacturing was being made uncompetitive by the yen's rise over the years. They had accordingly started to cut costs and shift production overseas, first to the UK and continental Europe and then to the fast-growing industrial economies of south-east Asia.

This year's unexpected fresh surge in the yen suggests that industry might after all be only at the start of relocating production outside Japan, prompting fears of a so-called 'hollowing out' of domestically-based industry.

How industry will respond to the shift in production and to the maturity of cars and electronics is the question now being discussed anxiously in Tokyo boardrooms. Companies used to look for guidance on big strategic issues like this to the Ministry of International Trade and Industry (Miti), the body which was mainly responsible for Japan's post-war success in spotting new growth industries to succeed the old.

But today, Miti has no clear answers to these new challenges. Its officials argue that centralised industrial planning is unsuitable for the open market economy which Japan has become, and that the best Miti can do is to help industries to reflect on the future. For the first time, the private sector may have to find its own way to the next phase of industrial development.

Finally, previous recessions, unlike this one, were triggered by external shocks, such as the 1973 oil price shock, or the rise in the value of the yen, sparked by the 1985 Plaza accord to curb the appreciation of the dollar.

Yet this recession is only partly related to the yen's continued rise. It also has internal causes such as companies' unwillingness to invest - in contrast with their tendency to increase capacity in previous recessions, in the hope of better times around the corner.

This time, however, the better times are proving slower to emerge. Japan's economic growth rate has fallen back for nearly four years running. Industry will cut capital investment for the fourth consecutive year in 1994, according to a recent survey by the Long Term Credit Bank of Japan.

Most economists think that gross national product will stagnate or fall by a fraction of a percentage point this year - the first year-on-year fall since 1974 - after 1.5 per cent growth in 1992. Even the government's Economic Planning Agency, often criticised for being over-optimistic, has abandoned its 3.3 per cent target for economic growth this year.

As one senior Japanese securities company executive puts it, previous recessions broke a limb, from which Japan quickly recovered, while this one is like a disorder of the circulation, which takes longer to cure. The government's medicine, including interest rate cuts, and about Y30,000bn of pump-priming measures over the past 13 months, have not yet revitalised the patient's system. The one available measure not yet tried is an income tax cut, and that is likely early next year.

There were signs that the economy might pick up in the spring, but since then economists have steadily downgraded their forecasts as a stream of gloomy indicators have shown that spring was a false start. Industrial output is on the slide, down 5 per cent year-on-year in September, for the 24th month running, the longest decline on record.

One structural weakness revealed by Japan's recession is the faltering supply of credit. Banks are still scarred by the collapse in asset prices that came with the start of the downturn, a problem highlighted when Muramoto Construction, a medium-sized contractor, sought protection from its creditors early last month with debts of Y590bn, Japan's largest post-war financial collapse.

A sharp decline in loan growth which began three years ago shows no signs of easing. Officially, bad debts account for 3 per cent of the leading banks' loans, although the proportion rises to nearly 10 per cent if the more stringent US definition of what constitutes a bad loan is applied, says Ms Alicia Ogawa, investment analyst at Salomon Brothers Asia, the securities house.

Banks deny that they are being too cautious. There are clear signs that demand for credit is just as weak as supply, despite the Bank of Japan's decision to cut its official discount rate by three-quarters of a percentage point in September to a record low of 1.75 per cent.

Corporate Japan has, as it usually does, reacted to its problems rapidly. The first sign that the industry's response to the downturn had entered a new phase came early this year when Nissan became the first Japanese carmaker since the second world war to announce a plant closure - at Zama, near Tokyo, with the loss of 5,000 jobs over the next three years.

Nissan's motives are echoed across Japanese industry. The group had cut costs in previous downturns, 'but then we tended to put on more weight, more fat than before,' when a recovery materialised, said Mr Yoshifumi Tsuji, Nissan's president. The Zama closure is part of a plan to reduce capacity from 2.5m units a year to 2.3m units over the next three years. This time, the group will stay smaller, says Mr Tsuji.

Industrial cost-cutting entered another important phase in September when NTT, the telecommunications group and a pillar of the industrial establishment, announced that it would shed 10,000 staff, through voluntary retirement, by next year.

This was significant because it reduced other companies' inhibitions about cutting jobs, still seen as socially unacceptable in Japan. In the weeks that followed, the Toshiba electronics group announced that it was to cut 5,000 jobs; Honda the carmaker 3,000; and Kawasaki Steel 3,200, to cite just some of the most prominent.

However, one taboo remains intact - Japanese companies' reluctance to impose straightforward redundancies. All the job losses announced so far by leading industrial companies will take place over a period of years and will be achieved through methods that appear painless by the standards of US or European competitors.

These include cutting down on recruitment, not replacing people who retire, or requiring surplus staff to move to other divisions or affiliate companies, some of which can be geographically remote.

This has enabled Japan to keep its unemployment rate low, at about 2.5 per cent. This does not include the estimated 800,000-1.2m employees who are surplus to companies' needs but are still kept on payrolls.

One consequence of Japanese industry's relatively gentle approach to job reductions has been to increase the pressure on salaries. Companies' determination to cut payroll costs is underlined by the present negotiations on bonuses, an important part of total salaries. The electronics industry has set the tone by cutting bonuses to the lowest level for 18 years, prompting uncharacteristic complaints from normally compliant unions. Car and steel industries are taking an equally tough line, likely to be continued when Japanese industry embarks on its annual wage round next spring.

All this has provoked widespread questioning - by both companies and employees - of Japan's social contract of a job for life in return for complete loyalty to the company. The car industry has already long experience of using temporary workers to increase flexibility and thus cut costs. But now an increasing number of big industrial groups, such as Sony and Toyota, are trying to employ a small proportion of people who are not expected to stay with the company all their lives.

The industrial consequence of surpluses in the workforce, the maturity of cars and electronics and the banking system's weakness, is to diminish Japan's growth potential.

For the past few decades, Japanese industry has always planned on the basis of fast growth - hence its former reputation of chasing turnover at the expense of profits. In the next few years it can expect economic growth of between 2.5 per cent and 3 per cent, roughly a percentage point less than in the 1980s, forecasts Mr Peter Tasker, chief strategist at securities house, Kleinwort Benson, in Tokyo.

All this indicates that Japanese industry is on the threshold of what will be a new experience for it: how to switch from the strategic offensive, to adjusting to a slow growth world.

The European Commission is facing calls from animal welfare groups to restrict the trade in live animals between member countries as it prepares a transit directive for discussion at the next meeting of agriculture ministers on December 13.

Pressure groups throughout Europe have formed a committee to urge the commission to lower maximum journey times for animals sent to slaughter across country borders.

Livestock can currently travel for 24 hours non-stop across the European Union although the UK imposes its own limit of 15 hours before lorries have to stop to feed and water the animals.

Animal welfare campaigners are calling for journey times to be cut to 8 hours, although the Germans want to go further and impose a 6-hour limit on journeys. Denmark and the Netherlands are believed to be sympathetic to the proposals.

In Britain, the Royal Society for the Prevention of Cruelty to Animals has been running a series of emotive advertisements about conditions experienced by UK lambs heading for the continent. 'Before they're roasted in garlic and rosemary, they're soaked in urine and excrement,' runs the text of one.

'We have scientific evidence that shows journey times over 8 hours cause significant stress in the animals,' an official said.

The RSPCA says public opinion over the transport of live animals is running high, but it has so far received little support from the UK government for its campaign.

Separately, Labour MPs have joined the RSPCA in calling on Mrs Gillian Shephard, agriculture minister, to ban the export of lambs from the UK to Spain following revelations about inhumane conditions in abattoirs.

Although it costs more to transport live animals than carcases, the trade in living animals, particularly shipments of lambs from the UK to France and Spain, has grown in recent years. Exporters have been encouraged by demand for live lambs in France following shortfalls in home production.

If lambs are slaughtered in French abattoirs, they can be classed as home-produced and command higher prices than imported carcases. This can more than cover the costs of exporting.

The trade in live animals from the UK, particularly sheep, destined for slaughter has grown from around 2m animals last year to an estimated 3m this year following changes in rules that made exports more competitive.

The UK lifted a ban on the export of live lambs to Spain at the beginning of the year with the introduction of the EU's single market. The government is fighting a claim for damages of more than Pounds 1m from Hedley Lomas, an Irish exporter based in the UK, which was refused export licences for live sheep from 1990 to 1992.

The RSPCA says the government could act unilaterally to ban the export of live animals to Spain again on moral grounds. The UK government says the commission must enforce rules on slaughter methods in Spanish abattoirs.

Multilateral talks on the problems of the world aluminium market had generated 'positive' momentum but were likely to end with no more than a 'broad framework' for easing the current oversupply, the head of a US industry group said as government delegates prepared to complete a two-day session here, reports Reuter from Washington.

Mr David Parker, president of the Aluminum Association, added that another session of talks would probably be held during the next six weeks.

Speaking after a closed-door briefing by US government negotiators, Mr Parker added that, 'there's been no discussion of formulas or numbers'. And he thought no such discussion was likely yesterday.

Government officials from the US, Russia, Australia, Canada, Norway and the European Union met on Wednesday to discuss ways of resolving the world aluminium glut, following talks earlier in the day that included industry representatives. The meeting was continuing yesterday.

Mr Parker noted that a number of factors made a quick agreement unlikely, including the General Agreement on Tariffs and Trade talks and the coming parliamentary elections in Russia, the main source of the flood of aluminium that has undermined the western market since the collapse of the Soviet Union.

He nevertheless expressed satisfaction with the talks so far, which were scheduled as a follow-up to multilateral talks held in Moscow in late October.

'The momentum that was generated at (Wednesday's) discussion we find to be positive,' he said.

He added, however, that the urgency of the issue was such that governments would be placed under pressure to find a solution.

Jamaica's bauxite mining and refining industry is weighing carefully the depressed state of the international aluminium market, hoping that companies operating in the island will not be dissuaded from continuing a USDollars 500m investment programme over the next seven years.

As the world's third largest producer of bauxite (aluminium ore), however, the island is feeling the effects of falling metal prices. Ore production, which slipped last year by 1.5 per cent to 11.3m tonnes, is expected to be unchanged this year, as is alumina (aluminium oxide) production, at 3m tonnes.

It is in the earnings from the industry - an important component of the island's narrow economy - that Jamaica is feeling the pressure. Mr Carlton Davis, chairman of the Jamaica Bauxite Institute, says that the soft metal market is depressing Jamaica's earnings from bauxite and alumina, most of which is through production levies and income taxes.

While bauxite production fell only marginally last year, the island's earnings from the industry declined by a hefty 13.6 per cent to Dollars 577m. Jamaica will be fortunate if earnings amount to Dollars 500m this year, Dollars 200m less than two years ago, says Mr Davis. This forecast is supported by figures showing bauxite production in the first three quarters of this year down 1.4 per cent from a year ago, with alumina output little changed.

Earnings have also been depressed by a steady depreciation of the Jamaican dollar over the past two years, with mining and refining companies spending less to meet local costs.

'The current state of the market might lead some companies to reconsider their capital programmes,' says Mr Davis. 'But conventional wisdom in the industry is that it is in times like these that one prepares to meet an upturn in the market.'

The aim of the Jamaican industry is to lift refinery capacity, which is now being fully utilised, to 5m tonnes a year by the year 2000. The Jamalco refinery in central Jamaica, owned jointly by the island's government and the Aluminum Company of America, is being expanded to a rated capacity of 1m tonnes a year, from 700,000, at a cost of about Dollars 60m. Already under consideration is a later expansion that could lift capacity to 2m tonnes a year.

Alumina Partners of Jamaica, owned by Kaiser of the US and Hydro Aluminum of Norway, is spending Dollars 200m to increase the output from the island's largest refinery to 1.5m tonnes year, and then to 2m tonnes by the turn of the century.

Two refineries operated by Alcan of Canada, with a combined capacity of 1.1m tonnes a year, are being refurbished to lift output to 1.5m tonnes. Mr Davis says that the plants could be further expanded to produce 2m tonnes a year, using a grade of ore that was not yet being processed by the company.

While there is optimism that the state of the industry will not adversely affect these expansion plans, there has been reconsideration of two ventures. The governments of Jamaica and Trinidad and Tobago had been discussing the construction of an aluminium smelter in Trinidad, using a 'modular' system, starting with a small plant and enlarging in stages to meet market demand. Both governments were considering starting with a 'module' with a plant of 55,000 tonnes per year. Mr Davis says this project is not now being given priority because of the state of the market, and uncertainty over the cost of the local natural gas which would fuel the plant.

The industry's plans also included the construction of a caustic soda plant to reduce reliance on imports to meet the demand for 300,000 tonnes per year for the refineries. The project for a 50,000 tonnes-a-year plant has been put back, Mr Davis said, because of a significant drop in world prices of caustic soda.

In a longer term project, the Jamaican industry is testing ore deposits in the north and north-western districts that could supply one or two new refineries. The island's government is planning an approach to multilateral financial institutions, and to aluminium majors, in an effort to stimulate interest in financing and operating the refineries. If these projects are not feasible, the ores will be used to feed the expanded refineries, Mr Davis says.

'Jamaica is one of several locations which can attract new investment in the industry,' he acknowledges. 'There are many questions being asked about the continued efficiency of plants in North America and Europe. Along with Australia, India, Brazil and Venezuela, Jamaica is a profitable location for added production. The industry is very competitive.'

---------------------------------------------------- Jamaican Bauxite Output (tonnes) ---------------------------------------------------- 1980 12m 1987 7.6m 1981 11.6m 1988 7.4m 1982 8.3m 1989 9.3m 1983 7.6m 1990 10.9m 1984 8.9m 1991 11.6m 1985 5.9m 1992 11.3m 1986 6.9m 1993 11.3m* ---------------------------------------------------- *Projected. Source: Jamaica Bauxite Institute. ----------------------------------------------------

Centromin, Peru's state-owned mining and refining giant, will go on the auction block early next year, company president Mr Hernan Barreto told delegates to Metals Bulletin's Latin America conference, which opened in Lima yesterday.

According to Mr Barreto, the company has a portfolio of 22 mining projects all over Peru 'waiting for investors to come along', in addition to the seven units currently operating. In all it has over 2,000m tonnes of proven and probable reserves, The most important projects are Toromocho and Antamina, which have pre-feasibility studies completed and are intended to replace Centromin's Cobriza copper mine, where reserves are expected to run out in six years.

Centromin is a vast mining and metallurgical complex that has developed over 90 years (until 1974 operated by the US-based Cerro de Pasco Corporation). The decision has been definitively taken to sell it as a single unit.

Mr Barreto was coy about the actual value he would place on Centromin, although he mentioned 'several hundred million (dollars)'. Assets total Dollars 1.6bn, he said, but the new owner would have to assume substantial company liabilities as well.

The sale of what Mr Barreto admitted was a hugely complex asset will be facilitated if secondary debt paper is accepted. A new law, passed by Peru's Congress on 19 November, sets the framework for Peruvian debt to be used in privatisation - under this ruling a minimum 10 per cent will still have to be paid in cash. Precise details are to be worked out on a case-by-case basis but the prospect was viewed with 'great enthusiasm', Mr Barreto said.

Twenty-four companies pre-qualified to bid for Centromin, but an unspecified number have pulled out as a consequence of the decision not to split the company into separate units. According to Mr Barreto, 'three or four' major international companies remain seriously interested and are forming bidding consortia - industry sources say these include Mexico's Penoles, Britain's RTZ, Cominco of Canada and South Korea's Daewoo.

For all its problems - of which environmental pollution is perhaps the most daunting - Centromin looks a much more attractive investment prospect today than it did two years ago. Under a new, private-sector board, a 1991 loss of Dollars 163m was turned into pre-tax profits of Dollars 26m last year. Poor international minerals prices this year pushed profits to September down to just under Dollars 4m, however.

But, says the indefatigably optimistic Mr Barreto, Centromin is a 'very attractive prospect'. It is polymetallic (40 per cent of current income comes from zinc, 28 per cent from copper, 20 per cent from silver and 11 per cent from lead) so income is diversified and partially protected from price fluctuations. It is a going concern with a wide range of assets and projects. And, importantly for the future owner, the workforce has been sharply reduced from 19,000 two years ago to today's 11,700, while at the same time output has been increased.

Russian aluminium producers 'are starting to price themselves out of world markets', according to a study by the Anthony Bird consultancy.

Russian production costs, which in mid-1993 were 61 per cent of western levels, up from 46 per cent a year earlier, last month reached 94 per cent and are 'still rising', Bird says. 'The flood of metal from east to west will cease,' it suggests, as only two Russian smelters are likely to be competitive in the longer term.

Bird calculates average western operating costs at 51.5 cents a pound, compared with a market price yesterday of 49.2 cents. Inclusion of capital servicing costs and normal profits raises the costs figure to 64.7 cents a pound.

Aluminium Production Costs 1993: Pounds 4,200, from Anthony Bird Associates, 193 Richmond Road, Kingston upon Thames, Surrey, KT2 5DD, UK.

The Australian market, after easing throughout last week, stabilised when sales were resumed and showed a little morestrength yesterday. This represents an overall picture as indicated by the Australian Wool Corporation's market indicator, which a week ago was 468 cents a kg., and by yesterday was at 469 cents. Some wool types eased, mainly finer Merinos, but others were firm to dearer, with middle range Merino fleece in strong demand yesterday at Adelaide. Trade generally subsided a couple of weeks ago with prices and buyers remaining cautious.

The Bundesbank's latest rate cut fuelled easing hopes among Germany's European neighbours, prompting investors to shift funds into shorter maturities and causing yield curves to steepen.

While the Bundesbank left its discount and Lombard rates unchanged, it cut its rate for securities repurchase agreements by 1/4 point and set 6 per cent fixed-rate repos for the next five weeks.

The German yield curve steepened after the Bundesbank's announcement, with 10-year yields rising by two basis points and the rate for three-month Eurodeposits falling by 13 basis points.

With the repo rate fixed for the next five weeks, a widespread feeling that there will be no more key rate cuts until January caused the sell-off at the long end, said Torsten Bohler, bond analyst with UBS.

The longer-dated sector was also damped by the announcement of new ultra-long supply after the Bundesbank cancelled the 10-year bund issue scheduled for December and announced the auction of a new tranche of 6 per cent bonds due 2016.

The December bund future fell 0.22 point to 99.68, while the three-month Euromark future climbed 0.06 point to 93.92.

The Bundesbank's rate cut fuelled speculation that France may soon deliver its long-awaited rate cut, with some traders betting on a 1/4 -point rate cut as soon as today, or a cut in the 6.45 per cent intervention rate at Monday's Bank of France repo.

But others said the French authorities may prefer to wait until Germany lowers its official rates before following suit. According to Mr Michael O'Hanlon, chief international economist with Kidder, Peabody Securities, the French authorities do not want to risk pressuring the franc by a unilateral cut in official rates.

Moreover, he said France still has to repay some of the intervention funds it borrowed during last summer's currency crisis, and needs to fully replenish its foreign currency reserves before being in a comfortable position to cut rates.

The December notional bond future on Matif ended 0.10 point lower at 124.10 while the three-month Pibor future rose 0.08 point to 93.60.

UK gilt traders also reported heavy demand for short-dated debt as investors took profits at the long end. The March long gilt futures contract slipped by 5/16 to 116 3/4 .

Italian bonds weakened further on political worries ahead of the second round of municipal elections on Sunday. The March BTP contract on Liffe fell 0.42 point to 111.43.

However, some said this represents a buying opportunity for medium-term investors. 'Italian bonds are getting to very attractive levels,' said Marc Hendricks, head of international bond research at Swiss Bank Corporation.

US Treasury bond prices softened yesterday as the market digested a batch of second-tier economic statistics and awaited the government's report on November employment due out today.

In late trading the benchmark 30-year government bond was down 3/16 at 99, with the yield edging higher to 6.268 per cent. At the short end, the two-year note was unchanged at 100 1/16 , to yield 4.20 per cent.

The market weathered the day's generally upbeat readings on the economy with little fanfare. Prices inched ahead soon after the release of the data, mainly because the figures were in line with expectations.

The Commerce Department said personal income in October had risen 0.6 per cent from September to October, and personal consumption climbed 0.8 per cent. The Labor Department, meanwhile, said initial claims for state unemployment benefit last week showed a modest decline.

More favourably for bonds, October sales of new homes dipped 6.5 per cent against September's figure, which was revised downward.

However, prices slipped into negative territory as the morning progressed amid speculation that the Clinton administration may support an increase in short-term interest rates early next year.

Germany's Treuhand privatisation agency will shift its borrowing to longer-term instruments because of lower interest rates, Mr Heinrich Hornef, a member of the board said yesterday.

The Treuhand, which was set up in 1990 to privatise and restructure eastern German industry, will have a deficit of DM216bn by the end of 1994, and will have a total accumulated debt of DM275bn.

At the same time, the net borrowing requirement for the Treuhand will total DM44bn for 1994, of which DM38bn will be earmarked for running costs. The remaining DM6bn will be used to service the interest from the Krediabwicklungsfond, the government-backed fund set up to cover the debt of the former east Germany.

The DM44bn will be raised through bonds and medium-term notes. But Treuhand officials said the agency would focus on longer-term financing because of the gradual fall in Germany's interest rates.

By the end of 1993, the agency will have borrowed a total of DM133bn through bonds and Treuhand obligations, or medium-term issues.

The agency has a net borrowing requirement of DM44bn in 1994, and on top of this it has DM39bn of old debt, which is due to be paid back, and will be restructured.

The agency is due to be dissolved late next year, after it had privatised more than 12,000 of enterprises placed under its control.

By October, the agency had 1,392 enterprises on its books. It had obtained DM181.6bn of investment commitments, earned DM44.3bn in sales, and secured 1.48m job guarantees.

However, these investment and employment commitments are not indefinite. Many are spread out over a maximum of five years. To monitor the implementation of these contracts, the Treuhand has set up a special contracts department which will not be wound up until the contracts expire.

However, the agency will be still be saddled with about 500 enterprises. Some have already been placed in Management KGs - enterprises which the Treuhand will pass on to west German managers for restructuring and preparation for privatisation. The agency has allocated more than DM17.3bn for this purpose.

Apart from the Management KGs, the Treuhand will be left with some of the most difficult enterprises to restructure and privatise. These include Deutsche Waggonbau, the rail carriage manufacturers, Sket, the large machine tool complex, and the chemical sectors of Leuna and Buna.

Beyond that, the agency will invest DM4.3bn in eastern Germany's chemical sector, which has yet to be privatised. It will also earmark a further DM5.4bn for environmental clean up and land reclamation of chemical and brown coal mines which have been closed.

Mr Hornef said he expected the agency to earn about DM11bn from privatisation sales next year, which include selling off Veag, eastern Germany's largest utility company.

Merck, the large US pharmaceuticals group, yesterday made its first appearance in the Eurobond market in order to help finance its Dollars 6bn acquisition of Medco Containment, a drugs mail order company.

The triple-A rated borrower raised Dollars 250m through an issue of five-year Eurobonds which were priced to yield 15 basis points over US Treasuries, in line with market expectations.

The scarcity of top-quality corporate issuance in the Eurobond market contributed to the success of Merck's debut offering. 'Although the market is not in fantastic shape, the transaction has gone very well,' said lead manager Morgan Stanley.

Syndicate managers at other banks described the issue as a 'blowout'. Investor demand for the bonds was such that when the bonds were freed to trade the spread tightened to 13 basis points. Morgan Stanley said that more than half of the bonds were sold to investors in the UK and Switzerland, with the remainder being placed elsewhere in Europe.

Mr John Kearney, Merck's assistant treasurer, said that the proceeds of the issue would be used to re-finance some of the short-term funding linked to the Medco purchase. A good portion of the Dollars 2.4bn cash part of the acquisition had been raised in the commercial paper market, he said.

According to Morgan Stanley, Merck saved around 10 basis points by tapping the Eurobond market rather than the US domestic bond market. Mr Kearney added that Merck could well return to the Eurobond market early next year.

The Bank of Greece also tapped the Eurodollar sector with a widely-expected Dollars 500m issue of five-year floating-rate notes (FRNs). The notes were priced to yield 115 basis points over Libor, in line with market expectations.

Joint lead manager Salomon Brothers said that sales of the bonds had got off to a good start, with demand coming from eastern Asia and from yield-hungry investors in Europe. However, the notes were likely to remain in syndicate for the next couple of days.

The Inter-American Development Bank (IADB) raised Fl 300m through an issue of seven-year Eurobonds, which more or less completed its Dollars 3.8bn international borrowing programme for this year.

Mr Stephen Abrahams, chief of the IADB's capital markets division, said the yield spread on the bonds of 13 basis points over Dutch government bonds was in line with spreads on outstanding bonds issued by other triple A-rated borrowers. The proceeds of the issue would be kept in guilders.

Mr Abrahams said that the IADB was likely to borrow a similar amount in 1994 but that a larger portion could be raised in dollars.

Spain's MEFF fixed income exchange said it would start trading an options contract based on notional 10-year Treasury bond from January 11 1994, with monthly maturities, Reuter reports from Barcelona.

The contract will give investors and fund managers a new instrument to cover interest rate risk.

MEFF already trades an options contract on 10-year notional bond, but with quarterly maturities.

In September volume rose to 1.78 contracts from 894,469 in August.

New Zealand's state-owned Electricity Corporation yesterday announced a profit of NZDollars 256m (USDollars 140m) for the six months to September 30, almost NZDollars 100m more than in the comparable period last year, writes Terry Hall in Wellington.

The government is under pressure from the business community to privatise the company, its most valuable remaining unsold state asset. However, this week the new finance minister Mr Bill Birch repeated the prime minister's pre-election promise that it would not be sold.

Revenue rose by NZDollars 22m to NZDollars 899m, helped by a 6.2 per cent rise in volumes. Price rises were limited to 2 per cent, which the company said meant real prices for electricity had fallen 15 per cent since 1987.

The company had a 12 per cent return on shareholders' funds.

An initial public offering of 60m shares in Pactel, the mobile communications arm of Pacific Telesis, the Californian-based Baby Bell telephone company, was priced last night at Dollars 23 a share, raising nearly Dollars 1.4bn, writes Martin Dickson in New York.

The offering is the first stage of a plan by Pacific Telesis to spin off the company as a separate entity. The remaining Pactel stock - amounting to 80 per cent or more of the total outstanding - will be distributed to existing Pacific Telesis shareholders in the new year.

The company had been expected to offer the shares at between Dollars 21 and Dollars 23.

The lead underwriter is Lehman Brothers. Some 42m of the shares are being sold in the US and the remainder in international markets.

A new tax on foreign investment in Brazil's lucrative local currency fixed-income market - announced as part of the government's plans to tackle inflation - is expected to squeeze out most short-term speculators who had been taking advantage of real annual interest rates of up to 20 per cent.

But a new tax on Eurobond issues by Brazilian companies announced at the same time probably will not reduce new issue volume significantly, according to bankers in Brazil. Banks, the biggest issuers, are expected to pass on the extra cost to the local borrowers. For private sector companies, it will remain much cheaper to go to the Euromarkets than to local lenders.

The government's moves are aimed at stemming the huge tide of dollars entering the country, attracted by a high real interest rate policy which aims to combat inflation. The inflow is itself inflationary, since the central bank is obliged to issue local currency, the cruzeiro real, in exchange for foreign currency. This increases the money supply and helps to sustain Brazil's chronic inflation, now nearly 2,000 per cent a year.

'The measures are understandable and will help the government's macroeconomic plans,' said Mr Vincent Parkin, Brazilian representative for CS First Boston.

Last Thursday, the government ruled that foreigners investing in fixed-income instruments will have to pay a financial operations tax at 5 per cent on the capital they bring into Brazil, which will have to be channelled mainly to a new type of fixed-income fund for overseas investors to be managed by the private sector. Issuers of Eurobonds will have to pay 3 per cent tax on the money they raise.

Money market traders said that investors would have to leave their money in the new funds for at least five to six months to make paying the tax worthwhile.

Shuwa, a Japanese stock and real estate speculator, is to sell its 26.7 per cent stake in leading department store Isetan, built during the Tokyo stock market boom of the late 1980s.

The country's retail industry has been closely following developments surrounding Shuwa's stake in Isetan, after leading supermarket operators and department stores wanting to expand their businesses offered to buy the shares off the ailing stock specu-lator.

Before its downfall, Shuwa invested heavily in leading retailers - much of which has been bought by Daiei, Japan's largest supermarket chain.

Mr Kazumasa Koshiba, president of Isetan, said Shuwa would sell the 58.8m shares to 41 companies at Y1,300 per share. The announcement, made after the market closed, may pull down Isetan's share price, which finished at Y1,780 on the Tokyo stock exchange yesterday.

Mr Koshiba said the price was decided on the advice of Nikko Securities, its leading underwriter, and was based on prices of other department store shares. Shuwa will receive Y76.4bn (Dollars 70m) from the equity sale.

Of the 41 companies which will take on Isetan stock, three are financial and 38 non-financial.

Although Mitsubishi Bank, Isetan's main creditor and shareholder, will not buy any of the shares, eight companies belonging to the Mitsubishi keiretsu, or corporate grouping, will be among the purchasing companies.

The first gesture of Mr Abdulhadi Shayif, deputy general manager of National Commercial Bank (NCB), as he greets visitors in his lofty office overlooking Jeddah is to hand over a slim 12-page brochure containing the bank's results for 1991 and 1992. 'It makes a nice change to be able to give people something,' he says, with open delight.

His delight is not surprising. The figures are the first that Saudi Arabia's biggest and oldest bank has published in three years, and the first passed unqualified by the bank's auditors since 1987. They cap, Mr Shayif says, the end of a troubled few years for a bank which was a foundation stone of the kingdom's banking system and is probably still its best connected financial institution - meaning closest to the ruling al-Saud family. 'The abnormal period is over,' he says.

The figures show the bank returned a profit in 1992 of SR427m (Dollars 114m), up 168 per cent on 1991. No results, however, have been released for 1990. Says Mr Shayif: 'They were audited but are not available for publication.' Asked if they show a loss, he replies 'no comment'.

NCB's missing 1990 results are a clue to the damage done by six years of internal disputes over non-performing loans - the cause of the auditors' qualification and last year's suspension of the bank's credit rating by Cyprus-based ratings agency Capital Intelligence. There was also last year's indictment in New York of Mr Khalid bin Mahfouz, then chief operating officer, on fraud charges connected with the BCCI scandal.

Mr bin Mahfouz has since resigned, and the BCCI affair is dismissed by Mr Shayif as 'a separate and personal issue - the damage is behind us and the confidence of international banks is back'.

Nevertheless, that affair, along with the non-appearance of results, contributed to NCB's closure of its New York, London and Cayman Islands branches - in the former cases under pressure from the US and British authorities - which stripped Dollars 2.5bn from its total customer deposits.

These closures, says Mr Shayif, are the reason deposits have fallen to Dollars 13bn from Dollars 17bn between 1989 and 1992. The bank's balance sheet has shrunk to Dollars 17bn at the end of 1992 from Dollars 23bn in 1989, while its market share of commercial banking assets in Saudi Arabia has slipped to 22 per cent from 34 per cent.

The bank's notorious and mysterious bad debts are also a thing of the past, Mr Shayif says. 'You could now classify our portfolio as normal, and the provisions are quite adequate,' he says. However, the provisions shown in the 1992 figures merely hint at the debt problem bank analysts believe NCB has now put behind it. These totalled SR470m in 1991 and SR81m in 1992.

But according to analysts at Capital Intelligence, which last month reinstated NCB's credit rating, loan loss provisions taken by the bank since 1980 - including CI's own estimate of provisions or write-offs made in 1990 - probably amount to nearer SR10bn, suggesting problem loans were between 25 and 30 per cent of its entire portfolio. Mr Shayif has no comment on the debts - which have been shrouded in speculation for years and attributed to what analysts wryly describe as 'very senior Saudis'.

In 1991, the accounts also show that the bank allocated the full balance of its other capital reserves, a total of SR910m, as provisions against the 'decline in value of investments', which CI takes to mean cover for about 70 per cent of the bank's residual holding of BCCI convertible bonds.

But the longest awaited step in restoring the bank to a sounder footing was the decision of the bin Mahfouz family to recapitalise NCB with an injection of SR6bn - a considerably greater capitalisation than anyone in the Saudi banking industry had expected and one which makes the bank the biggest in the kingdom, not only by assets but also capital base. The move brings NCB's BIS formula risk/asset ratio to a comfortable 13.76 per cent, according to CI.

For the present, the recapitalisation has not altered the shareholding structure of Saudi Arabia's only privately-owned bank, which is 90.5 per cent in the hands of the bin Mahfouz family with most of the remainder held by members of the Kaki family.

Mr Shayif says the injection has taken the form of bridging finance, until the two shareholding families determine how and if the shareholding is to be altered. He adds that the move is also likely to defer for the foreseeable future any plans to float part or all the bank's shares on the Saudi stock market - an option which had been under consideration last year.

Mr Shayif denies that NCB's internal problems caused it to take its eye off its place in an increasingly sophisticated, profitable and competitive Saudi banking market, where consolidated profits in the sector rose by 29 per cent in 1992 and are about 25 per cent up for the first three quarters of 1993.

But while the bank claims a lead in the number and efficiency of its ATMs, an edge in the breadth of its local coverage and market leadership in unit fund management in the kingdom, NCB has undeniably lost market share to nimbler rivals - notably such joint-venture banks as Saudi British Bank, Saudi American Bank and Saudi Hollandi Bank.

But the bank hopes to address this with the appointment earlier this year of Mr Michael Callen, former head of Citibank's global finance operations, as special adviser on a management restructuring. Costs are being cut, staff reduced by 10 per cent to 6,900 by the year end and a programme of rationalisation and modernisation is under way. If all of this has the desired results, at least this time they will be publicly visible.

Navistar International, the Chicago-based truck and diesel engine manufacturer, posted a turnround to income of Dollars 22m or 28 cents a share for the fourth quarter. The extent of the improvement surprised Wall Street, which had pushed Navistar's stock down in anticipation of a weak earnings report.

The gain reverses a Dollars 30m or Dollars 1.46 per share loss in the fourth quarter of 1992, when the company took a charge of Dollars 23m for a vehicle recall.

Sales for the quarter were up 14 per cent to Dollars 1.3bn, boosted by an 18 per cent gain in shipments of mid-range diesel engines and a 13 per cent increase in shipments of medium and heavy trucks in North America.

A year ago, Navistar recorded fourth quarter sales of Dollars 1.1bn.

For the year ended October 30, Navistar reported a net loss of Dollars 501m or Dollars 15.19 per share. The loss includes a previously announced Dollars 513m contribution to an employee benefits programme, established in the third quarter to alleviate Navistar's long-term pension and health-care obliga-tions.

In the fiscal year 1992, Navistar suffered a loss of Dollars 212m, or Dollars 9.55 per share.

Excluding the special charges, Navistar reported pre-tax income of Dollars 72m for the year, compared with a loss of Dollars 145m from continuing operations in 1992.

Navistar's sales for the year were up 21 per cent at Dollars 4.69bn, from Dollars 3.87bn a year ago.

Mr James Cotting, Navistar's chairman, said the company anticipates moderate growth in the North American economy. He projected 1994 North American medium truck and school bus chassis demand to be up 11 per cent over 1993, at 136,000 units, while heavy truck and diesel engine sales were expected to be flat in 1994.

The Chicago Board of Trade, the world's busiest futures exchange, posted an all-time single-month volume record in November, with a turnover of 19.7m contracts, up 64.7 per cent on a year ago.

For the first 11 months of this year the board reported volume up 18 per cent at 165.8m contracts, above its previous world record of 154mfor all of 1990. The Chicago Mercantile Exchange is also reported record year-to-date figures, with 13.6m contracts in November, up 22 per cent.

Australia's finance minister, Mr John Dawkins said he would not object to a ConAgra plan to increase its stake in Australia Meat Holdings to 90.9 per cent from 50 per cent, Reuter reports from Camberra.

ConAgra is buying the shares from Elders Meat Investments, a Foster's Brewing Group unit in a transaction worth about ADollars 100m (USDollars 66m). Foster's said it made a profit of about ADollars 47m on the deal.

GE Capital, the financial services arm of General Electric, is to take on the running of Exxon's credit card business, adding an estimated 12m cardholders to the 70m holders of 'private label' credit cards whose accounts it already administers for other retailers.

GE Capital, which is also buying Exxon's existing credit card receivables, will administer all aspects of the business, though the cards will continue to bear the Exxon name.

Unlike Shell Oil, which last month sought to expand its card business by launching a MasterCard in association with Chemical Bank, Exxon's move suggests that it intends to keep a private label card, available for use only in its own service stations.

Like other oil companies, Exxon has been in the credit card business a long time, issuing its first cards in 1929. However, with the exception of Shell Oil, the companies have been slow to move to co-branding, despite the success of co-branded cards issued by AT&T and others.

According to MasterCard, there are around 117m private-label oil company cards in issue, generating Dollars 27bn of payments each year.

BellSouth, the largest of America's 'Baby Bell' regional telephone companies, yesterday filed a legal challenge to the proposed Dollars 12bn takeover of McCaw Cellular Communications, the wireless telephone group, by long-distance carrier American Telephone & Telegraph.

However, the company indicated that its primary purpose was not to block the McCaw deal, but to use the suit as a lever to remove certain legal restrictions on Baby Bells' operating in the long-distance wireless market.

Its motion was filed in the US district court in Washington, DC, before Judge Harold Greene, who presided over the 1982 anti-trust court case which led to the spin-off from AT&T of the seven local 'Baby Bell' telephone companies.

As part of the break-up, the Baby Bells were forbidden to operate in the long-distance market, while AT&T was prevented from acquiring the stock or assets of a Baby Bell.

BellSouth argues that the proposed McCaw takeover violates the anti-trust settlement because McCaw owns minority interests in several cellular properties where Baby Bells hold the majority stake. AT&T dismisses this claim.

BellSouth says it is prepared to support modifications to the anti-trust settlement, allowing the McCaw deal to proceed, provided that in return the Baby Bells are allowed to compete on equal terms with AT&T in the wireless market.

This would mean allowing them to send calls out of court-mandated local areas, as well as removing restrictions which force Bell companies to offer their wireless customers a choice of companies to handle their long-distance cellular traffic.

'Non-Bell companies can save money by combining all of their long-distance traffic to take advantage of volume discounts,' it said. 'This gives McCaw an enormous competitive advantage in the wireless market.'

Canadian Imperial Bank of Commerce staged a strong earnings rebound in fiscal 1993, thanks to a sharp drop in loan-loss provisions, and record retail and investment banking earnings.

But the bank, which was one of the biggest lenders to failed property developer Olympia & York, said it continued to have real-estate problems.

Earnings of Canada's second-biggest financial institution totalled CDollars 730m (USDollars 547m), or CDollars 2.99 a share, in the year to October 31, against a loss of CDollars 12m, or 59 cents per common share, a year earlier. Last year's losses were due to the bank's exposure to O&Y.

Return on assets for 1993 was 0.53 per cent, compared with 0.01 per cent. Assets stood at CDollars 141.3bn on October 31, up from CDollars 132.2bn a year earlier. Loan-loss provisions dipped to CDollars 920m from CDollars 1.84bn. Non-performing loans stood at CDollars 2.43bn on October 31, or 2.3 per cent of total loans, from CDollars 3.04bn, or 3 per cent.

Fourth-quarter earnings jumped to CDollars 191m, or 75 cents a share, from CDollars 45m, or nine cents a share.

The continued difficulties in the real-estate market are reflected in the transfer of CDollars 100m in excess loan-loss reserves from country-risk provisions to a special provision set up last year for troubled property loans. Real-estate provision now stands at CDollars 250m.

Mr Al Flood, chairman, said: 'While there is evidence that real estate values in North America have stabilised, we do not expect an early turnround.'

Kmart, the second biggest US retailer, yesterday confirmed plans to sell its PayLess drug store chain to a company controlled by Leonard Green & Partners, a Los Angeles investment firm, for more than Dollars 1bn.

The purchaser, TCH Corporation, will pay Kmart Dollars 592m in cash and assume Dollars 170m worth of debt. The remainder will take the form of 47 per cent of TCH's equity and Dollars 100m worth of subordinated debt securities.

Kmart said it was in the process of putting a value on the TCH equity.

Grupo Televisa, the Mexican media group, has been granted a concession to 62 television stations that will enable it to extend a television network across much of the country.

Televisa serves 90 per cent of Mexico's television audience, and takes a similar proportion of advertising. The new network will give the company a total of 291 television stations, about 51 per cent of the total in the country.

The concession has caused a controversy since the beginning of the year. Rivals complained that while the government was selling off two state-owned television national networks in an open auction, Televisa was being given another national network without any competition.

The concession was granted to Radiotelevisora de Mexico Norte, a subsidiary of Televisa, after it promised to pay the Mexican government Dollars 91m.

The two state-owned television networks were sold for Dollars 646m last July, to an investor group headed by Mr Ricardo Salinas of Grupo Elektra.

Critics say Televisa is being rewarded for its close co-operation with Mexico's ruling party.

Televisa was not available to comment on the transaction.

The company is planning a secondary stock offering of about Dollars 900m later this month, which will give it a full listing on the New York Stock Exchange.

The stations will enable Televisa to turn Channel 9, a local channel, into a network with of covering much of Mexico.

The company has three other networks, with varying degrees of national penetration.

Televisa has 90 per cent of Mexico's television audience, and takes a similar proportion of advertising.

The rapid rise of Alcatel-Alsthom to its position as one of France's most profitable companies has been based on its ability to forge industrial alliances and acquisitions.

The merger of the telecommunications activities of Compagnie Generale d'Electricite and ITT of the US gave birth to Alcatel in 1987. Since then, milestones in the group's expansion have included a joint venture with GEC of the UK in transport and energy and the acquisition in 1990 of the telecommunications equipment operations of Fiat of Italy.

Now, Mr Pierre Suard, chairman of the group, has his eyes fixed on Framatome - the state-controlled French nuclear reactor group with interests in electrical components and computer services and annual sales of more than FFr12bn (Dollars 2.04bn).

He believes the centre-right government of Mr Edouard Balladur is preparing to give the green light to Alcatel-Alsthom's long-held ambitions to raise its 44 per cent stake in Framatome to a majority holding.

This is not the first approach from Alcatel-Alsthom. In 1990, the group briefly managed to raise its stake to 52 per cent, from 40 per cent, before the Socialist government of Mr Michel Rocard forced it to reduce its share-holding.

For Mr Suard the logic is as clear now as it was then. 'We are present in all areas of power generation except nuclear,' he says.

To illustrate the possible advantages of a merger he points to the case of Daya Bay in China where GEC-Alsthom is building a conventional power station and Framatome is developing a nuclear facility.

According to Mr Suard, negotiations would have been simpler had the deal been struck with a single group. Framatome's electrical components and computer services operations would also fit well with Alcatel-Alsthom.

If Mr Suard's wish is granted, Alcatel-Alsthom should see its competitive edge further honed. It is already sharp. Confronted by the worst economic downturn in Europe since the second world war, the group has resisted well.

Net profits, says Mr Suard, are likely to be about the same this year as the FFr7.1bn recorded in 1992. In the three preceding years, profits increased by about FFr1bn annually.

This resistance is partly the result of the timing of the continent's economic cycles. 'In 1991 and 1992 the Spanish market was very bad but the German market was strong,' says Mr Suard. The group's principal divisions - telecommunications, transport and energy, and electrical engineering - have also proved relatively secure.

But the outlook remains difficult. Mr Suard is not yet convinced by government claims that the French economy has stabilised and will start to recover from the end of the year.

'I don't see any signs of recovery which confirm the encouraging indicators of June and July, such as a pick-up in investment activity.'

According to Mr Suard, the German market remains depressed, while government procurement in Italy has been 'paralysed' by the wave of scandals and corruption investigations.

The response from Alcatel-Alsthom has included a strong push in productivity. 'We have always been careful to restructure as soon as it is necessary,' says Mr Suard.

But this is not easy, particularly when the group is profitable. GEC-Alsthom, for example, has recently faced a series of demonstrations as French workers protest against planned job cuts.

In the face of depressed European markets and what Mr Suard perceives as damaging rigidities in the continent's labour markets, Alcatel-Alsthom has stepped up its efforts in non-European markets, in particular in east Asia.

In addition to the Daya Bay power stations, GEC-Alsthom has won orders for a Dollars 2.4bn South Korean high speed train project and contracts across the region for engineering projects.

East Asia accounts for about 10 per cent of sales - a proportion which could be doubled within 10 years, according to Mr Suard.

If overseas markets have helped maintain profits, they also raise the stakes for Alcatel-Alsthom in the transatlantic wrangling over the Uruguay round of international trade talks.

Few companies are as European as Alcatel-Alsthom, which derives three quarters of its sales from the continent. It has its financial base in the Netherlands, its management base in Paris, and its biggest telecommunications market in Germany. Any threat to free-trade between Europe, the US and east Asia could, therefore, have damaging implications.

Mr Suard, however, is sanguine. 'We tend to manufacture where we sell,' he argues, discounting the impact of a failure of the trade talks.

In the US, for example, the group has about 12 per cent of the market for cables. Over the border in Mexico, however, the Nafta accord is likely to mean higher tariffs for switching equipment imported from Belgium.

The Alcatel chairman says he is in favour of a successful conclusion of the Uruguay round, providing it is on acceptable terms.

This response reflects anxieties about the terms of the current debate. Chief among them are the lack of reciprocity in public procurement contracts - an important source of orders for Alcatel-Alsthom - and restrictions on foreign ownership of telecommunications companies in North America.

For a precocious company like Alcatel-Alsthom, such constraints are hard to bear.

Carrefour, the French retailing group, is to sell its 30 per cent stake in But, the furniture retailer, to Kleinwort Benson for FFr536m (Dollars 90m). Carrefour said yesterday that it had accepted Kleinwort Benson's offer for its stake, which was equivalent to FFr937 per share.

Kleinwort Benson said it had placed the shares with investors in France, the UK and the US. The placement is subject to a right to match the offer during the next 15 days from Venturini But, a family company which holds just over 50 per cent of But.

Chrysler, the US car maker, boosted its quarterly dividend by a third in recognition of its return to profitability this year and recent upgrades from credit rating agencies.

The company's dividend, payable on January 15, is being raised to 20 cents a share from 15 cents a share. This is the first increase since Chrysler slashed the quarterly payment from 30 cents to 15 cents in the second quarter of 1991.

Mr Robert Eaton, chairman, warned, though, that the company remained intent on further reducing its pension fund deficit and building cash reserves, suggesting a cautious approach to future dividend increases.

'We are pleased with our recent operating results and credit upgrades and wanted to share this success with our shareholders,' said Mr Eaton.

Stronger cashflow enabled Chrysler to make contributions of Dollars 2.6bn to its pension fund in the first nine months, helping to reduce the Dollars 3.9bn deficit reported at the end of 1992.

Lower US interest rates mean that the fund's liabilities will be revised upwards at the end of this year, though Chrysler said the scale of the deficit will be below last year's level.

Kmart, the second biggest US retailer, yesterday confirmed plans to sell its PayLess drug store chain to a company controlled by Leonard Green & Partners, a Los Angeles investment firm, for more than Dollars 1bn.

The purchaser, TCH Corporation, will pay Kmart Dollars 592m in cash and assume Dollars 170m worth of debt. The remainder will take the form of 47 per cent of TCH's equity and Dollars 100m worth of subordinated debt securities.

Kmart said it was putting a value on the TCH equity, but preliminary estimates suggested the transaction could result in a Dollars 100m after-tax charge in the current financial year.

Kmart is selling the PayLess chain in line with its strategy of shedding specialty retailing businesses to concentrate on its core discount store operations. Last month it announced that most of its 113 Pace warehouse clubs would be sold to Wal-Mart, and the rest of them closed.

The company has also indicated it was considering selling stakes in its Sports Authority sporting goods stores, Borders book stores, OfficeMax office supply stores and Builders Square home improvement stores through initial public offerings.

TCH Corporation owns two drug store operations: Thrifty Drug Stores, with 494 drug stores in California, and Bi-Mart Corporation, a membership discount drug and general merchandise chain with 41 stores based in Oregon.

An offer by Capital Cities/ABC, the broadcasting and publishing company, to buy back 2m of its shares has been largely shunned by shareholders other than Berkshire Hathaway, the investment company headed by Mr Warren Buffett.

Capital Cities, which announced a 'Dutch auction' tender offer for the shares on November 1, said yesterday that only 1.1m shares had been tendered, and 1m of these came from Berkshire Hathaway.

The low take-up suggests many investors expect the group's shares to be valued at more than Dollars 630 a share, which was the upper purchase price limit set by Capital Cities in the Dutch auction. The stock stood unchanged at Dollars 637 1/2 in early trading on the New York Stock Exchange.

Under a Dutch auction, a company sets a range of prices at which it is willing to buy stock and investors specify a price at which they are willing to sell. The company then computes the lowest price at which it would be able to buy the block of stock and pays that sum to holders who offered to sell at or below that price.

Capital Cities noted that since fewer than 2m shares had been tendered, it would buy all shares tendered by Berkshire Hathaway at Dollars 630 a share. The purchase will leave Berkshire with 2m shares, or about 13 per cent of the outstanding stock, down from 18 per cent. Mr Buffett has a seat on the Capital Cities board.

An unusual feature of the tender was an agreement by Capital Cities that it would accept either all or none of the 1m Berkshire Hathaway shares tendered in the offer - a condition that could have left Mr Buffet with a 21 per cent stake in the business.

Capital Cities decided a buy-back was the most attractive use of Dollars 1.2bn of surplus cash, since acquisitions were not available at attractive prices.

If Volvo stumbles, the tremors are felt elsewhere in Swedish society,' Pehr Gyllenhammar once wrote. Yesterday Volvo did stumble and the tremors brought down with them the man who had led the group for the last 22 years.

Only three months ago it would have been impossible to credit. Then PG, as he is known in Sweden, looked set to crown a glittering and controversial career by assuming the figurehead role at the top of Renault-Volvo.

Since then a massive shareholder revolt, characterised by strong personal criticism of Mr Gyllenhammar himself, has changed everything, so it was not surprising that when the deal collapsed its principal architect should fall with it.

Along with Mr Percy Barnevik, the head of Asea Brown Boveri, Mr Gyllenhammar, 58, can claim to be Sweden's best known industrialist. But he was never content just to be a businessman.

As the head of Scandinavia's biggest industrial group and a passionate advocate of Swedish membership of the European Union, he relished a broader role as both a statesman and an ambassador for his country. Sometimes it seemed that both Volvo and Sweden were too small for his restless energy.

This energy manifested itself in a number of ways. On the one hand, he always seemed to have some ambitious new deal on the go, despite the setbacks he not infrequently suffered with his plans. On the other hand, he never shied away from controversy and often seemed eager to question long-standing Swedish taboos.

He focused the national debate on Swedish membership of the European Union well before the country had even applied to join, and talked about the need for free market reforms before the country became serious about adopting them.

His success and his outspokenness provoked admiration and envy in equal degrees. Some were infuriated by his arrogance and his domineering style. Others were compelled by his charm. If the business community often derided him, Swedish people were certainly won over.

His critics are only too anxious to reel off the Gyllenhammar deals that never were. They include a plan to merge with Saab-Scania, Volvo's domestic rival; a scheme to sell a 40 per cent holding in Volvo to the Norwegian government in return for North Sea oil rights; and a SKr5bn co-operation pact with Fermenta, the pharmaceuticals group.

The setbacks continued last year when a plan to take over Procordia was rebuffed outright by the Swedish government and when two car plants which pioneered 'humane' production techniques were forced to close down.

For PG, the deal with Renault looked ideal, enabling him to fuse his pan-European ambitions with his role as Sweden's industrial statesman. A fluent French speaker who holds the Legion d'Honneur, it was obvious he would revel in the position of chairman of the supervisory board of the combined concern.

Again, his critics say this ambition blinded him to the deficiencies in the accord which shareholders have picked on so relentlessly in recent weeks. A suspicion that the deal was effectively put together by just Mr Gyllenhammar and Renault chairman Louis Schweitzer - with other Volvo board members remaining in the dark on some aspects of it - was never far from the surface.

This and Mr Gyllenhammar's cavalier attitude to shareholders help to explain why criticism at times centred as much on the Volvo chief's handling of the Renault agreement, as it did on details of the accord.

Many thought the great survivor might pull something out of the bag to save both the Renault deal and himself, even at the last minute. It was not to be.

For many years I have worked as assigned by the board of directors to provide Volvo with an economically sound structure and to participate in the establishment of a world-class automotive industry through a merger with Renault.

Since the board's proposal for the merger is deemed not to have the support of the shareholders, I have decided to resign from Volvo's board of directors, effective immediately.

My special assignment from the Volvo board has been strategic. That is, to develop a co-operation with Renault and to complete the Procordia project. This assignment has now been carried out after four years of preparations.

The proposal to merge with Renault has been subject to a lively debate. Discussions have been conducted with a fervour that has gone well beyond anything that is normal for large business deals.

The Swedish maxi devaluation has created hopes that Volvo will now do well on its own. A couple of positive quarterly reports and the prematurely published monthly results would have changed Volvo's strategic position in the world automotive industry?

This of course is not the case.

The alliance will not remain. It will be dismantled by a Renault management who, understandably, has lost their confidence in Volvo. To dissolve the alliance will require time, energy and will be demoralising.

To build for the long term is the base for a good industry. Our painstakingly built relations with France and with Renault will now be destroyed.

The critics of our merger turn their backs on Europe and the world.

This reduces the probability of a Swedish presence in Europe and for Volvo's long-term survival.

The excitement over a temporary upturn in Volvo's share price should be seen in the perspective of the lost opportunity for Volvo to develop in a larger industrial structure.

The weakness of capitalism is its shortsightedness. The tendency is to follow the law of the least resistance.

Volvo is now left with a failed merger project. With a crushed organisation which since September this year has been built for Renault-Volvo RVA. With an alliance which certainly has to be dismantled, and with concern and worries which will not quickly disappear after what has happened.

Volvo is right now a wounded company and runs the risk of being uprooted from its unique and genuine Gothenburg base, with a perspective towards the world. Volvo is about people in a joint mission.

I have had a firm belief in Volvo's future in a merger with Renault. I have today decided to leave the Volvo board of directors with immediate effect.

Mr Jurgen Sarrazin, chief executive of the Dresdner Bank, yesterday delivered a pungent defence of the German banking sector's right to make record profits amid the country's worst recession since the second world war.

Speaking as Dresdner, Germany's second biggest bank after Deutsche Bank, unveiled operating profits up by 16.2 per cent to DM1.6bn (Dollars 932m) for the first 10 months of 1993, Mr Sarrazin contended that banks' profitability served to limit the extent of the crisis in the German economy.

'Now is just the right time for banks to show their strength as a frail financial sector would push the economy as a whole deeper into crisis,' Mr Sarrazin said

Despite sharply increased provisions against bad and doubtful debts, buoyant securities markets seem set to ensure that German banks will enjoy another record year this year.

Last week Commerzbank - Germany's third largest bank - reported profits up 52 per cent at the 10-month stage and next week Deutsche Bank, Germany's biggest bank, is also likely to report a further acceleration in profits growth.

As at other banks, the impetus for Dresdner's profits growth came from securities trading: the contribution from the bank's own-account trading activities more than doubled to DM536.1m after DM234.5m in the comparable period last year.

Commission income grew by 15.9 per cent to DM2.37bn, again reflecting buoyant currency, equity, fixed-income and derivatives markets. Net interest income - the profit on mainstream lending business - climbed by a more modest 6.8 per cent to DM5.11bn.

Risks provisions rose 23.8 per cent to DM1.25bn, reflecting the malaise of the bank's corporate clients.

Mr Sarrazin said the dividend would probably be raised by DM1 to DM13. The decision would be taken on the basis of full-year results.

Procter & Gamble, the US consumer products giant, is to take its first step into the Dollars 5.5bn-a-year European market for toilet paper, kitchen towels and paper handkerchiefs with the acquisition of VP-Schickedanz, a leading German manufacturer of hygiene products.

The VPS brands being acquired include Bess toilet paper, Tempo paper handkerchiefs, Camelia feminine protection pads and Certina adult incontinence products. VPS's disposable nappy business is not included in the sale.

The purchase is being made from VPS's parent, the privately-held Gustav und Grete Schickedanz Holding of Furth, Germany. The purchase price is thought to have been about DM1bn (Dollars 582m), although neither side would confirm this.

Information about the German company is scarce: Schickedanz said that in the year to end-January, consolidated turnover was DM1.5bn and, despite increased European competition, the company had shown a 'sound and solid financial performance'.

Mr Edwin Artzt, Procter & Gamble's chairman and chief executive, said paper products were the group's biggest business after detergents, but this would be the company's first move into the tissue business outside North America.

Procter & Gamble already sells disposable nappies, feminine protection pads and adult incontinence products in Europe, and Mr Artzt said the purchase was a good opportunity to extend that presence into tissue products.

The VPS business represents only a small part of the Schickedanz group, a family concern with annual sales of around DM18bn in activities as various as mail-order, retailing, beer and financial services.

The recession has forced Schickedanz, in common with many large German groups, to focus on its 'core businesses' and the sale of VPS is an early example of a corporate spin-off prompted by the streamlining process under way in broad swathes of German industry. The company was advised on the sale by Morgan Stanley.

Adia, the troubled temporary employment group, yesterday held out the prospect of breaking even next year after two years of losses.

Mr John Bowmer, chief executive, said the group's net debt had come down from SFr1.5bn (Dollars 1bn) at the end of 1991 to SFr785m at September 30 1993 and would fall to SFr593m after a SFr200m capital increase approved at an EGM in Lausanne yesterday.

The capital increase, the second in less than a year, was announced last month when Adia revealed losses of SFr112.2m for the first nine months of the year, compared with a loss of SFr219m for all of 1992.

The capital increases consist of SFr100m in new shares to be issued to a consortium of banks which is converting its loans into equity and a SFr100m rights issue which is being underwritten by Mr Klaus Jacobs, the chairman. Following the increase, the group's equity would rise to SFr334m.

If shareholders take up their rights, Mr Jacobs will have a 51.04 per cent stake in the group. If not, his stake will rise to 57.5 per cent. Adia said it expected most shareholders would take up their rights.

Rhone-Poulenc, the French chemicals and pharmaceuticals group, could modify the terms of a proposed merger with Institut Merieux, following the suspension of production of a blood product by the vaccines group, the company said.

Pasteur Merieux Serums et Vaccins, a division of Institut Merieux, said on Wednesday that it was suspending production of placenta albumin because of a decision by the French health authorities to introduce extra precautions in collecting human placentas, which are used to produce placenta albumin.

Pasteur Merieux will take a provision of about FFr100m (Dollars 16.9m) to cover the suspension. As a result, Rhone-Poulenc, which owns 51 per cent of Institut Merieux, will see its net profits reduced by about FFr70m this year. It is expected to report full-year net profits about 30 per cent lower than the FFr1.52bn of 1992.

Rhone-Poulenc, which was successfully privatised by the French government last month, said that a decision would be taken by the middle of the month about whether to alter the terms of an agreement to increase its stake in Institut Merieux from 51 per cent to 100 per cent.

Under the terms of the agreement, which was announced at the beginning of October, it was to offer minority investors 77 group shares for every five shares in Institut Merieux. At the end of August, Institut Merieux had a market capitalisation of FFr13.2bn.

Internationale Nederlanden Group, the big Dutch financial services group, has raised its profit forecast for 1993 after reporting an 11 per cent increase in net profit for the first nine months of the year.

The improvement was due mainly to continued profit growth in virtually all areas of banking, as well as to higher results in life insurance, particularly in the Netherlands and North America. The rise also reflects ING's withdrawal from the volatile and loss-making field of general re-insurance.

Group net profit rose to Fl 1.39bn (Dollars 731m) in the first nine months of 1993 from Fl 1.25bn the year before.

ING, which had previously forecast that profits would at least match the 1992 figure, is now predicting a 'moderate increase' in profits per share.

The group's banking operations turned in a 17.7 per cent rise in pre-tax profit, outstripping the 6.2 per cent increase reported by ING's insurance arm. ING, created out of the 1991 merger between the Netherlands' biggest insurance company and its third-largest bank, is the leading Dutch proponent of 'bancassurance', the combining of insurance and banking services in one financial services group.

ING's profits in banking rose virtually across the board, both at home and abroad, where ING Bank is a specialist in emerging markets banking. ING Bank's relatively new offices in eastern Europe have already started contributing to group profits, the company said.

Nissan Motor, the Japanese carmaker, is to pay Pta9.38bn (Dollars 66.6m) to buy the outstanding 29.7 per cent minority shareholding in Nissan Motor Iberica, its Spanish subsidiary.

Nissan said Nissan Europe was offering Pta260 per share for the 36.09m outstanding shares in NMISA. The shares last traded at Pta147 before they were suspended on November 18 and traded at an average price of Pta205 in the 30 days before the suspension.

The shares have plunged in the last four months from a high for the year of Pta423 in August, as the company's losses have deepened. The share price peaked at Pta3,312 in September 1987. Nissan said the terms of the bid had been approved by the Spanish stock exchange commission.

Nissan Motor Iberica has run up heavy losses in the last two years, which are forcing Nissan to undertake a radical financial restructuring in order to comply with Spanish corporate solvency law.

Losses are expected to total around Pta40bn (Dollars 285m) in 1993, which will wipe out around two thirds of the company's share capital, reducing it from Pta60bn to around Pta20bn at the end of the year.

Peninsular & Oriental Steam Navigation yesterday announced its second investment in Chinese container ports in 10 days.

The group is to take a controlling stake in the Yangtze river port of Zhangjiagang. The terminal is being expanded to develop two container berths. P&O believes it will become the focus of one of the main industrial centres of central China.

The Zhangjiagang port can handle Panamax carriers, and the leading Chinese shipping groups already operate services to ports around Asia. The total cost of constructing the two berths will be about Dollars 50m (Pounds 33.5m).

Last week, P&O joined forces with Hong Kong's Swire Pacific to purchase 50 per cent of the container terminal at Shekou, in the Pearl River delta, for HKDollars 615m (Pounds 54m).

The investment in Zhangjiagang is less ambitious. The terminal is situated about five hours upstream from Shanghai and currently has container capacity of 150,000 trailer equivalent units.

Ferranti International's joint administrative receivers, Mr John Talbot and Mr Murdoch McKillop of Arthur Andersen, warned yesterday that some further redundancies at the defence electronics group are inevitable.

Yesterday they held preliminary meetings with union and staff representatives. Ferranti's workforce had already shrunk from over 22,000 to about 3,700 in the last three years.

'Management had already identified a need for some reductions in overall employment levels to bring production into line with anticipated 1994 business,' they explained. But no immediate decisions are being taken and further discussions are planned.

'Our priority is to stabilise the company's trading operations,' the receivers also said. They added that they were concentrating on restoring trading to near-normality 'as soon as possible.' The two Arthur Andersen partners have begun an initial investigation into the defence electronics group's position.

Buoyant demand for replacement windows helped Anglian Group, the double glazing company, increase pre-tax profits by 19 per cent to Pounds 12.2m in the six months to October 2.

The self-proclaimed market leader said yesterday that a strong performance by its retail division pushed turnover up 18 per cent to Pounds 84m (Pounds 71.4m).

The division, however, has come under increasing pressure to sustain the group following the loss of lucrative contracts with the recently privatised Property Services Agency.

Turnover in the commercial division, which handled work for the PSA, declined 5 per cent and accounted for just 10 per cent of the half-year total.

In the last financial year the value of Anglian's PSA contracts was estimated at Pounds 15m, representing about 75 per cent of the commercial division's business.

Mr David Herman, group finance director, admitted yesterday that the privatisation - ending three years in which Anglian had enjoyed 'favoured status' with the PSA - was a blow for the company.

'It has increased the pressure on our retail business to make up the shortfall. If we get any work from the PSA's successors it will be a bonus,' he said.

To shore up its commercial division, Anglian has pursued new local authority contracts. The move follows its Pounds 8.5m acquisition in March this year of New England Windows, which already supplies councils. NEW contributed Pounds 6.97m to turnover, but margins on public sector work are expected to shrink because spending cuts have forced councils to opt for low cost products.

Mr Bill Hancock, chief executive, said the introduction of new products and a sales drive in Scotland, north west England and the Midlands would help the group 'continue its positive progress'.

Mr Hancock also announced he will retire next September to make way for Mr Ron Swift, managing director of the Anglian Windows subsidiary.

Earnings per share - restated on a pro-forma basis to take account of last year's flotation - were up from 8.5p to 9.1p and an interim dividend of 4.1p (3.7p) is declared.

COMMENT

Anglian's shares closed 22p lower at 331p, reflecting concern at the loss of the PSA business. However, the group's move to win local authority business was likely to soften the blow in the long-term. The continuing strength, meanwhile, of the retail division is expected to result in full year pre-tax profits of Pounds 26.6m, putting the shares on a forward multiple of 16.5. The group's ability to rely on its retail side should ensure continued growth, although uncertainty over price cutting by competitors could depress the share price further.

ICL, the computer company is raising a total of Pounds 100m through a rights issue, underwritten by its parent, Fujitsu of Japan.

Northern Telecom of Canada, which holds 20 per cent of ICL, is not taking up its entitlement resulting in Fujitsu's stake rising from 80 per cent to 84 per cent.

Fujitsu is subscribing for 77m new shares for Pounds 50m, giving it an entitlement to warrants to subscribe for a further Pounds 50m of new shares next year. It has agreed to exercise the warrants in November 1994.

It is the first time since 1982 that ICL has sought further equity and reflects the company's pessimistic view of trading conditions for the next two years. Mr Peter Bonfield, chairman and chief executive, said the issue was to strengthen the balance sheet as a precaution against continuing structural upheaval in the industry.

'Against this background,' he said, 'it is more important than ever that we approach the next few years from the strongest possible financial base.

'I may be more cautious than I need be, but I believe a number of information technology companies are going to find themselves seriously short of cash and that access to money will become as big a problem as access to technology.'

The proceeds will be used to cut borrowings, giving gearing of between 20 per cent and 30 per cent against the present 50 per cent to 60 per cent.

Fujitsu took over ICL, formerly a subsidiary of STC, at the end of 1990. The two companies have since operated at arms length, partly in preparation for ICL's return to the London stock market, now unlikely for at least three years. As a consequence, Fujitsu's further investment has been treated as a formal rights issue.

ICL has proved the only consistently profitable European computer maker over the past few years as red ink has engulfed its French, German and Italian competitors.

Profitability has been falling, however. Last year the group recorded pre-tax profits of Pounds 60.6m on turnover of Pounds 2.48bn. Mr Bonfield did not see appreciably better results for the next two years.

Peninsular & Oriental Steam Navigation yesterday announced its second investment in Chinese container ports in 10 days.

The group is to take a controlling stake in the Yangtze river port of Zhangjiagang.

The terminal is being expanded to develop two container berths, and P&O believes it will become the focus of one of the main industrial centres of central China, between the cities of Wuxi, Suzhou and Changzhou.

The Zhangjiagang port can handle Panamax carriers, and the leading Chinese shipping groups already operate services to ports around Asia. The total cost of constructing the two berths will be about Dollars 50m (Pounds 33.5m).

Last week, P&O joined forces with Hong Kong's Swire Pacific to purchase 50 per cent of the container terminal at Shekou, in the Pearl River delta, for HKDollars 615m (Pounds 54m).

The port will have container throughput of 1.1m TEU's.

The investment in Zhangjiagang is less ambitious.

The terminal is situated approximately five hours upstream from Shanghai and currently has container capacity of 150,000 TEU's. However, the investment underlines the group's determination to develop its transport-related activities throughout China.

Mr Brian Baillie, deputy chairman of P&O Asia, said that growth in export-oriented manufacturing around Zhangjiagang was similar to that of the Pearl River delta, which in the past decade has become one of the world's biggest export-processing centres.

P&O has bought the majority of a company which owns 51 per cent of the port, but Mr Baillie would not reveal the amount of P&O's investment.

The Chinese government has been anxious to bring in foreign expertise to improve the efficiency of its ports.

Mr Li Ka-shing's Hutchison group has already taken stakes in the ports of Zhuhai, Yantian and Shanghai, while the late Sir YK Pao's Wharf (Holdings) has secured the deep water port of Ningbo.

Mr Baillie said P&O was analysing a number of other investment opportunities for ports along the Yangtze,and in north-eastern China.

Graseby has sold its Graseby Keltek offshoot to its management for a minimum of Pounds 3.17m of which Pounds 2.56m has been paid on completion and the balance over three years.

The final price will be determined when the purchased net asset values have been determined.

Butte Mining, the UK quoted company whose main activity is prosecuting US lawsuits - it is seeking damages of Dollars 975m (Pounds 654m) from former managers and promoters - cut its loss for the year to June from Pounds 10.5m to Pounds 540,000.

Losses per share narrowed from 4.5p to 0.2p. The company said the reduced deficit resulted from the disposal of lossmaking assets and cost cutting.

The company was unable to dispose of its shareholding in VAM, a lossmaking Australian gold producer, and a provisional liquidator was appointed in March. The liquidator has arranged for VAM to be refloated and, if this is completed early next year, Butte will receive about Pounds 350,000.

Net asset value per share at Monks Investment Trust increased from 472.2p to 575.5p over the six months to October 31.

Net revenue for the period was Pounds 3.53m (Pounds 4m) for earnings per share of 4.55p (5.15p). The interim dividend is maintained at 2p.

Northumbrian Water Group, through its waste management subsidiary, has acquired Enviricare, a waste collection and transport company. The precise terms were not divulged.

Enviricare has 20 per cent of the waste transport market in the region with more than 500 clients, including large supermarkets and chain stores.

Angerstein Underwriting Trust has invested about Pounds 58m in a portfolio of UK equities designed to replicate the constituents of the FT-SE 100 Index.

The trust has also invested in a put option, expiring in September 1994, to protect against a fall of more than 5 per cent in the value of the portfolio.

Profits of the Wrexham and East Denbighshire Water Company rose from Pounds 1.07m to Pounds 1.74m pre-tax for the half year ended September 30.

The improvement mainly reflected the completion of remedial work at the company's raw water reservoirs in 1992-93.

Turnover expanded from Pounds 5.15m to Pounds 5.52m. The interim dividend on the participating ordinary stock is lifted from 40p to 46p.

UniChem, the pharmaceutical distributor and retailer, has announced further expansion in the form of an acquisition and a distributorship.

E Moss (Moss Chemists), the retail subsidiary, has acquired Gerald Hughes Chemist, based in Reading, Berkshire, for a maximum Pounds 660,000, to be satisfied by Pounds 380,000 in cash and the issue of 105,889 shares.

In addition, UniChem has been appointed sole distributor in Scotland by Numark, the own brand of independent pharmacies.

Scottish Investment Trust has increased its total debenture borrowing to more than Pounds 77m through the placing of a Pounds 50m issue with the Royal Bank of Scotland. The issue has a coupon of 7.75 per cent and is redeemable in 2013.

The independently-managed trust, which has assets exceeding Pounds 825m, said a proportion of the funds would be invested in the UK equity market.

Inchcape, the international services and marketing group, has formed a joint venture with LA Gear of the US to market, distribute and sell LA Gear branded footwear, apparel and accessories in selected south-east Asian markets.

Operations of the joint venture will begin in Singapore, Malaysia and Indonesia and will subsequently extend into other markets, including China.

Pre-tax profits at Castings advanced 24 per cent to Pounds 1.97m in the six months to September 30, against Pounds 1.59m. Turnover was 12 per cent ahead at Pounds 18.3m, compared with Pounds 16.3m.

The shares for this West Midlands-based maker of iron castings advanced 10p to 208p.

Mr Brian Cooke, chairman, said it was the first time since the year to March 1991 that the company had seen a return to reasonable levels of trading at all companies. Margins, though not at previous levels, were satisfactory.

Earnings per share were 6.25p (5.05p) and the interim dividend is raised to 1.55p (1.3p).

Tinsley Robor, the printing and packaging group, reported pre-tax profits of Pounds 12,000 for the six months to September 30, against losses of Pounds 132,000. For the full year to March 1993 the group returned to the black with Pounds 15,000.

Ongoing losses at Howards Printers, the label printing subsidiary, continued to depress group results, Mr John Rose, chairman, said. Elsewhere trading continued at tight margins with volumes maintained but expected growth had not materialised.

The new specialist music industry printing plant at Uden in the Netherlands, completed its first orders in August, Mr Rose said. Start-up costs of Pounds 206,000 were included in the results.

Most of the Pounds 1.9m capital expenditure during the period related to the Uden plant. Spending in the second half would be much reduced, he said.

Turnover grew from Pounds 12.4m to Pounds 13.1m. Losses per share were cut to 0.2p (0.4p).

Shares in Micro Focus, the Berkshire-based computer software house, closed 16 per cent down at Pounds 10.58p on a warning that profits were unlikely to match revenue growth in the second half of the current year.

In February the shares touched a peak of Pounds 30, but have since been declining.

Mr Paul O'Grady, chairman and chief executive, attributed the profits slowdown to three factors. First, customers were confused by the plethora of new technologies available. The increased time being taken on spending decisions was causing a temporary slowdown in the growth of spending on Micro Focus products.

Second, the large computer manufacturers, who had been buying the company's software tools in substantial quantities to market with their hardware, had seen their own businesses decline and this had adversely affected Micro Focus sales.

Third, a new and advanced software product, PL/1, was still in the later stages of customer acceptance testing and was due for first deliveries in late-December. It would make little difference to turnover in the current year.

Mr O'Grady concluded: 'This means that I foresee some revenue growth in the current fiscal half year, but it will be difficult to achieve sequential earnings growth in dollars compared with the first half.'

In the first half to July 31, pre-tax profits grew by 20 per cent to Pounds 11.6m on sales of Pounds 40m. In dollar terms, however, pre-tax profits fell from Dollars 17.6m to Dollars 17.4m.

Micro Focus develops software tools that make it possible for companies to develop large software systems on personal computers.

The company's shares fell sharply in August after a US analyst issued a sell note - some 20 per cent of Micro Focus stock is held as ADRs, so US investment sentiment has a powerful effect on the company's share price.

Yesterday analysts said they were confused by the company's explanations for the projected slow-down; US analysts were especially strident. Their UK colleagues have cut their full-year earnings projection from between Pounds 27m and Pounds 30m to between Pounds 22m and Pounds 23m.

HAYS, the business services group, has decided to transfer its in-house insurance business to Alexander & Alexander, the international brokers based in the US.

The group has consequently agreed to sell its St Olaf insurance broking business to a management buy-out. St Olaf will continue with its non-Hays clients, which comprise a substantial minority of its current business.

Hays said this move would produce ongoing annual savings of more than Pounds 600,000. The changes will result in some 20 redundancies, about half the St Olaf staff, although some may be re-employed by Alexander & Alexander.

Mr Ronnie Frost, executive chairman of Hays, said: 'Hays does not view insurance broking as a long-term activity, and as the group becomes increasingly international, it requires an international rather than a UK broker to service its insurance needs fully and cost-effectively.

The move would allow St Olaf's management to devote their time to servicing their portfolio of clients.

Baring Investment Management is attempting to raise between Dollars 40m and Dollars 120m (Pounds 80.5m) for a new investment trust which will invest in southern and eastern Europe.

The Baring Emerging Europe Trust will concentrate on Greece, Portugal and Turkey in the Mediterranean region and on Poland, Hungary and the Czech Republic in eastern Europe.

The managers argue that political changes, low labour costs, the potential for faster economic, and therefore corporate earnings, growth make emerging Europe an attractive investment opportunity.

Warburg Securities is arranging the offer which will consist of ordinary shares with warrants attached on a 1-for-5 basis. Shareholders will have the right to wind up the trust after 10 years.

The Enlightened Tobacco Company yesterday announ-ced that its private placing of 1.25m shares at Pounds 1 had been fully subscribed.

The company, which claims a corporate ethos of an honest approach to cigarette marketing, sells cigarettes under the Death brand name, which it said had proved very popular with its target market of 18 to 34-year-olds.

A new brand, Death Lights - to be marketed as Slow Death - is also planned for the new year.

Scapa Group, the industrial materials group which mainly supplies the paper industry, yesterday announced a European acquisition, a second enhanced scrip dividend and an 11 per cent increase in interim pre-tax profits to Pounds 22.2m.

The group is buying Barnier, a French specialist tape manufacturer, from the Borden Group in a deal worth Pounds 20m. The Blackburn-based company said this developed its strategy of building a substantial international business in specialist tapes.

Barnier, which exports a third of its products, last year made pre-tax profits of Pounds 2m on sales of Pounds 25m. Scapa, which entered the speciality tapes market in 1986, has since made acquisitions in the UK, France and Italy.

The Barnier acquisition will be funded from Scapa's existing cash resources. Barnier, founded in 1917, employs 260 people and has two manufacturing bases in Valence, France, with further sales and distribution operations in Dusseldorf and Barcelona.

Mr Harry Tuley, Scapa's chairman, said: 'Annual turnover from our specialist tapes businesses will now be in excess of Pounds 70m, making us one of the largest manufacturers of specialist adhesive tapes in Europe.'

Group sales for the six months to September 30 rose by 19 per cent to Pounds 187.2m. Scapa said only five percentage points of that was organic growth, the rest coming from acquisitions and the effect of foreign currency translation.

Earnings per share increased to 6.1p (5.7p) and the interim dividend is lifted from 1.6p to 1.65p. Scapa is again offering an enhanced scrip worth 2.475p, an increase of 50 per cent over the cash dividend. BZW is offering a cash alternative worth at least 2.426p, worth 98 per cent of the enhanced scrip.

Mr Tuley said Scapa had made a second enhanced scrip issue because the group could still profitably employ the cash saved in the business, but the board would not seek to renew the authority for issuing enhanced scrip dividends next year.

The chairman said the results demonstrated Scapa's resilience against a background of continuing economic recession in its main markets, and the group had increased market share. The extended recession had been coupled with continuing problems of over-capacity in the paper industry in both western Europe and the US.

Scapa is about to open a new plant for engineered fabrics in Malaysia, the group's first factory in its rapidly growing markets of south-east Asia.

Shares in Telspec, the elect-ronic telecommunications equipment manufacturer which is coming to market through a placing with institutional investors, were priced at 160p yesterday, valuing the Rochester-based group at Pounds 50.7m.

The group designs and manufactures advanced equipment which enables its customers such as British Telecommunications, Telecom Australia and Deutsche Telekom, to improve the efficiency of their networks and reduces the cost of installing, expanding or extending local telephone services.

Telspec said it expected pre-tax profits of at least Pounds 3.3m in the year to December 31.

Last year it made profits of Pounds 3.36m before tax on sales of Pounds 18.2m.

The flotation price represents a multiple of 20.1 times forecast earnings per share for the current year; the notional gross dividend yield is 2 per cent.

The 12.65m share placing was completed by Credit Lyonnais Laing and will raise about Pounds 20.2m, including Pounds 5m net of expenses, which will be used to fund increased capital expenditure and expand overseas service and support facilities.

Mr Frank Hackett-Jones, Telspec's founder and chairman, retains a 60.1 per cent interest in the group.

He said the company had just won a Pounds 7m order for advanced digital telecommunications equipment from Deutsche Telekom.

Losses for the 12 months to the end of September at Yorkshire-Tyne Tees, the financially troubled ITV company, are likely to be higher than expected.

Last month the company issued a formal statement saying that a deficit was likely for the year.

All the signs were that the expected loss, mainly caused by controversial methods of selling advertising such as trying to pull forward revenue by heavy discounting, could be contained at a pre-tax loss of about Pounds 5m.

It is believed that Yorkshire-Tyne Tees has now decided not to include a discount on its subscription to the national ITV network in the 1992-93 year because it will not be paid until early next year.

A discount of some Pounds 3.5m is expected because of the fall in Yorkshire-Tyne Tees' share of net advertising revenue - the basis on which network programme costs are allocated.

As a result pre-tax losses of the company, in which Pearson, owners of the Financial Times, has a stake, are likely to be in the region of Pounds 8.5m.

There is,however, a realistic possibility of a return to profit in the current financial year.

Despite its problems Yorkshire is being examined by a number of possible predators, including LWT which already owns 14 per cent.

Any purchase by another ITV company, however, would require the immediate disposal of Tyne Tees because under proposed new government rules an ITV company, outside London, can hold two broadcasting licences but no more.

The new rules, due to come into effect on January 1, will be debated in the House of Commons next Wednesday and by the House of Lords on December 13.

Increasing interest in radio as an advertising medium and signs of returning consumer confidence helped Metro Radio Group, the USM-quoted radio station operator, increase pre-tax profits by 27 per cent to Pounds 2.36m in the year to September 30, against Pounds 1.86m .

The group operates seven independent radio stations in north-east England and Yorkshire.

Advertising revenue rose by 17 per cent to Pounds 14.7m (Pounds 12.6m). Local and regional revenue was 23 per cent higher. A strong recovery in the second half resulted in a national revenue increase of 1.9 per cent.

Turnover rose to Pounds 17.7m (Pounds 15.2m). Net debt dropped 38 per cent to Pounds 1.47m (Pounds 2.36m).

Earnings per share rose by 25 per cent to 9.4p (7.5p) and the total dividend goes up 10 per cent to 5.5p (5p) via a final of 4p.

Mr John Josephs, managing director, said the increase in advertising demand had been across the board,but growth areas had been motor manufacturers and dealers and retailers of furniture and white goods.

The arrival in the marketplace of Classic FM and Virgin had raised radio advertising's profile, he said.

Mr Neil Robinson, chairman, said the group had made an excellent start to the new financial year, with advertising revenue well ahead.

Shares in Heywood Williams, the building materials group, rose sharply yesterday after it forecast a sixfold rise in pre-tax profits to Pounds 34m for the year to December 31, against Pounds 5.5m.

The bullish forecast was announced along with plans to buy Bristol Products, a US plumbing components manufacturer and distributor, for Dollars 81.2m (Pounds 54.9m), including the repayment of borrowings.

The acquisition, complementing the group's purchase of US building group LaSalle-Deitch earlier this year, will be funded by a 1-for-4 rights issue to raise Pounds 50.6m.

Strong growth in existing businesses was forecast to push earnings per share ahead to 14.8p (1.7p).

The shares rose 43p to 387p following the announcement, before closing at 384p.

Mr Ralph Hinchliffe, Heywood's chairman, said Bristol would help the group develop its niche business in the US, where LaSalle distributes building products to the manufactured housing and recreational vehicle industries.

Bristol was a rival bidder for LaSalle, and the Indiana-based company approached Heywood after it failed.

Bristol's management, which is forecasting profits of Dollars 12.5m in the year to November 30, will be kept in place.

COMMENT

Heywood Williams has seen a marked improvement in its share price since it sold most of its glass business to Pilkington earlier this year. Since then it has turned its back on the construction industry and concentrated on auto glass sales in the UK and the growing manufactured housing and recreation vehicle market in the US. Future acquisitions are now likely in the UK, where it wants to keep at least 40 per cent of its business. If the rights issue is fully taken up, it will certainly be in a position to do so with cash balances of up to Pounds 10m and shareholders' funds of Pounds 120m. Following yesterday's announcement, brokers upgraded pre-tax profits forecasts for 1994 by Pounds 11m to Pounds 39m, putting the shares on a multiple ratio of 16. The positive sentiment and upgrading appears to make Heywood a good long-term buy.

Severn Trent, the privatised water utility, yesterday announced interim pre-tax profits of Pounds 146.9m, held back by a decline in demand from commercial and industrial customers and higher interest charges.

Pre-tax profits were 4.3 per cent higher than last year's reported Pounds 140.8m. However, on a comparable basis following accounting changes last year, pre-tax profits fell from Pounds 148.3m.

Turnover for the six months to September 30 rose by 6.7 per cent to Pounds 489.8m. Interest charges were more than doubled at Pounds 23.2m (Pounds 11m).

Mr Roderick Paul, chief executive, said the results reflected 'tight cost controls in the business'.

Direct operating costs, excluding East Worcester Water, the recently acquired supplier, were 1.3 per cent lower in the first half.

Mr Paul said Biffa, the waste management company acquired for Pounds 212m in 1991, had contributed operating profits 10 per cent higher at Pounds 6.6m. Turnover was 15 per cent up at Pounds 58.1m. Biffa was, however, still some way from covering interim interest costs of about Pounds 12m.

The other non-regulated businesses declined at the operating level from Pounds 1.6m to Pounds 600,000. Mr Paul said this was largely due to Pounds 1.2m in marketing costs for the international operation.

The core UK regulated water business benefited from cost cutting and production efficiencies, contributing a 12 per cent rise in operating profits to Pounds 167m. Sales were 5 per cent up at Pounds 394.1m.

Severn suffered an 8 per cent fall in consumption by its top 1,500 commercial customers.

Capital expenditure of Pounds 470m was budgeted this year, down from Pounds 550m, with a further decline to roughly Pounds 400m next year. The interim dividend is lifted to 7.55p (7p), payable from earnings 5 per cent higher at 39.4p.

COMMENT

The good news came where least expected at Severn Trent. Biffa, long the focus of unhappy controversy over the price paid and onerous financing commitments, appears to have more than held its own; at least, compared with Shanks & McEwan. Still, cynics argue any contribution after financing costs could be up to a decade away. The decline in operating costs was expected, but could work against Severn in the price review next year. There is a possibility that Ofwat will squeeze the efficient Severn harder to allow others with greater commitments leeway. Given such uncertainties, Severn appears fully valued. Full-year forecasts are for Pounds 275m pre-tax, with a dividend of 22.8p.

Shares in Hanson tumbled 15 3/4p to 268 1/2p yesterday as investors took to heart the cautious tone of the statement - including a warning there could be Pounds 275m negative swing in interest costs in 1994 - and the lack of a dividend increase.

Mr Derek Bonham, chief executive, said the holding of the dividend had been a particularly difficult decision, and he thought it the first time in the group's 30 year history that it had not been increased when final results were announced.

He admitted being conscious that Hanson was a yield stock, but said with dividend cover at 1.3 times, the earnings outlook dull in the short term, and the Peabody coal strike still unresolved, Hanson had felt unable to increase the dividend.

However, he said the issue would be under constant review, and hoped that as trading turned up, and subject to the outlook for 1995, an increase might be forthcoming later in 1994. Hanson pays dividends quarterly.

He doubted whether the Foreign Income Dividend scheme, detailed in the Budget, would be beneficial to Hanson. 'We must satisfy all our shareholders. FIDs are a massive turn-off for tax exempt investors.'

Mr Bill Landuyt, finance director, said the corporation tax provisions in the Budget would have little effect on Hanson, and the group would 'look for every legal way to reduce tax'. The 11p increase in duty on 20 cigarettes would be harmful to volumes at Imperial Tobacco, while cuts in the road building programme would affect ARC.

Group turnover in the year to September 30 was Pounds 9.76bn (Pounds 8.8bn) and operating profits fell from Pounds 1.07bn to Pounds 978m, affected by the Pounds 125m cost of the US coal strike but a Pounds 87m benefit from exchange rate moves. Exceptionals, profits on disposals less closure costs, added Pounds 24m (Pounds 172m).

Lower rates cut net interest income from Pounds 46m to Pounds 14m, leaving pre-tax profits at Pounds 1.02bn (Pounds 1.29bn). The fall in UK interest rates, the lack of high yielding long-term deposits fixed in 1992 and higher borrowings due to acquisitions, could add Pounds 275m to interest charges in 1994.

Earnings, excluding exceptionals, were 14.1p (18.5p).

A fall in operating profits from industrial activities to Pounds 291m (Pounds 393m) was not quite offset by a rise from Pounds 390m to Pounds 443m in consumer products and from Pounds 257m to Pounds 301m in building products.

PEEK, the multinational traffic and field data systems group, is paying Pounds 1.85m for Elequip, a subsidiary of Silvermines. Price will be satisfied by Pounds 400,000 in cash and balance by issue of ordinary shares.

LINTON PARK is to buy British African Tea Estates (Holdings) from Lawrie for Pounds 2.4m, subject to an adjustment, which will be satisfied by the issue of 923,077 new shares at 260p.

GENTON International offer for Anglo-Eastern Plantations has gone unconditional. At 3pm on November 25, Genton and its concert parties, owned and had received acceptances in respect of 13.41m AEP shares (51.19 per cent). Offer will remain open until December 9.

DANKA BUSINESS Systems is acquiring the photocopying interests of Murray International Holdings for Pounds 1.7m cash. The acquired companies' most recent accounts showed a pre-tax loss of Pounds 350,000 on turnover of Pounds 10.5m.

Schlumberger, the oilfield services company, is selling its transducer and instruments group to a management team led by Mr Phil Tempest, currently group managing director.

Funds advised by Schroder Ventures are supporting the buy-out of the group which will be known as Solartron.

Kingfisher, the retailing group, is buying a 33 per cent stake in Maxi-Papier-Markt, the German office superstore group for DM20m (Pounds 7.9m). The purchase follows its move into France through the takeover earlier this year of Darty, the electrical retailer.

The agreement also involves Staples, the US office superstore chain investing a further DM20m in Maxi-Papier, which was founded in 1989 and operates 11 office discount stores in Germany, lifting its holding to 49 per cent.

Kingfisher and Staples formed a joint venture last year to develop office superstores in the UK.

Sir Geoffrey Mulcahy, chairman of Kingfisher, which also owns the B&Q, Comet, Woolworths and Superdrug chains, said its entry into the German market was a direct result of its relationship with Staples.

'Staples' and Maxi-Papier's expertise in the office supplies industry combined with our own retail experience will enable us to expand and grow this business,' he added.

Leeds Group, the West Yorkshire-based textile dyer and printer, increased pre-tax profits by 31 per cent from Pounds 5.53m to Pounds 7.23m over the year to September 30.

The group is proposing to lift the annual dividend by 16 per cent and make a 1-for-2 scrip issue.

Mr Robert Wade, chairman, said that the dividend rise - up to 8.5p (7.33p adjusted for last year's scrip) via a 5.75p final - was the 27th consecutive annual increase for the group.

Turnover expanded 14 per cent to Pounds 47.1m (Pounds 41.3m), though Mr Wade pointed out that a 30 per cent fall in wool prices for the second year running and the reduction in output at the Walsden factory hid an increase in volumes of about 15 per cent.

The fire at Walsden made its way on to the profit and loss account via credits of Pounds 572,000 and Pounds 286,000 for business interruption insurance and material damage insurance respectively.

Mr Wade said the group was having to look for future profits not from price increases, but rather cost cutting, higher volumes and other such measures.

He said that about 30 per cent of the group's output went abroad, though the Japanese and European markets remained depressed. The Middle East was 'quite good, though not as good as last time', but new markets, such as Taiwan, South Korea, Thailand and Singapore, were doing well.

'All divisions of the group contributed to the increased profit,' said Mr Wade, with the two Dutch companies acquired in April for an initial Pounds 2.49m contributing Pounds 553,000, and the leasing side, often thought anomalous, making Pounds 356,000 (Pounds 286,000).

Earnings per share, including the material damage insurance, emerged at 28.5p and excluding it at 26.9p, against 22.1p last time.

Linread, the components and fasteners group, warned yesterday that its pre-tax profits for 1993 would be lower than market forecasts, but ahead of last year's Pounds 810,000.

Profits would be held back by redundancy charges roughly double the Pounds 268,000 for the first half. The shares closed down 8p at 98p.

Shares in Royal Doulton, the fine china manufacturer demerged from media parent Pearson, ended the first day of trading 14p higher than the opening quoted price of 193p, valuing the company at Pounds 113.8m.

A group of three UK institutions is believed to have led the buying as media investors sought to shed the shares. The institutions are also thought to be existing Pearson investors.

A total of 23.9m shares were traded, the second largest volume after Hanson.

Pearson shareholders were offered one Royal Doulton share for every 10 held in the parent, which owns the Financial Times.

Pearson shares closed Wednesday at 614p. They opened at 594p, reflecting the demerger of Royal Doulton, but gained 3p during the day to close at 597p.

Analysts said buyers of Royal Doulton shares were focusing on the longer-term.

The company has made it clear that the current year will be depressed by redundancy and restructuring costs. It reported a Pounds 2.1m loss for the six months to June 26 and a profit of Pounds 8.4m (Pounds 15.5m) for 1992. There were no comparable first-half figures for 1992.

The forecasts for next year range from Pounds 10m to Pounds 17m.

Compass, the catering group that already has links with Pizza Hut and Burger King, yesterday added the name of Roux to the menu, writes David Blackwell.

The group has paid about Pounds 900,000 for the 11 catering contracts managed by the Roux brothers. It will launch a special executive service to be known as Roux Fine Dining.

Mr Albert Roux described it as 'a perfect marriage.' The Roux business would benefit from the experience, wide customer base and financial expertise of Compass. Both Albert and Michel Roux will be involved in the business.

Mr Francis Mackay, Compass chief executive, said the link would complete the jigsaw of businesses that would enable his group to cater from schools to boardroom level.

Last May Compass reported interim pre-tax profits up from Pounds 17m to Pounds 18.2m on sales ahead by 19 per cent at Pounds 209.4m.

Brent Walker is rapidly approaching a vital deadline in its efforts to sell or refinance William Hill, its betting shop business. A decision is required on Monday.

Discussions are understood to have become fraught, with accusations flying and banks complaining of strong-arm tactics.

Advisers believe that if the flotation course is to be pursued, a decision must be made early next week. This is so that a marketing campaign can begin in time to manage a successful float by the March 1 deadline for the repayment of William Hill's debt.

Lenders to William Hill are only concerned with getting their loans repaid on time. This can be achieved either through a flotation, a sale to a group of venture capitalists which has put in an offer, or by the Brent Walker banks taking on the William Hill debt.

Standard Chartered and Lloyds Bank, lead banks to Brent Walker, appear determined to adopt the latter course, refinancing Hill's Pounds 330m of secured and Pounds 40m of unsecured debt, which is ring-fenced from Brent Walker.

They prefer that route since they believe that William Hill's true value could be higher than the expected Pounds 500m flotation proceeds. Furthermore, the Brent Walker refinancing completed last year was predicated on the retention of two cash generating businesses - the pubs chain and William Hill. Without William Hill, the prospects for Brent Walker's banks being repaid eventually would seem dimmer.

Standard Chartered and Lloyds could block a flotation, since the consent of the Brent Walker banks is needed for a sale of William Hill.

But refinancing attempts have so far failed, with deadlines being missed and extended. Standard Chartered and Lloyds are said to have found takers for only Pounds 270m of the William Hill debt. Even large lenders to Brent Walker, such as Credit Suisse, are understood to be unwilling to participate in the refinancing.

That leaves the venture capital offer, which exceeds Pounds 450m. This could provide a way out for Brent Walker, as the offer could repay the William Hill debt and allow the company to retain an equity stake in the betting business.

However, bankers fear that if the flotation option fades and the refinancing fails, the value of the venture capital offer could recede, leaving little for Brent Walker after repaying the William Hill banks.

Shares in Racal Electronics fell sharply yesterday after the data communications, radio and network services group reported a small interim pre-tax loss, mainly reflecting Pounds 20.2m in provisions for disposal and closure costs on the Racal-Redac computer aided engineering business.

The shares closed 29p lower at 160p after the group announced a Pounds 388,000 pre-tax loss for the 28 weeks to October 8, compared with a Pounds 23.2m profit.

The results were the first to be reported under the new FRS 3 accounting rules.

Losses per share amounted to 0.07p compared with earnings of 3.95p. . The interim dividend, however, is maintained at 1.5p.

Turnover from continuing operations slipped by 3.9 per cent to Pounds 428.7m (Pounds 446m) while discontinued operations added a further Pounds 1.26m (Pounds 2.77m).

Operating profits from continuing operations declined by 3.5 per cent to Pounds 23.1m (Pounds 23.9m) after charging Pounds 3.9m (Pounds 7.7m) in redundancy, severance and reorganisation costs.

Sir Ernest Harrison, chairman, said the operating results were adversely affected by lower turnover in the radio communications business resulting in a Pounds 4.5m reduction in profit. The decline in turnover reflected the continued worldwide recession, government defence spending cutbacks and increased competition.

Operating profits from the data communications and marine and energy businesses also fell, but were higher in the defence radar and avionics and specialised businesses.

Aside from the the Racal-Redac activities which were sold or closed in October, discontinued activities also included the HRM Marine activities in Spain which were discontinued in the summer of 1992.

Operating losses for these businesses totalled Pounds 4.9m (Pounds 5.02m).

This, together with the Racal-Redac disposal and closure costs of Pounds 6.3m and the acquisition goodwill of these businesses, written off in previous years, of Pounds 13.9m, produced a loss of Pounds 25.1m (Pounds 5.02m) on discontinued operations and resulted in a Pounds 1.88m trading loss compared with Pounds 18.9m profits. Interest income fell to Pounds 1.5m (Pounds 4.29m).

A cash-outflow of Pounds 23.6m, mainly reflecting a Pounds 34.7m increase in working capital, meant the group ended the period with net borrowings of Pounds 54.9m and gearing of 10.4 per cent. Sir Ernest said improved performances were expected in the second half from the data and radio communications businesses.

However, he warned that given the need for increased expenditure on the British Army Bowman communications project and the National Lottery bid, operating profits from continuing operations for the full year would be similar to last year.

See Lex

Forte has taken its Harvester restaurant chain off the market after failing to find a buyer prepared to pay the price it was asking.

Forte was hoping for a price of more than Pounds 120m for the 78 Harvester restaurants. It is believed that the highest price offered was Pounds 110m. Among the potential buyers believed to have expressed an interest in the chain were Whitbread and Allied-Lyons.

Forte said it would now invest in the chain. Sales are currently believed to be almost 10 per cent up on last year.

The group also said it had completed the sale of its 50 per cent stake in the UK chain of Kentucky Fried Chicken to Pepsico for Pounds 40m cash.

Fleming Far Eastern Investment Trust reported net asset value of 361.5p (219.7p) per share at September 30. Net revenue for the six months to the end of September was Pounds 2.2m (Pounds 1.54m) for earnings of 1.42p (0.98p) per share.

MEPC, the UK's second largest property company which completed a Pounds 222m rights issue earlier this year, yesterday announced a fall of almost 15 per cent in pre-tax profits from Pounds 95.2m to Pounds 81m for the year to end-September.

The latest figure was struck after exceptional items of Pounds 13.2m, including a Pounds 10m provision on interest rate hedging, compared with Pounds 14.2m last time.

Earnings fell from 18.9p to 15.5p. Nevertheless, the group proposed a final dividend of 14.75p, giving an unchanged total for the year of 20p.

Net asset value per share fell from 445p to 416p.

The shares closed 27p lower at 523p.

Lord Blakenham, chairman, said the net asset values did not reflect the scale of the upturn in the market since they were prepared in August. 'We believe we have seen the turning point in the UK property market,' he said, citing much increased investor interest.

The company was in a far stronger position than a year ago, he said. After property sales of Pounds 225m, a Pounds 150m preferred share issue and the rights issue, gearing had fallen from 82 per cent to 48 per cent. The group had cash of Pounds 211m (Pounds 89m).

After an external valuation, the group's overall valuation write-down was 1.1 per cent, while the investment properties rose in value by 3.1 per cent. The group said 'substantial write-downs' had been incurred at Alban Gate in the City and at a Tunbridge Wells shopping centre.

Mr James Tuckey, chief executive, said the group was very pleased with the progress made on void properties, which were down to less than 5 per cent compared with 8 per cent a year ago and 18 per cent two years ago.

Last month the group announced the proposed acquisition for Pounds 115m of American Property Trust, a unit trust controlled by UK pension funds that owns two shopping malls in Los Angeles and Atlanta. Completion of the deal will lift the proportion of retail property in the MEPC portfolio from 27.5 per cent to 32.3 per cent, and reduce offices from 61.4 per cent to 57.3 per cent.

COMMENT

The City was taken aback by the sharp fall in net asset values, which ended well below the bottom of the expected 435p to 485p range. No figure was given for the write-down on Alban Gate and Tunbridge Wells, but it appears to be on the way to Pounds 100m. While it is worth noting that the valuations were made last August, and the property market has shown signs of recovery since, this is still an embarrassing figure. The dividend, which remains uncovered, is the prop for the stock. Even if the recovery leads to a rise in net asset values to over 500p next time, the shares are still at a premium - and there is no prospect of dividend growth.

------------------------------------- UK ------------------------------------- Angerstein 21 Anglian Group 21 BTR 17 Baring Emerging 20 Brent Walker 18 Butte Mining 21 Castings 21 Compass 18 Enlightened Tobacco 20 Ferranti 21 Fleming Far Eastern 18 Forte 18 Gateway 12 Grand Metropolitan 42, 17 Graseby 21 Hanson 42, 19 Hays 20

Heywood Williams 19 ICL 21 Inchcape 21 Kingfisher 19 Leeds Group 19 Linread 19 MEPC 18 Marks and Spencer 12 Metro Radio 20 Micro Focus 20 Monks Investment 21 Northumbrian Water 21 P&O 21 Pearson 18 Racal Electronics 42, 18 Royal Bank Scotland 42, 17 Royal Doulton 18 Scapa 20 Scottish Inv Trust 21 Severn Trent 19

Telspec 20 Tinsley Robor 21 UniChem 21 Wrexham Water 21 Yorkshire-Tyne Tees 20 ------------------------------------- Overseas ------------------------------------- Alcatel-Alsthom 23 BellSouth 23 Bristol Products 19 CIBC 23 Capital Cities 23 Chrysler 23 Dresdner Bank 22 Electricity Corp NZ 24 GE Capital 23 ING 22 Isetan 24 Kmart 23

LA Gear 21 Maxi-Papier-Markt 19 Nat Commercial Bank 24 Navistar 24 Pacific Telesis 24 Procter and Gamble 22 Renault 22, 17 Rhone-Poulenc 22 Shuwa 24 Staples 19 Swiss Bank Corp 10 Volvo 22, 17 -------------------------------------

The resignation last night of Mr Pehr Gyllenhammar, Volvo's dominant figure for more than two decades, was the culmination of one of the most extraordinary episodes in Swedish industrial history.

When Volvo announced its proposed merger with Renault in September, it was billed as Mr Gyllenhammar's crowning achievement, but instead it turned out to be the beginning of his humiliation.

In a battle with his shareholders, Mr Gyllenhammar saw the merger torn up, a three-year alliance with Renault thrown into doubt and questions raised about the strategy of Volvo.

Mr Gyllenhammar hit back hard at his enemies last night, accusing them of wilfully blurring debate over the merits of the merger with emotional and political issues. In a bitter commment, he said Volvo shareholders had simply followed popular sentiment.

'Many have let me know that they are very observant of where the wind blows,' he said. But the shareholder revolt was bred by longstanding disquiet over Mr Gyllenhammar's dictatorial management style which spilled over into outright hostility at what was seen as his bungled negotiation of a deeply flawed agreement with Renault.

For shareholders, the core question of exactly how much Renault was paying to take over Volvo's vehicle manufacturing was never properly answered. In spite of publishing sheaves of information, the two groups never explained how they had calculated the 35 per cent share of the merged company that Volvo was to receive.

The lack of detailed valuations exacerbated strong Swedish doubts over placing Volvo's core assets into an unquoted company controlled by what was regarded as one of Europe's most interventionist states.

Latterly, concern was also fuelled by growing reports from groups within Volvo - such as engineers - that co-operation between Renault and Volvo under the existing alliance had not gone as smoothly as Mr Gyllenhammar had suggested.

Pushed along by saturation media coverage, much of it hostile to the deal, these factors helped overturn a mood of the sober acceptance by politicians, unions, the business community and shareholders that had greeted the merger announcement in September.

As the doubts piled up, the latent emotional reluctance to seeing the greatest symbol of Swedish industrial prowess fall under foreign control came to the fore.

But the question Volvo's shareholders have not addressed is where the company goes if not to a merger with Renault. 'Whatever happens, it will be bad for Volvo,' admitted Mr Stig Ramel, chief executive of the 92-94 Fund, a state investment fund which was in the 'no' camp to the merger. 'It is a question of finding the way out that is least damaging.'

The central aspect of the merger proposal which Volvo always felt commanded widespread support was the 'industrial logic' of the deal - the belief that Volvo needed to deepen the partnership already established with Renault if it was to survive in a world automotive industry saddled with overcapacity.

Critics argued that the rapid return to profitability at Volvo this year - in contrast to sagging profits at Renault - showed the company could stand alone. They pointed out Volvo's truck division was much stronger than Renault's. Moreover, they said Renault, which already owns 10 per cent of Volvo, was unlikely to try to reverse out of the alliance which benefits both companies, especially in cost savings.

Those who rejected the merger are apparently willing to contribute, via a share issue, to the SKr8bn (Pounds 640m) Volvo has said it will need in new capital without the merger. But Mr Gyllenhammar derided the notion that Volvo suddenly had a 'brilliant future' without Renault.

'Our painstakingly built relations with France and with Renault will now be detroyed with immediate effect. This reduces the probability of a Swedish presence in Europe and for Volvo's long-term survival.' This argument has always been accepted by Volvo's blue-collar trade unions - something Mr Gyllenhammar paid tribute to in a further swipe at his critics.

'(The unions) see the long term. They understand industrial development. And they have courage.' Mr Gyllenhammar stressed the weaknesses at Volvo which the merger was meant to address.

Strong profits flow this year has been helped by a weak Swedish krona and low development costs, as new models have been recently launched. In the meantime, Volvo's narrow model range - it does not produce a small car - is a severe hindrance.

The market-leading safety record which powered Volvo's success in the 1980s has also been eroded by advances made by other manufacturers. 'Volvo needs a partner, now or later, and later there won't be such a good deal available,' said one of Volvo's international advisers.

Much will now depend on Renault's response to the crisis at Volvo. Within Volvo itself, meanwhile, it was clear last night that the Volvo board will be almost completely reshaped, with Mr Gyllenhammar's allies, including Mr Raymond Levy, the former Renault chief, stepping down with him. Mr Soren Gyll, brought in as chief executive by Mr Gyllenhammar last year, is now set to exert full influence over Volvo.

He has retained shareholder support throughout the merger episode and will be the key figure in shaping Volvo's uncertain future.

Lex, Page 16; Gyllenhammar, Page 22; World stock markets, Page 39

Germany responded to demands from the international investment community yesterday when it announced plans for the issue of bonds with a maturity of more than 10 years for the first time in nearly eight years.

The Bundesbank, the German government's issuing agent, said that next Wednesday the government would sell a new tranche of its 6 per cent bond issue due 2016. The bonds were launched in May 1986.

A senior official at the finance ministry in Bonn said that if next week's auction was a success, the government would consider issuing more long-dated bonds, including a 30-year issue. Traders expect the auction to raise DM3bn to DM4bn.

German banks have recently begun to push hard for a new 30-year bund to bring the German market into line with leading bond markets elsewhere. Most German government bond issuance is concentrated in the five and 10-year areas of the yield curve, while government bond markets in the US, the UK, the Netherlands and France have liquid, long-dated sectors, with maturities as long as 30 years.

Italy has become the latest European sovereign borrower to issue 30-year bonds and Spain will make its first issue of 15-year bonds in the domestic market this month.

Two weeks ago, a DM2bn offering of 30-year Eurobonds by the Austrian government was snapped up by international investors starved of long-dated bonds denominated in D-Marks. It prompted a flood of long-dated D-Mark bond issues by German federal states.

The German finance ministry said the government was keen to raise long-term financing at the current low level of interest rates. Bankers said that it was in the German government's interest to satisfy the demands of international investors since their continued support was central to the government's success in funding its massive borrowing requirement. Next year, net public sector borrowing is expected to total around DM230bn, marginally below this year's DM235bn (Pounds 93bn).

Royal Bank of Scotland yesterday reported transformed pre-tax profits of Pounds 265.2m, up from 12.6m, helped by a 26 per cent fall in bad debt provisions, a recovery from losses in branch banking and a sharp rise in income from foreign exchange and derivatives.

Its shares rose 33p to 428p yesterday, completing a 21 per cent advance since the Pounds 50.2m pre-tax profits of its Direct Line insurance subsidiary were announced last week.

The results for the year to September 30 raised expectations that other clearing banks will report much improved profits for the year as income is boosted by trading activities, and charges for bad and doubtful debts are cut.

Royal Bank raised its total dividend 25 per cent to 11p, against 8.8p. Mr George Mathewson, chief executive, said it had reduced the volatility of its earnings and could now 'deliver a stable and growing dividend stream'.

Earnings per share increased from 0.7p to 17.7p and the dividend was covered 1.6 times, against 0.1 times. It kept a strong 6.9 per cent ratio of tier 1 capital to risk-weighted assets in spite of raising assets to Pounds 36.3bn, against Pounds 34.6bn.

Total income rose 17 per cent to Pounds 1.43bn, while expenses rose 10 per cent to Pounds 837.2m, against Pounds 764.3m. Bad debt provisions fell from Pounds 396.2m to Pounds 293.2m, with Pounds 182.3m of the provisions falling in the first half.

Mr Peter Wood, Direct Line chief executive, bought nearly Pounds 8m of shares yesterday morning, raising his stake to the level agreed with Royal Bank. The bank's UK staff will receive a 5.1 per cent profit-related pay bonus.

The branch banking division turned from a Pounds 16.1m loss to a Pounds 69.7m profit after higher sales of mortgages and life products. The division gained Pounds 26m from a restructuring programme which is expected to add Pounds 200m a year to profits by 1997.

The corporate and institutional banking division increased profits 92 per cent to Pounds 129.7m, and expanded its customer base by 20 per cent. Related foreign exchange and derivative activities contributed Pounds 107.5m, against Pounds 63.2m.

Citizens, the US retail banking subsidiary, raised profits 84 per cent to Pounds 36.3m, with net interest income rising 23 per cent from acquisitions and growth. Loan loss provisions rose Pounds 4m to Pounds 19.7m because of exchange rate movements.

Lex, Page 16; Markets, Page 42

Grand Metropolitan, the UK drinks, food and retailing group, saw pre-tax profits fall 31 per cent to Pounds 630m in the year to September after Pounds 286m charges.

The costs include: Pounds 175m for restructuring, largely in US food and retailing; Pounds 66m provisions for money owed by Brent Walker on the William Hill betting shops, plus Pounds 20m to cover costs; a Pounds 50m write-down of UK property assets.

But for the exceptionals, pre-tax profits would have been 6.6 per cent ahead at Pounds 916m. Sir Allen Sheppard, chairman, said: 'Recoveries in the US and UK did not produce significant benefits and many European economies remained in recession.'

Operating profits from continuing businesses rose 18.6 per cent to Pounds 958m on turnover up from Pounds 6.58bn to Pounds 7.64bn.

Profits of IDV, the drinks division, increased 14 per cent to Pounds 561m, and by 4 per cent excluding currency effects. Total sales of wines and spirits exceeded 100m cases for the first time. The leading brands - Smirnoff vodka, J & B Scotch whisky and Baileys liqueur - gained volume, and Russia became the fifth biggest market for Smirnoff.

North American food operations lifted profits 29 per cent to Pounds 212m, or by 9 per cent in local currency terms. But European food profits fell from Pounds 22m to Pounds 15m.

Burger King's profits rose 29 per cent to Pounds 170m, also boosted by currency moves. Another 540 stores were opened, bringing the total to 7,121.

GrandMet's share of losses at Inntrepreneur, the UK pub joint venture with Fosters Brewing, fell from Pounds 14m to Pounds 9m. The business is expected to break even this year, but each partner has had to inject Pounds 84.5m into it since September to ensure compliance with financial covenants.

The group spent nearly Pounds 900m on advertising and marketing during the year.

Sterling devaluation added Pounds 674m to net borrowings, lifting the total to Pounds 2.8bn and gearing to 75 per cent. The sale of Chef & Brewer pubs in October is expected to reduce debt by Pounds 700m and gearing to 60 per cent.

Earnings per share, before exceptionals, rose 4.6 per cent to 29.7p; after the charges they fell from 30.3p to 20p. A final dividend of 8.15p lifts the total 5.7 per cent to 13p.

Lex, Page 17; Markets, Page 42

BTR, the UK-based industrial conglomerate, went back on to the acquisition trail yesterday with an agreed Dollars 820m (Pounds 550m) purchase of Rexnord, a US industrial manufacturer based in Milwaukee.

BTR has been talking since May with Fairchild, the US supplier of aerospace and industrial components which has a 44 per cent stake in Rexnord. The UK group already has irrevocable commitments for more than 50 per cent of the shares.

Rexnord makes material conveying systems, power transmission components and industrial and aerospace seals for US and international manufacturers and users of industrial equipment. In the year to June 30, the group made operating profits of Dollars 83m on sales of Dollars 533m. Net earnings before extraordinary items were Dollars 23.9m.

Rexnord employs about 4,700 people. It has 14 manufacturing sites - 11 in the US, two in Germany and one in Italy.

Although the UK group has a fearsome reputation as a cost-cutter, Mr Alan Jackson, BTR's chief executive, said he was more interested in increasing Rexnord's sales by widening its market beyond the US. 'In particular, we see great potential for substantially growing Rexnord's sales in the large Asian markets and also in Europe.' He said the purchase would be earnings-enhancing from year one.

If the deal goes ahead, BTR's gearing is likely to go up from 40 per cent at the year-end to about 60 per cent. Mr Jackson said he was comfortable with that level, not least because Rexnord was very cash generative.

BTR said Rexnord's brand names were a good fit with the group's existing products and would expose it to a wider market. One of Rexnord's attractions was that 50 per cent of sales were spares.

This deal is the biggest announced by BTR since it paid Pounds 1.55bn in 1991 for Hawker Siddeley, the UK aerospace and engineering group. Mr Jackson said BTR was concentrating resources on industrial manufacturing. The policy has recently led it to invest in Chinese bottling plants and dispose of two wholesale distribution businesses in the UK and US.

The UK group will pay a total of Dollars 420m in cash for Rexnord and assume borrowings of about Dollars 400m.

Japan's government was struggling to restore public confidence yesterday as a deepening recession plus the resignation of a cabinet minister threatened to delay political reform beyond the year-end deadline.

The seven-party coalition agreed to launch early next week the fourth economic stimulus package this year. It will include Y5,000bn to Y6,000bn (Pounds 31.4bn to Pounds 37.7bn) of income and other tax cuts, a further reduction in bureaucratic controls, lower taxes on land sales and measures to stimulate the stock market, said officials.

Details have yet to be settled, particularly about how to fund the income tax cut, on which the coalition is deeply split.

The move is a clear sign that government concern over the economy, which has failed to respond to record low interest rates and a boost in public spending, has reached a new phase.

The gross national product for the third quarter and the Bank of Japan's quarterly review of business confidence are to be published next week and both are expected to show deepening gloom. Today's annual report on Japan by the Organisation of Economic Co-operation and Development warns that growth prospects are not encouraging.

Recent stock market falls have reinforced the need for economic action. The government has had to give priority to a supplementary budget, needed to finance the previous spending package, at a time when it was hoping to be pushing political reform.

This makes it unlikely that Mr Morihiro Hosokawa, the prime minister, will get parliamentary clearance by the end of the year for plans to reform the corrupt electoral system, said officials of his Japan New Party. 'We just don't have the time to worry about political reforms. Our immediate attention is on the economy,' said one official.

The government lost a valuable day of parliamentary business yesterday when Mr Keisuke Nakanishi, director general of the defence agency - the Japanese equivalent of defence minister - created an uproar by calling for the pacifist constitution to be revised to allow Japanese soldiers to take a larger combat role under United Nations command. Mr Nakanishi resigned, to be succeeded by Mr Kazuo Aichi of the Japan Renewal Party.

OECD urges reforms, Page 4 Editorial Comment, Page 15 Industry survey, Pages 27-32

The sharp differences between London and Dublin over the shape of any settlement for Northern Ireland broke into the open last night on the eve of today's Anglo-Irish summit.

As Mr John Major gave a public pledge that any deal must be acceptable to the Unionist majority in Northern Ireland, it emerged that the British prime minister had rejected a peace plan tabled by Mr Albert Reynolds, his Irish counterpart.

The plan, sent to London last month, provided for the Dublin government to drop its constitutional claim to the north and to recognise that Irish unification could come only with the consent of a majority in Ulster.

As a quid pro quo, the British side would have to agree to a document endorsing the value of eventual Irish unity and to early and simultaneous referendums in the republic and the north to provide a visible expression of 'self-determination'.

Mr Reynolds wanted the plan to provide the basis of the communique after today's talks. The two leaders agreed to downgrade the status of the summit after acrimonious exchanges earlier in the week threatened at one stage to result in its cancellation. Dublin now refers to it as a 'working meeting' rather than a summit.

It is understood that Mr Major was ready to accept a document framework that included explicit recognition of the legitimacy of the aspirations of Irish nationalists. But he rejected as unacceptable to moderate unionists the idea that Britain should tacitly support the goal of Irish unity by signing up to a statement proclaiming its 'value'.

Mr Major also judged that the proposal for joint referendums on 'self-determination' would dilute his government's commitment to the Unionists' veto on constitutional change. Both sides were last night attempting to play down the rift. In London, it was suggested a short statement to be released after the talks would emphasise the two leaders' commitment to seek an agreement.

Irish officials pointed out that by agreeing to a total of three working meetings during December there was still room for manoeuvre and hope for progress.

Mr Major, anxious to reassure Mr James Molyneaux's Ulster Unionist party after the disclosure of the government's clandestine contacts with Sinn Fein, told MPs: 'There is for us one fundamental point: Northern Ireland's status as part of the United Kingdom will not change without the freely expressed consent of the people of northern Ireland.'

Sir Patrick Mayhew, the Northern Ireland secretary, in a thinly- veiled reference to Mr Reynolds' plan, also rejected the idea the government could recognise the goal as well as the aspiration of Irish unity.

Sinn Fein says cabinet split on Ulster, Page 9

Sinn Fein, the political wing of the IRA, yesterday claimed it had received highly sensitive information from the British government on its stance towards the terrorist organisation.

Mr Martin McGuinness, a Sinn Fein official closely involved in talks with the Britain, said he had been told of a disagreement between Sir Patrick Mayhew, the Northern Ireland secretary, and Mr Kenneth Clarke, the chancellor, over how to deal with Sinn Fein.

The differences allegedly surfaced at a meeting chaired by Mr Major in May. Downing Street said the allegations were 'inaccurate', but did not deny such a meeting took place.

Sinn Fein also said it had copies of a Northern Ireland office briefing paper on talks last year with Ulster's democratic parties.

The US and European Union last night appeared close to a comprehensive bilateral deal on market access for industrial products and on trade in food products.

But the absence of a definitive breakthrough because of last-minute snags is still holding up overall progress in the Uruguay Round trade negotiations in Geneva, involving 116 countries.

After 36 hours of intensive talks in Brussels between Sir Leon Brittan, the EU's chief trade negotiator, and Mr Mickey Kantor, US trade representative, both sides said they hoped to reach an outline deal in a new bargaining session on Monday.

Sir Leon won a vote of confidence at a meeting of EU foreign ministers late last night. France, which has taken the hardest line, particularly over international farm trade, threw its weight behind the tight timetable for a deal with the US.

Officials of the General Agreement on Tariffs and Trade in Geneva welcomed France's 'clear willingness to do business', but they cautioned that little time was left to meet the December 15 deadline for concluding the Gatt talks.

They said other Gatt signatories were still holding back their best offers in expectation of a US-EU deal.

'What we really need here is for market access to move,' said one Geneva official.

The most significant progress appears to have been made in farm trade, an issue that has dogged the Uruguay Round since it was launched in 1986. In prospect is a deal providing improved access for US and other farm exporters to Europe's market for grains, meat, dairy products and 'other speciality crops'.

Negotiators were also confident of satisfying French demands for amendment of the US-EU Blair House agreement regulating Europe's subsidised farm exports.

Mr Kantor said: 'We are talking of an overall agriculture package that not only the EU, but every country in the Community can agree to.'

However, Mr Willy Claes, the Belgian foreign minister who chaired last night's meeting, sounded a note of caution after most countries raised concern about the scope of the potential market access deal and the lack of detail provided by Sir Leon.

Mr Claes said: 'We are convinced that progress is being made constantly, but it would be dangerous to draw conclusions at this stage.'

Sir Leon and Mr Kantor spoke of 'tangible progress' at their talks in Brussels which allowed negotiators 'to see the outlines of a final package'. Later Sir Leon indicated that the plan was to reach a broad deal on Monday and for him to accompany Mr Kantor to Geneva to accelerate the multilateral negotiations.

Little detail emerged from the talks as officials stressed that premature publicity could jeopardise a deal. But Brussels indicated that the US was taking a tough line on textiles and was still pressing Europe to further open up its market in films and broadcasting.

Gatt failure would reopen old disputes, Page 6

The US and European Union appeared close to settling longstanding differences on international farm trade last night. However, negotiators fell short of the comprehensive bilateral market-opening deal needed for successful completion of the Uruguay Round of talks on world trade liberalisation.

The farm trade issue has dogged the round since it was launched in 1986. In prospect is a deal providing improved access for US and other farm exporters to Europe's market for grains, meat, dairy products and 'other speciality crops'.

Negotiators were also confident of satisfying French demands for amendment of the US-EU Blair House agreement regulating Europe's subsidised farm exports. Mr Mickey Kantor, US trade representative, said: 'We are talking of an overall agriculture package that not only the EU, but every country in the Community can agree to.'

Sir Leon Brittan, the EU trade commissioner, and Mr Kantor talked of 'tangible progress' at the end of 36 hours of intensive negotiation in Brussels.

EU foreign ministers last night gave a positive response to Sir Leon's report on his talks with Mr Kantor, but they asked him to provide detail on all the outstanding issues at a second meeting on Monday.

Sir Leon said the plan was to reach a comprehensive bilateral deal on Monday and for him to accompany Mr Kantor to Geneva to accelerate agreement between all the other parties.

Mr Kantor has returned to Washington for further consultations with President Bill Clinton and the US Congress.

Key differences remain over US access to Europe's film and television markets, and on liberalising maritime services. US demands for better protection of its anti-dumping laws under the draft Uruguay Round agreement and its proposed amendments to the deal in financial services and taxation are also being fiercely contested by the EU and many other US trading partners.

Sir Leon last night reported on the outcome of the negotiations directly to a special meeting of EU foreign and trade ministers, where it was critically important that he won backing for the commitments already made to the US and the likely compromises that will have to be made.

Conscious that time is rapidly running out ahead of the December 15 deadline to complete a deal satisfactory to all 116 countries participating, Sir Leon acknowledged the 'awesome responsibility' of the US and the EU to reach agreement.

He said Mr Peter Sutherland, director-general of the General Agreement on Tariffs and Trade, had been kept fully informed on progress. Mr Sutherland is making a statement in Geneva today to a meeting of Gatt negotiators from all 116 countries involved.

Market-opening offers from other countries have been held back as the critically important US-EU package has been awaited. 'It is essential for other nations like Japan, the Asians and in Latin America to come forward now with their best efforts,' Mr Kantor said.

The theory behind the recent surge in Volvo's shares has been that opposition to the Renault merger reduced the immediate risk of earnings dilution. Combining a recovering Volvo with a recession-bound Renault was never particularly attractive in the short term. Now the opposition has won the day, the market must move on to assess the long-term strategic lacuna. With its limited model range and small home market, Volvo badly needs a partner. But even operational collaboration with a jilted Renault will not be easy. Alternatives may remain elusive while Renault still owns 10 per cent. If Volvo needs fresh capital, meanwhile, even its most chauvinistic shareholders should think carefully before stumping up any cash.

If the size of the write-off at Redac was what unnerved Racal shareholders yesterday, then a closer look might have reassured. Some Pounds 13.9m of the Pounds 20.2m provision was a write-back of acquisition goodwill which had previously been charged to the balance sheet. The Accounting Standards Board is clearly right to insist that companies should not buy, run and sell a business without recognising permanent losses of goodwill. Yet in this case, as many others, the write-off is of merely historical interest with little relevance to future prospects.

Equally, the 15 per cent fall in the share price may have reflected worries about trading prospects. Military radio is an increasingly competitive field in a shrinking defence market. The constant struggle to raise margins in the data communications business is a race to stand still, since even sophisticated technologies are rapidly becoming commodities. Managed networks is a growth area but the company is pitched against some tough telecoms competition. As ever, Racal's problem is to keep enough plates spinning to keep profits moving. Avoiding nasty surprises might please the market too.

GrandMet's tub-thumping defence of brands yesterday came as a startling flash-back to the 1980s. But not even GrandMet appears wholly convinced by its revivalist rhetoric. Its Pounds 175m restructuring charge to cut its cost base certainly shows a healthier regard for the real competitive forces shaping its markets. Much of that provision relates to its US food businesses, which face a fierce fight defending premium prices. The bigger concern, though, is over its European food arm, which is generating operating profits of just Pounds 15m on sales of Pounds 735m, and appears trapped in a strategic cul-de-sac.

Doubts about GrandMet's diversification into foods cannot obscure the underlying strength of IDV. The loss of the Absolut vodka distribution contract will knock profits this year. But IDV's geographic spread and product mix should enable it to maintain robust progress, particularly in developing markets.

GrandMet's growth ambitions remain constrained by its Pounds 2.8bn borrowings. The disposal of Chef & Brewer and its strongly improving cash flow will help ease the strain. But with GrandMet's continuing woes at IEL and Pearle - and its embarrassingly expensive legal dispute with Brent Walker - still clouding the picture, it is hard to see how its 23 per cent underperformance against the market over the past year will quickly be reversed.

One way of looking at Royal Bank of Scotland's 25 per cent dividend increase on cover of only 1.6 times is that the bank expects only modest loan growth. Without mortgage lending its UK advances would not have grown at all last year. So Royal may be anxious to avoid building up surplus capital. Its move could thus be a signal that other banks will raise their payouts to avoid excess profit retention as provisions come down. Royal's dividend, though, is also a striking gesture of confidence that another year of bumper profits lies ahead. It is not just Direct Line. Last year fee income, treasury revenues and profits from its US subsidiary Citizens all showed rapid growth, some of which at least should continue. Royal can thus rightfully claim that diversification has reduced the volatility of its revenues while putting them on a fast upward track. The question is whether this happy combination can last.

At Direct Line, which the previous management stumbled across and the new one has cannily locked into the group, prospects look good. Mortgage lending may be less lucrative as base rates fall and competition increases. At some point the market will doubtless perceive a limit to growth, but after yesterday's dividend increase the shares have probably further to rise on yield considerations alone.

The alchemy which allowed Hanson to remain burdened with debt and yet receive interest income is waning. Lower interest receivable in yesterday's figures is the prelude to a nasty reversal next year, as the assumption of Quantum's debt and falling income on sterling deposits start to bite. Without action the interest bill will rise by around Pounds 275m. The need for disposals to pay down debt suddenly looks more urgent.

Floating house building interests in the UK and US makes good sense. Housebuilders generate little cash even on the upswing, since profits are generally ploughed back into land. The prospectus will tell whether Hanson has been reinvesting in this virtuous manner since it acquired Beazer Homes in 1991. The size of the land bank will determine the final price. While stock markets are taking a rosy view of recovery, though, Hanson will raise more from flotation than trade sales, though the disposals should meet Hanson's Pounds 500m existing overall target.

How much more is required depends on the strength of recovery. Even if profits rise modestly from here, utilisation of provisions set up against Beazer and Peabody - and the Pounds 540m cash cost of the dividend - will leave little scope for debt reduction. That might explain the decision not to raise the pay-out yesterday. The 5 per cent fall in the shares is similar to the treatment meted out to BOC last month for taking the same decision. Hanson's status as a yield stock cuts both ways.

It is easy to be cynical about the government's initiative for attracting private finance for UK public sector projects. One year after the initiative was launched, there are still no new holes in the ground. Patience is running out among many of the construction companies which would like to build roads, railways, hospitals and schools and for the banks which would like to finance them.

Yet some progress has been made in clearing the ground for involving the private sector in providing public services. In the health service and on the railways the initiative has eased rules on leasing expensive equipment. NHS hospitals are now forming partnerships with the private sector to build patient hotels. The home secretary plans to use the private sector to build and manage six new prisons.

This week's Budget has opened up new possibilities. The firm commitment to introduce tolling on motorways will eventually provide a stream of income to reward companies which build new roads. Since it will be years before electronic tolling can be introduced, the government has sensibly reversed its opposition to shadow tolling. Thus investors in a new road can be paid by the Department of Transport according to the number of vehicles using it.

The chancellor also committed the government to three larger projects, including the modernisation of the west coast railway line between London and Glasgow. This should reassure companies which have become frustrated with 'no win competitions', where expensive tenders are submitted for projects that are subsequently withdrawn. Mr Clarke has shown himself commendably willing to sweep away Treasury orthodoxy on private finance, especially in endorsing shadow tolling.

Yet most projects so far agreed have been either free-standing private investments, such as the Dartford bridge over the Thames, or almost entirely financed by the public sector, such as the Jubilee line underground extension. The test will come with joint partnerships involving investment by both the private and public sector.

The Treasury still appears to have an unrealistic view of the level of risk which the private sector will accept in such partnerships. With the Channel tunnel rail link, investors are being invited in before the legislative and planning process is complete - against the advice of most experienced advisers. The Treasury may also find it hard to stomach the returns that private investors expect to make - especially if earned on the back of a sizeable investment of taxpayers' money.

Striving to find solutions acceptable to both sides is, however, well worthwhile. Contracting out services such as refuse removal and computer management has already produced better value for money in central and local government. The private finance initiative promises to extend similar benefits throughout the public services.

Deep divisions over the future of Europe were revealed during the ratification process of the Maastricht treaty - not only in Denmark and the UK but also in France and Germany. In order to heal these divisions, the member states of the European Union are turning to a new pragmatic agenda that promises tangible benefits rather than distant visions - one that focuses on implementation rather than on new initiatives.

In the short run the agenda is already crowded.

First and foremost, there is the need to complete successfully by mid-December the General Agreement on Tariffs and Trade negotiations - without which there will be an immediate crisis in the Union.

Second, membership negotiations with the European Free Trade Association applicants - Austria, Finland, Norway and Sweden - should be concluded in spring next year. This is necessary to show that the Union is not an exclusive club dividing rather than uniting Europe.

Third, there is the re-casting of the economic agenda to focus on the micro-economic changes needed to improve Europe's economic performance relative to the rest of the world. This does not depend on Community transfers and new regulatory initiatives, but on getting rid of state aids, enforcing competition within the single market and opening up those sectors where state monopolies have led sheltered lives.

Fourth, in respect of macro-economic policy, this means discarding the artificial deadlines for monetary union and emphasising instead the convergence objectives of reducing budget deficits so that less burden is placed on interest rates.

Fifth, there is a redefinition of the concept of 'social Europe' away from its equation with new regulatory burdens on business or new financial burdens on governments towards comparisons of 'best practice' in meeting social objectives and towards harnessing private finance.

Sixth, the two 'pillars' of the Maastricht treaty (foreign security policy and home affairs) must be shown to work despite the tarnishing effect of events in former Yugoslavia.

Last, but not least, the Nato summit in January should see progress in reformulating the purposes of the Atlantic alliance and extension of security links eastwards.

This new pragmatism will be welcomed by many, not least by the business community. Business would like to see the commission and other bodies focus on their administrative and managerial tasks rather than the endless invention of new legislative initiatives or visions for which there is no clear path to attainment.

At the same time, this healthy turn towards pragmatism has to be guided by an informed view of the longer-term development of the European Union. The question of the kind of European Union we wish to see develop will not go away. There will be renewed debate next year during elections for the European parliament and in 1996 when the next intergovernmental conference will be held.

Meanwhile, proposals for the next round of discussions on the future shape of the European Union are being forwarded by a group of independent academics and think-tanks from across Europe, known as the Constitutional Group. Their report avoids terms which merely add to confusion, such as 'federal' or 'confederal', 'integrationist' or 'intergovernmental'. Equally, it avoids simplistic and often self-interested assertions that development of the Union simply involves giving more powers to central bodies such as the commission or the European parliament.

Instead, the report addresses the basic questions Europe faces. How do we structure a union that will embrace all democratic countries in Europe and promote the interests of both the smaller and larger member states? How do we redefine the role of the nation state and its institutions within the Union? How do we entrench rule-based procedures rather than discretionary powers in the Union? What are the fundamental values we should try to enshrine in the development of political union?

No one should pretend there are easy answers. But if there was one lesson from Maastricht it was the dangers of governments getting out of step with their electorates. Closer union is in the interests of all. But it cannot be imposed. It must rest on consent. Whether there will be consent to further union may depend on whether governments can first demonstrate tangible benefits of union from the successful pursuit of their new pragmatic agenda.

The author is director of the European Policy Forum and a member of the European Constitutional Group

The worst fears of Tokyo's salarymen are coming true. Japan's recession is not turning out to be the short-lived blip that the bureaucrats said it would be. To its credit, Japan's fractious coalition government is still trying to revive the economy. But a sagging stock market, troubled banks and increasingly uncompetitive exporters all suggest that a long and painful period of retrenchment lies ahead.

The latest, if rather belated, evidence that the squeeze has a long way to run comes from the Organisation for Economic Co-operation and Development. Over the last two years, it has publicly supported the Japanese government line that recovery was just around the corner - last June it forecast growth of 1 per cent this year rising to 3.3 per cent next year.

But the truth has slowly sunk in. In its latest report on Japan, published yesterday, the OECD has revised these forecasts to zero growth this year and 1.4 per cent next. But even these numbers are out of date. The OECD secretariat now says it expects output to contract this year and grow by less than 1 per cent next.

Have Japan's growth prospects been deteriorating that fast? No. The OECD has been catching up with reality. It is true that Japanese industrial output fell by 6.2 per cent in October compared with the same month last year. But output also fell by more than 4 per cent in each of the first three quarters of this year.

The reasons for this accelerating fall in output are well documented in the report. Medium- and small-sized companies are hampered by a credit squeeze imposed by indebted banks, while the sharp appreciation of the yen has cut competitiveness. In 1990, US hourly wages were 109 per cent of Japan's. Now they are 76 per cent.

The report also provides the government with the economic case it needs to justify next week's further fiscal package. Up to now, the OECD has been backing the Japanese bureaucracy in a sterile dispute with the US government over the appropriate measure of Japan's fiscal stance. But, as this report shows, even on the widest definition of the public sector, Japan has a much lower ratio of net debt to gross domestic product than the OECD average.

In short, the government can safely cut income tax to stimulate consumer demand, especially if the cut is balanced by a consumption tax rise far enough into the future to avoid damaging recovery. Moreover, the scope for tax reform and deregulation to free barriers to higher consumption and to speed up the growth of the service sector is substantial.

Yet it looks increasingly doubtful that fiscal policy can do the trick alone. A further discount rate cut, to hold down the yen, a degree of monetisation of government debt and a temporary injection of Bank of Japan capital into the banking sector look more likely to accelerate what is set, in any case, to be a sluggish recovery.

Instances of predatory behaviour by British insurance salesmen have become so commonplace that revelations of mis-selling hardly come as a surprise. Yet the Securities and Investments Board's latest findings, reported in the Financial Times today, point to such extensive mis-selling in personal pensions that the picture is becoming increasingly disturbing.

Failures of compliance appear to have taken place in a significant proportion of the sales of nearly 500,000 personal pension plans to former members of occupational pension schemes. These failures, which involve a number of self-regulatory organisations including the SIB itself, go back as far as 1988. A sampling exercise has established that countless transactions were completed on the basis of inadequate investigation of the purchasers' existing pension arrangements and financial affairs. The watchdogs apparently did nothing to monitor those in the system whose selling techniques were known to be in most urgent need of monitoring.

None of this need imply that personal pensions were inappropriate for each and every one of the customers in question. There will be many, especially among the young for whom the flexibility of a personal pension plan is appealing, who may remain happy when their circumstances have been investigated. But it is already clear that many older people have been persuaded to leave good schemes with full index-linking of deferred pensions. Here the benefits are most unlikely to be matched by a personal pension. Redundant mineworkers, in particular, have been shamelessly gulled by salesmen from some of the best-known names in insurance and banking.

It is not putting it too strongly to say that this is scandalous. And to its credit the SIB is recognising as much in its response, which will aim to provide appropriate financial remedies, in co-operation with the insurance industry, over the next two years. Co-operation will almost certainly be forthcoming, since the damage to the industry's already tarnished reputation is potentially so great that urgent efforts at restitution are in the insurers' own interest. But the task of investigation and finding appropriate means of restitution will not be easy.

Nor will the damage to the regulatory structure be easy to repair. Insurance has always been the Achilles' heel of the 1986 Financial Services Act regime. Since the arrival of Mr Andrew Large at its head, the SIB has sought more vigorously to address this weakness. Yet the latest revelations indicate that an entirely new approach is needed to raise the standards of salesmanship that now prevail in dealing with complex products such as pensions. Education and training will have to be transformed if confidence is to be re-established. In promoting personal pensions with such enthusiasm before the regulatory regime had been tried and tested, the government has shown itself to be pretty much on a par with the insurance salesmen.

The billboard featured a tough-looking squad of soldiers and purported to be announcing plans for privatising the British army. What it was actually advertising was a well-known lager. It must have seemed a good joke at the time. If there was one thing that could never be privatised, it was the army. But that was five years ago.

Since that spoof advertisement appeared, bits of armed forces activity have been transferred to the private sector. Go to an army base in mainland Britain, and you will no longer find mess meals being cooked, served and cleared up by the Army Catering Corps, but by civilians. Join the RAF or navy as a novice pilot and you will be initiated in flying by a civilian instructor on an aircraft owned and operated by a private-sector company.

More is to come. Many military vehicles and other equipment will not in future belong to the forces but be leased from contractors. Forces' married quarters will be hived off on a long lease to a private-sector housing trust. Training, transport, distribution, spares and storage may increasingly be looked after by private companies. Already radically shaken up under the government's 1990 Options for Change defence reforms, the forces' support branches are set to be shaken up again in the quest for economies.

Defence planners are searching for ways to absorb a fresh and unwelcome series of spending cuts without damaging the forces' fighting strength.

The forces have not yet got over Options for Change. For instance, 80 per cent of armoured regiments have either just amalgamated or are now doing so. But pressure on the Pounds 23.5bn annual defence budget has kept increasing. Defence spending is now 16 per cent lower in real terms than in the mid-1980s. A further 12 per cent reduction in real terms is planned by 1996-97.

The biggest cut comes at the end of the three-year budget cycle. The Pounds 22.7bn now planned for 1996-97 is reckoned to be Pounds 1bn less than the MoD had been counting on in its own confidential plans. This seriously alters the assumptions military planners must use for subsequent years. MoD officials who have spent three months drawing up long-term costings for the next 15 years must now redo their sums.

Mr Malcolm Rifkind, defence secretary, argued long and hard with the Treasury over this delayed-action spending curb, while Tory backbenchers dug themselves in to resist further cuts in frontline combat units. Rising bitterness in the forces, already reduced in numbers from 320,000 a decade ago to 270,000 and on course to shrink to about 230,000 in the late 1990s, broke into the open last month when Air Chief Marshal Sir Michael Graydon, chief of the air staff, sounded off about a 'disreputable campaign' being waged against the services.

He and the other service chiefs twice made use of their prerogative to see the prime minister directly, in late September and again in October. Senior officers described it as the most difficult public expenditure round they could remember.

The MoD had carefully laid its defences. Its annual white paper in July listed 50 tasks the forces were being asked to fulfil in defence of the UK and its dependencies, in Nato or in support of wider British interests such as peacekeeping. Numbers of battalions, ships and air squadrons were neatly assigned to each military role. In many cases military units were earmarked for two or more roles at once. Almost all the overseas tasks could be done by drawing on the forces provided for UK and Nato defences.

The exercise was meant to challenge the Treasury. The implicit message was that, if big savings were wanted, it would mean scaling down or abandoning one or more commitments. Which - apart from peripheral commitments such as Belize, where the British garrison is being withdrawn - would the government be prepared to drop?

But Mr Rifkind's cabinet colleagues declined the challenge. According to an MoD planner, defence policy is not at issue. The question is whether it has to cost so much. 'It is clear,' he says, 'that the centre of government does not believe in the efficiency of the MoD as an organisation.'

The result will be what senior officers describe as 'another massive trimming exercise' - an attempt to do the same job on reduced means. But if funds continue to be squeezed year by year, as seems likely, Britain's broad-ranging defence effort risks becoming increasingly difficult to sustain.

The defence cuts so far have not reduced the range of military capabilities. One exception is the RAF's sub-strategic nuclear capability, which it is due to lose once its current bombs become obsolete. A new missile programme was formally abandoned last month, saving Pounds 1.8bn from the MoD's long-term budget provisions. Instead, Trident submarines, carrying limited numbers of warheads, will be the UK's all-purpose nuclear deterrent.

But the array of conventional capabilities, from armoured warfare to strategic reconnaissance, is untouched. Choosing between them would inevitably stir controversy since it would mean favouring one service over another.

To avoid the kind of political storm that blew up over the future of infantry battalions, the MoD aims to avoid any further loss of combat units. But there will be more base reductions and closures, and numerous equipment programmes are likely be curtailed, delayed or downgraded.

A number of important procurement decisions have been held up by this year's budget arguments. Some - the purchase of more Challenger 2 tanks, minehunters and RAF support helicopters - have now got the go-ahead. But others, including new Sea Harrier jets, an overdue production order for torpedoes and bidding for the first of two new assault ships, are still pending.

Back-up support for the services will now undergo close scrutiny in order to concentrate manpower and effort on the front line. Mr Rifkind has said the changes will have to be radical to achieve adequate savings. This is likely to mean transferring some activities outside the services and merging others on a joint-service basis. Munitions maintenance, for instance, is being rationalised, with the navy taking the main responsibility for sophisticated weapons and the army for basic ammunition. But in other areas the three services stand apart. Each has its doctors, dentists, educators and lawyers. 'The only thing we've managed to amalgamate in 10 years,' says a senior officer at MoD headquarters, 'is dog training.'

But other officers believe the real opportunities are limited, since the services are distinct and usually at some distance from each other. 'Joint training in everything would be irrelevant and probably a waste of time,' says one.

In any event, few of these measures promise to bring short-term savings. The temptation will be to cut training activity and 'consumables' such as fuel and ammunition. This goes down badly with service chiefs. It may cost an extra Pounds 500,000 to send a large unit to train overseas, say officers. But if British forces are to play a worldwide role, such training is 'absolutely vital'.

Some symbols of that reputation are already showing the signs of hard times. There are fewer bands and smaller guards of honour for state visits. Foot guards lining the streets on ceremonial occasions now stand nine feet apart instead of six. 'We're having to spread people a bit more thinly,' says the army.

Among the victims of the latest cuts will almost certainly be the 40-year-old Royal Yacht Britannia. Paid for out of the defence budget, it will have to go - unless the Queen finds the means to defray its Pounds 12.5m annual costs, or industry takes it over to promote Britain's image overseas. We may not have the Carling British Army, but could we be soon be cheering the Whitbread Royal Yacht?

The OECD's Financial Market Trends dated October 1993 betrays that organisation's deepest fears concerning the Italian bond market. 'In June, the Italian authorities introduced changes in the guidelines on lead management and secondary market trading of euro-liar securities.'

Last week's sudden announcement that Paris's Grand Palais - the vast, Crystal Palace-type building near the Champs Elysees used for block-buster art shows - is closing for FFr250m of emergency repairs, is somewhat embarrassing.

Among the 20 exhibitions planned for 1994 were January's highly successful SIME salon of museums; March's Salon du Dessin drawings fair; and September's glamorously expensive Biennale des Antiquaires antiques show.

Even more distressing than this blow to exhibitors and sponsors is the consequent buffeting of French pride. After all, the Palais was conceived as a monument to the brilliance of modern French engineering in the 1900 Universal Exhibition.

France's culture minister, Jacques Toubon, now admits that the Grand Palais was a jerry-built affair; four different architects had a go and the roof was still leaking 70 years later.

The only bit of the building which has been ruled as structurally sound and will remain open throughout the enforced closure is the police station, responsible for guarding President Mitterrand in the nearby Elysee Palace.

Remember Kevin Morley, Rover's marketing supremo who transformed himself into an advertising agency last year? He seems to have made a scintillating success of his first year - at least in terms of his salary.

In the first 18 months of the Kevin Morley Group Ltd, he paid himself a salary of Pounds 481,593, including a performance-related bonus of Pounds 304,316, according to accounts filed at Companies House.

That works out at Pounds 321,062 annually, a smidgeon more than that taken by Maurice Saatchi, chairman of advertising mammoth Saatchi and Saatchi. Mind you, Morley has some way to go before he reaches the level of Martin Sorrell, chief executive of WPP. He got Pounds 510,000 in 1992.

Good news from the Bank of England. Its chief economist, Mervyn King, has decided to stay on rather than return to academe when his three-year leave of absence from the London School of Economics ends.

Not only is King, 45, one of Britain's best regarded economists, but he is also a keen advocate of greater openness in UK policymaking. He wants to see greater independence for the Bank in setting interest rates, mainly because this would make officials more accountable to the public for their various policy mistakes. He's generally thought to have made more of a go of the job than John Flemming, his predecessor, who is now warden of Wadham College, Oxford.

There had been rumours that King's enthusiasm for life at the Bank had been tempered by the arrival of ex-Economist editor Rupert Pennant-Rea as deputy governor. However, King's decision to stay on as an executive director suggests that any tensions between the two have been resolved. Having lost Andrew Crockett to the Bank for International Settlements, Threadneedle Street could ill afford to lose another high-flyer in the space of a few months.

On Wednesday night one of the more prestigious head-hunting firms, Heidrick and Struggles, gave a slap-up do at the Royal College of Art, to which all its esteemed clients were invited.

Mingling among the champagne-quaffers, Observer was amused to hear one senior chief executive delicately talk business - and make a job offer to a fellow guest. 'But don't tell this lot,' said the offeror, 'or they'll be after their fee.'

A little hard on said head-hunters - who may well consider charging at the door next year.

Britain's royal family can sleep soundly again; the financial headache of how to pay for the restoration of the fire-ravaged Windsor Castle could soon be over, thanks to piles of the black stuff.

No, not coal - oil. According to an article in the Oil and Gas Journal, the US oil industry's bible, Her Majesty could be sitting on top of one of Britain's biggest onshore oilfields.

Desmond Oswald, boss of the little-known Canuk Exploration, has been poking around underneath the castle for the past four years. He believes that as many as 100m barrels of oil may be trapped in a reservoir which begins only 1,000 feet below the Castle. Little is known about Canuk, based in Gerrards Cross, but other oil industry sources say the idea is not as barmy as it sounds.

Oswald expresses surprise that 'such a large structure should have remained undrilled in a country where extensive exploration has taken place'. Having done his homework, he is now seeking a competent operator to contribute financially to the drilling of an exploratory well.

Of course, the royals may not be amused at the thought of nodding donkeys taking their place alongside the Household Cavalry. But times have changed. Prince Edward has set himself up in the film business and his mum opened Buckingham Palace to paying gogglers for a few weeks this summer. The possibility of a gusher under Windsor Castle should not be ignored just because it might keep the occupants awake at night.

For seven years, Merck, the world's largest drugs group, has been voted Fortune magazine's most admired US company. Its reputation has been based on a talent for discovering and developing new medicines, innovative and successful joint ventures, and an apparently remorseless ability to achieve double-digit earnings growth.

But Merck's global standing, and the judgment of Dr Roy Vagelos, its charismatic chairman, are now being questioned. Sales growth is faltering, battered by an increasingly competitive environment; the launch of Proscar, a treatment for enlarged prostate, has been disappointing; and Merck has few exciting new drugs in the pipeline.

In addition, the direction of the company remains unclear after Dr Vagelos's retirement next year. His heir apparent and chief operating officer, Mr Richard Markham, resigned unexpectedly in July. No obvious successor has emerged.

Concerns among shareholders that Merck had lost its way were heightened soon after Mr Markham's departure, when the group announced its intention to acquire Medco Containment, a drugs mail order company, for Dollars 6bn. Medco has an annual turnover of Dollars 2.5bn and net income of Dollars 138m.

The deal, which has been given the go-ahead by regulatory authorities, is a radical departure for Merck, and signals a shift from research and development to distribution.

The acquisition has been described as a watershed in the drug industry. Dr Vagelos says: 'We're not just trying to remodel Merck, we're trying to remodel the entire industry. The rest of the sector normally follows what we do.'

However, industry executives and the investment community remain divided over the move. Some view it as visionary and inspired. Others believe the acquisition was overpriced and will offer no lasting competitive advantage in pharmaceuticals marketing.

The Medco acquisition is Merck's response to the rapid changes overtaking US pharmaceuticals. In the world's largest market, hospitals and doctors are banding together to negotiate bulk discounts. Merck estimates that in 1991 only 33 per cent of health provision was supplied through bulk buyers, known as managed care organisations. Within two years, it forecasts the figure will be 67 per cent.

Merck believes the implications of this consolidation are momentous. It is particularly being hit by discounts in the highly competitive markets of cholesterol-lowering treatments and medicines for hypertension.

Bulk buying has been accompanied by greater prescribing of generic drugs, which are less expensive than their patented counterparts. Kline, the New-York based industry analyst, believes the generics sector could double to Dollars 10bn between 1992 and 1996. The growth of generics will accelerate as patents expire over the next two years, including that of Bristol-Myers Squibb's Capoten, a heart drug with worldwide sales of Dollars 1.6bn.

'Competition has already lowered prices of drugs,' says Dr Vagelos. 'Annualised price increases to the third quarter of 1993 averaged only 3.5 per cent. That compares with 9.9 per cent in 1990. We see price increases as a thing of the past.' The healthcare reforms being prepared by the Clinton administration will exacerbate the industry's plight, he adds.

As a result, the growth of the US market is slowing, from 18 per cent in 1992 to 4 per cent this year, according to observers. In this sluggish environment, market share is increasingly important.

Such a consideration was an impetus behind the acquisition of Medco, which supplies medicines to about 33m Americans. The crucial factor is whether Merck can expand that number. If Dr Vagelos succeeds, the deal should pay for itself within three years, as Merck promises.

Dr Vagelos says there are other benefits. 'We will acquire the ability to capture all the information when a person has a mail order prescription or goes to a pharmacy. This will allow us to capture more and more data on the individual, the diagnosis, and the doctor,' he explains.

He believes Medco's large databases will give Merck valuable information about the cost-effectiveness of its treatments. In a scheme known as capitation, Merck intends to use this information to provide large US companies with medical cover for employees for an annual set fee per head.

'We will share the risk. One of our drugs is Proscar, which is fantastic for stopping the growth of benign prostate enlargement. We are talking to customers about putting their males who have enlargement on our drug and then guaranteeing they will get relief. If not, we will pay for the operation needed to deal with it.'

Not all are convinced by Dr Vagelos's vision of integrated pharmaceutical care. Mr Ronald Nordmann, pharmaceuticals analyst at PaineWebber, the New York broker, says: 'I've recommended Merck as a buy every day since 1985. But when it announced its intention to buy Medco, I stopped.'

One criticism of the Medco deal is that Merck, with its bureaucratic organisation, will be unable to manage the entrepreneurial mail order group. To counter this perception Merck could install Mr Martin Wygod, Medco's free-wheeling chairman, as its chairman when Dr Vagelos retires. Mr Wygod is already due to join the board.

Other criticisms centre on the possible antagonism of Medco's suppliers and customers. The suppliers, for the most part Merck's competitors, could prove unwilling to supply drugs that boost Merck's profits. Managed care customers may be concerned they will increasingly be offered only Merck's drugs, which may not be the best or cheapest options.

Finally, it is not clear whether the advantage offered by Medco is sustainable. Merck's competitors could form similar ventures, or gain access to more comprehensive databases at less cost from insurance companies - an idea they are now contemplating.

If Medco's growth slows and fails to generate significant increases in volume for Merck, the deal could prove a drain on profits. Medco's Dollars 6bn price tag could be an expensive entry fee into distribution.

'It could prove to be the most brilliant deal in the history of the pharmaceuticals industry, offering vertical integration and allowing Merck to get closer to its customers. The logic is good. But the price looks too high and the future growth of Medco is questionable,' says Mr Nordmann.

Merck should be given credit for trying to stay ahead of the game, forcing change rather than having it forced upon it. But by moving fast, the world's largest drugs group could be moving in the wrong direction.

Sir, Mr T J Walsh (Letters, November 25) describes the giro payment system available in Switzerland and suggests that British banks should be taking similar steps to reduce cheque volumes. He misses the point. Most households in the UK already use an even more efficient way of paying their regular bills: the direct debit scheme. Once a direct debit instruction has been signed, no further action at all is required by the customer and, even if he is abroad or otherwise unable to attend to his affairs, the bills still get paid on time.

His peace of mind is further enhanced by the provision of a money-back guarantee in the very rare event that an error occurs. The scheme is actively promoted by UK banks and building societies and, indeed, more than 1bn direct debit payments will be made in 1993.

Richard Tyson-Davies,

head of public affairs,

Association for Payment

Clearing Services,

Mercury House, Triton Court,

14 Finsbury Square,

London EC2A 1BR

Sir, The extensive debate on Thorp in your pages has missed points of central importance. The measures employed to safeguard the plutonium separated will add further to the costs but cannot resolve the fundamental security problems.

The global surplus of separated plutonium is a fact reaffirmed as a serious concern by the then deputy director of the International Atomic Energy Agency at this institute a year ago. The world cannot develop enough capacity to burn up this surplus over the next few years. Consequently, any plutonium from Thorp which is consumed in civil applications will be partly at the expense of leaving other plutonium in more diverse and vulnerable locations for longer. This includes both weapons grade material arising from superpower arms reductions, and reactor grade plutonium (which is quite adequate for terrorist weapons) in various countries. Even if every atom separated at Thorp is burned as promised, it thus exacerbates a difficult security problem.

The safest solution to the security problem is to place all separated plutonium in a physically inaccessible form (vitrification) and/or secure international repository (which could include Sellafield). But the relevant governments - including Russia's - are reluctant to contemplate this due to their perception of plutonium as a potentially valuable fuel. Thorp's operation, and claims about the value of its products, will reinforce this myth.

Thorp's operation may mean fissile material being held in a range of states which may not use it for decades, a period in which their political orientation may shift dramatically. It will be difficult to refuse custom from currently 'acceptable' regimes, even if they may be politically unreliable in the longer term. Governments holding plutonium stocks for genuine civil purposes may also provoke fears among their neighbours. There are signs that South Korea may seek plutonium should Japan's stockpile increase.

Finally, the security regime surrounding the separation, storage and transport of plutonium from Thorp is impressive. But how much will it cost, and who is going to pay? Unless the requirements are fully costed and accounted for, not only is the economic case distorted, but the regime itself may eventually be weakened by financial constraints, as has occurred previously with IAEA safeguards operations.

Michael Grubb,

Trevor Taylor,

The Royal Institute of International Affairs,

Chatham House,

10 St James's Square,

London SW1Y 4LE

Mr Kenneth Clarke is bemused by the effect of his Budget. He must have anticipated groans about the increases in tax, or the pressure on spending. Instead there is euphoria, and not only in the markets. This could be a worry. The chancellor has been in politics long enough to be aware of the superstition that if you are greeted by cheers on the day of delivery, there is trouble in store. If the economy doesn't get you, your admirers will. When you have been puffed up to the dizzying heights, there is only one way to go.

We can consider some of the possible pitfalls in a moment. First it must be emphasised that the Budget has achieved its purpose. It has started the process of restoring the government's authority. This remains as true three mornings after delivery as it did on first hearing Mr Clarke's words on Tuesday. The chancellor had one aim: to begin to lift Mr John Major's administration out of the hole into which it had fallen. The party, and with luck the electorate, had to be shown that Downing Street was back in control of economic policy, following 14 months of destabilisation.

Mr Clarke reckoned that his best bet was to produce proposals that would eventually eliminate the Pounds 50bn deficit. All else followed. The public was prepared to expect more austere measures than in fact emerged. That is a routine pre-Budget ploy. The actual cuts and imposts were chosen for their likely acceptability on Conservative backbenches. Nice thoughts about creating a symmetrical or coherent system of taxation were suppressed as irrelevant.

The speech was carefully crafted. Aware that the House of Commons will not listen to anyone for longer than about 90 minutes, the chancellor pruned his words ruthlessly. The traditional, lengthy world-view of the state of economies here there and everywhere was omitted - although Treasury officials would have included one had they been asked. The new unified tax and spending Budget, which enabled the chancellor to announce many decisions in one go, provided him with a unique platform. He would not be Kenneth Clarke if he was not aware that this hugely strengthened the power of the chancellor, and thus his influence with the rest of the government.

This enabled him to make quick or possibly controversial decisions, without being over-ly concerned about the prime minister's reaction. His predecessor, Mr Norman Lamont, was not so fortunate. To take one example, Mr Major was always unsure about changing invalidity benefit. The upshot of the chancellor's efforts to spread the burden was that numerous small items were necessarily crammed into an address that turned out to be of greater significance in stating government policy than the Queen's Speech at the opening of parliament. Mr Clarke may or may not make it to No 10 Downing Street, but this week he is tasting some of the delights of being first among equals.

That said, the government is not out of its hole yet. Take taxation. The shadow chancellor, Mr Gordon Brown, has made a good start to what will be an energetic, and sensible, Labour campaign to remind the electorate that it was hoodwinked by the Tories in April 1992. The Conservatives promised lower taxes, no extention of value added tax, and no increase in national insurance contributions. All three undertakings have been cast aside. This may have an effect on future election results, although I doubt it. Much depends on the attention-span of the average voter. Is it as long as that of an elephant - or do most of us have the political memory of a gnat?

Public spending cuts may be a more serious pitfall. The reductions depend on squeezing public sector pay. The hardest hit sector is probably local government. Think ahead, as Mr Clarke surely does, to next April. Picture the scene. A new bargaining round has begun, but so far the government's freeze is sticking. In come the higher taxes, and VAT on domestic fuel, ordained by Mr Lamont in March and Mr Clarke this week. The inevitable upwards blip in inflation created by the Budget makes itself felt. People who have nodded over the favourable comments made since Tuesday suddenly notice where Mr Clarke's fiscal prudence is coming from: their pockets. Plenty of work for the trade unions, and Mr Brown, there.

The supposed government attack on the welfare state is another potential vote-loser for the Conservatives, at least in Labour eyes. But is it? The rhetoric of Mr Michael Portillo and Mr Peter Lilley has a calculated purpose. These hatchet-men of the right are working to a long timetable. They are believers in the minimal state, but they are wise enough to proceed slowly, softening up opinion in advance, threatening more than they do. Their aim, which they pursue with skill, is ever to push forward the frontiers of the thinkable.

Mr Clarke is not a philosopher. His Budget contained nothing on the social security side that is not defensible in its own terms. If it hit Portillo-Lilley targets, they were soft ones. More effective rules for invalidity benefits are common sense. Asking unemployed people to draw on their own savings, if they have any, after six months on contributory benefits is tough, but Beveridge would have understood. Making the system more like workfare is welcome. Equalising the state pension age at 65, after two decades' notice, is overdue. Throwing in a new benefit to help mothers who take low-paid jobs to finance childcare was Mr Clarke's signal to the moralists of the right.

When the chancellor had gone through his Budget at Tuesday morning's cabinet meeting, several ministers spoke on the welfare state. The upshot was a concordat between right and left. 'This government will never take part in any attempt to dismantle the welfare state,' Mr Clarke said in his speech later that afternoon. Any deal has a price. 'We must make sure that it is a system that future generations will be able to afford,' he also said. Labour cannot successfully quarrel with that. It will have to wait until its Commission for Social Justice has reported next summer before it can joust with the minimalists' arguments. The Labour leader, Mr John Smith, should not dilly-dally for too long. If the Conservatives have the will to build on what has been a good week for them, they will stop looking like losers comfortably in advance of a 1996 election.

Sir, Mr Nigel Wilkins (Letters, November 26) makes an excellent suggestion: that names of directors of failed companies should be publicised. But this should be augmented by names of directors and companies (and of their ultimate holding company) that failed to pay their bills on time - which contributes to business failure.

No public honours should be awarded to directors of companies which impose inequitable or untimely payment arrangements on their suppliers.

Martin E Simons,

24 Granard Avenue,

London SW15 6HJ