Aidan nodded.
‘The costs that will be incurred following the Stratford catastrophe will be sizeable,’ continued Donald. ‘The scale of these liabilities when added to the recent surge in Government debt, if not neutralised, will alarm the financial markets.’
An understatement if ever there was one, Rafi thought.
‘The results will be falling gilt and bond prices and a significant rise in interest rates across the board.’ Donald paused and cast a glance around the room. They were following his every word intently. Even the Defence Secretary, whom he’d been warned about, was nodding his head sagely.
‘Added to this we have the terrorists’ derivative positions, which are mainly in the financial futures and traded options contracts for gilts and Sterling interest rates. As things stand, if gilt yields and interest rates were to rise significantly, it would furnish the terrorists with massive profits. By massive, we’re talking in terms of tens of billions of pounds – our top estimate is £100 billion. The derivatives market is a zero-sum game: they win – others pay up, which would send a shock wave through the banking and insurance sectors, bringing many financial institutions to their knees. We have seen what contagion can do with the recent banking crisis,’ Donald paused.
The room was totally silent.
‘Currently the Government’s finances are stretched to the point where international investors are truly wary and there is a high probability that they will be unwilling to finance the new demands for Government borrowings unless they are offered unprecedentedly high rates of interest, and even then many will view the Government as a risk too far.’ Roger sensed that he had just put the fear of God into his audience.
‘All is not lost; we believe that there are ways to neutralise the threat. The terrorists are playing with a two-edged sword. If we can keep the markets stable or even cause interest rates to fall, the terrorists and their financial intermediaries will be wiped out, financially speaking.’
He looked at the Chancellor and, in a measured tone, asked, ‘Could I run through where the pressure on the public purse will come from, before I talk about the proposed way forward?’
The Chancellor nodded.
‘On the expenditure side we have the costs associated with Stratford, plus the accelerated decommissioning of the UK’s nuclear plants; then there will be compensation costs relating to the Olympics and the Eurostar Stratford link. Both sit within the exclusion zone. Also the mess at the outsourcing company PSSAF will need sorting or else many public sector services will self-implode. If we add these costs up we get a total of £220-250 billion.’
The figures were met by a stunned silence.
Donald looked at the faces scrutinising him. They were looking far from happy and for the time being things were not going to get any more palatable. ‘I should now like to turn your attention to the problems that the growing Balance of Payments deficit pose. In particular it makes it very difficult to defend a run on our currency and it will make interest rate reductions tricky, if not impossible.’ He paused and beckoned to Saara. ‘Last on our list is energy.’
She stood up. ‘The UK’s prospective energy deficit has to be resolved or it will unnerve the markets,’ she said. ‘The nuclear switch-off will result in the loss of around 20% of the country’s electricity generating capacity and will accelerate the energy shortfall. Against a backdrop of tight, Continental–European energy markets, more gas-fired power stations cannot provide the solution. We need to encourage the development of, and research into, alternative and environmentally-friendly energy sources. This will cost money up front, which might be seen as a brave move in the current financial climate, but in our view would be money well spent. We believe tax breaks to kick-start clean coal, carbon capture and alternative environmentally-friendly energy sources would cost the Treasury less than £1 billion and would have a short payback period. It would give the UK the wherewithal to become a leader in the sector.’
‘Thank you, Dr Khan,’ said the PM, ‘your point is well noted. I am pleased to say that Number 11 has taken this on board and has scheduled a meeting of energy experts for tomorrow morning. They will be briefing the Chancellor and me tomorrow afternoon. I can assure you we share your concerns.’
‘Thank you,’ said Saara, sitting down.
Donald carried on. ‘In summary, the key is to persuade the financial markets that the supply side of Government debt won’t mushroom out of control in meeting all the liabilities.’ He paused, then continued, ‘Increased taxes and new issues of gilts won’t bring in sufficient funds to meet the financial shortfall and, in our view, would send out totally the wrong message.’
There was complete silence as Donald waited for a few moments to allow the scale and complexity of the problem to sink in.
‘Let me now propose how the position can be addressed,’ he said, with the beginnings of a small smile.
‘It is the immediate short term that concerns us. If we can keep gilts prices and interest rates stable, the terrorists’ derivative positions will, in the space of a week, become untenable. If we could engineer a fall in interest rates and a small rise in gilts prices, within 24–72 hours the terrorists would be financially wiped out. The short term is driven by sentiment; what the markets will need is a transparent, robust and believable game plan.’
‘Step one. We take a leaf out of the Swedish Government’s book and transfer a significant proportion of the State’s and the public sector’s £500 billion plus of property and tangible assets into Real Estate Investment Trusts – REITs – and list them on the London Stock Exchange. Initially the shares would be owned by the Government. Share sales would be used to finance the expenditure I have just outlined. Currently these assets are valued on either a cost or an existing use, vacant possession, basis, but sitting in an REIT as investments let to the Government, their values would be much higher. We believe these Government REITs would give a war chest of over £400 billion.’
‘So we wouldn’t have to tap the gilts market?’ asked the Chancellor.
‘Precisely,’ replied Donald. ‘Now for the clever bit. For Government REITs to be successful, a liquid aftermarket is needed, so we propose that REITs be classified as a suitable alternative to annuities. Relative to annuities, REITs would provide pensioners with an enhanced real income stream. We have set out our analysis in the handouts.’
‘Would I be right in suggesting that offering REITs as an alternative to annuities would reduce pension fund deficits?’ asked the Chancellor – who thought a bit more – ‘and additional REIT sales could be used to reduce the Government’s debt and reduce the money supply?’
‘Yes, you would,’ replied Donald.
The Chancellor smiled.
‘We suggest that a statement is issued, declaring that some of the REITs’ sales would be used to buy back long dated gilts. This would underpin market sentiment and support long gilt prices,’ continued Donald.
‘Now I come to a thorny issue.’ Donald paused. ‘Sterling will come under immense pressure and its steep decline will cause unfortunate and painful long-term consequences. The solution we propose is for Sterling to join the Euro. This would stop Sterling being targeted by speculators and enable the Bank of England to bring UK interest rates in line with Euro rates, thus boosting the economy and market sentiment. Our thoughts on the entry rate are set out in the supporting documents. Representatives of the Bank of England should meet with the heads of the leading central banks and explain the risks which the global financial system is facing, such that the Chancellor on Monday can announce wide-ranging international support for Sterling, pending its entry into the Euro.’
‘The next area for consideration is the superfluous Trident missile programme. Stratford has shown how radioactive contamination can blight a vast area. The UK has thousands of tons of highly toxic radioactive materials in storage. Trident should be replaced by “dirty” missiles designed to contaminate an area of several square kilometres. The threat of being
able to detonate a “dirty” missile in the middle of an aggressor’s city will, post-Stratford, be as strong a deterrent as annihilating it with a Trident missile. The cancelling of the next generation of Trident missiles and switching to “dirty” missiles would save billions. We advise that this money should be invested in higher education and academic research and development activities, which will assist the long-term growth of our economy.’
‘Finally, we would like to draw your attention to the problem of a Government guarantee which hitherto has been swept under the carpet. Its superficial invisibility, in these dire times, will be called into question by the international financial markets.’ Donald looked around the room. ‘I am talking of the public sector pensions deficit, which is estimated by top actuarial firms to exceed £1,000 billion. It dwarfs even the monumental costs of the Stratford disaster. To put this deficit into context, next fiscal year it will be equivalent to one-third of the revenue generated by basic rate income tax. And worse still, this annual liability is growing. Its scale is such that in these perilous financial times it must be addressed as part of the process of getting the economy back on track. It is too large for us to deal with it in one go but, given the circumstances, we believe a start has to be made. I repeat, the financial markets will go through ALL the Government’s financial liabilities and look for items which could jeopardise the country’s economic fight back. Unfunded public sector pensions are precisely the potential spanner in the works that could seriously damage the country’s credit rating. At this point, no exact figures need to be given: just a framework for change. Our proposals are straightforward. The guaranteed pension element should be up to a specified percentage of average wages. Where employees have incomes above this, their pension relating to the higher amount should be funded by unit-linked pensions. This unit-linked fund could be enhanced by injecting into it a number of Government REIT shares. Our supporting appendices show how our proposals will significantly reduce the Treasury’s subsidies and liabilities in this area. I’d like to point out that sorting this problem out would produce savings that are greater than all the costs associated with Stratford.’
Aidan got up and went to a couple of large boxes in the corner of the room from which he pulled out smartly bound reports. ‘Gentlemen,’ he said as he handed them across the table, ‘you’ll find in these the numbers behind our proposals.’
Donald meanwhile walked back to the table and sat down.
‘I am grateful to you for your incisive work,’ said the PM. ‘Any questions?’
‘Just one,’ said the Chancellor. ‘Timing is going to be tight. You and I will be making our announcements to the House on Monday afternoon. Am I right is assuming that we don’t want the terrorists to know we’re on to their conspiracy, whilst they’re still at large?’
‘Yes,’ replied the PM.
‘So, the financial rescue plan shouldn’t be revealed until the terrorists have been captured, which is expected to be . . . when?’
‘Around 3.30 p.m. on Monday afternoon,’ said the PM.
‘So that means we must speak for at least ninety minutes before being able to make any concrete announcements?’ queried the Chancellor.
‘Possibly longer, if the capture of the terrorists doesn’t go to plan,’ replied the PM.
The Chancellor looked thoughtfully at him. ‘If you were to set the scene and explain how the Government is tackling the enormous problems associated with Stratford, and what the future holds, then I could run through the financial issues. Would that be OK?’
‘Yes, that’s about it,’ agreed the PM.
‘Then if things are delayed, I shall just have to make sure that I have some other worthy proposals I can talk about, which will use up time,’ said the Chancellor with a small frown. ‘I have been given a lot to consider. Mr Gilchrist, I am extremely grateful to you and your team for letting me have advance warning of what’s in the wind. I hope I can live up to your expectations.’ He glanced back at the PM. ‘Perhaps I could retire with my team to work on Monday’s speech. Shall I report to Cabinet tomorrow evening?’
‘Yes, please,’ replied the PM. ‘Is there anything else?’
‘I have an observation,’ said Rafi. ‘If the wind had been blowing in the opposite direction, the City of London would have become the no-go area. I believe the terrorists would have thought of this, so my thinking is that they could have sizeable positions in both the Frankfurt and Chicago derivatives markets. We suggest that they be asked not to open on Monday.’
‘Good point,’ said the Chancellor. ‘Leave that with me.’
The meeting had finished. The PM spoke to Aidan’s team. ‘Would any of you like to watch Monday’s proceedings from the Gallery?’
‘If it’s all right with you, sir,’ Aidan replied, ‘we would prefer to watch with a couple of trading screens in front of us in order to see what the other markets make of the speeches.’
Saara spoke up. ‘I would like to take up your offer, please. I’m ashamed to say that I’ve never been into the Houses of Parliament. This would make a good first time, I think.’
‘Of course.’
‘If you’ll excuse me,’ said the Chancellor. He picked up his papers and, deep in thought, headed for the door, followed by his team.
Aidan hovered by the door. ‘How did you manage to get all that documentation together so quickly?’ Rafi asked.
‘It was a close run thing. We brought in a couple of Donald’s team to help with the word processing behind the scenes, plus a lot of copying and pasting from existing documents. We shipped a couple of large printer–photocopiers in from my offices and in the end borrowed the PM’s secretarial team for the collation and binding of the documents. I reckon we did quite a good job!’ answered Aidan proudly.
‘Bloody outstanding considering the circumstances,’ replied Rafi.
‘Would you like to join us for a quick bite to eat?’
Rafi was about to say yes when the PM beckoned him to stay behind with his permanent secretary.
‘I’m afraid I still have a few things to do. Let’s get together for lunch soon, though.’
The tense atmosphere that had characterised the previous meeting remained. The PM picked up the phone and Kate was shown in. ‘Sorry, I don’t have that much time; I have another meeting due to start in five minutes. I wanted to speak to you both. I had considered leaving it until this was all over, but it didn’t seem appropriate given all you’ve both gone through and done.’ The PM drew breath. ‘It’s not possible for me to fully express my gratitude. Your foresight has given us the opportunity to come out of this disaster with some vestige of hope for the future.’
He had a serious look on his tired face. ‘Mr Khan and Inspector Adams, were I to be in a position to grant you a request or two, what would they be?’
Rafi looked at the Prime Minister and then across to Kate. He sensed that his first wish had been granted. He had found someone with whom he would enjoy spending time; hopefully lots of time. Rafi returned his gaze to the Prime Minister. ‘I’m not certain whether I need anything, thank you, sir.’
‘But come now, there must be something?’
Rafi thought for no more than a few seconds. It dawned on him that here was an opportunity of a lifetime – he could do something that would have made his hard-working parents proud. Rafi took a deep breath.
‘Well, here goes,’ he said. ‘Would it be possible for there to be a Royal Garden Party at Buckingham Palace, where those invited are drawn from Muslim communities throughout the United Kingdom? Not the movers and shakers, but rather the quiet, hard-working, first-class citizens who help to make this country tick. For too long they’ve been unappreciated and disenfranchised.’
The Prime Minister thought for a moment. ‘I like your idea of acknowledging those who quietly get things done.’
‘Also, it would be much appreciated if my flat could be given a bit of a tidy up!’
The PM smiled and nodded. ‘Consider it done.�
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‘Detective Inspector, is there anything we might do for you?’
Kate thought for a moment. ‘Could I have a couple of weeks’ leave starting as of Monday evening? I’d like to recharge my batteries and get to know someone I’ve recently met,’ she said with a grin.
Rafi felt a warm glow building inside him. He looked across at Kate approvingly. The Prime Minister nodded. ‘I suggest that you speak to your boss and say that I asked you to spend a couple of weeks overseeing Mr Khan’s recuperation, following the unfortunate events at Paddington Green.’
‘Sir, there is one other thing,’ said Rafi. ‘It’s more a comment rather than a wish. I’m not a vindictive man; however, in my experience as a fund manager, the vast majority of people in positions of influence get there because they’re good at their job or, in a few cases, because no one else is willing to pick up a poisoned chalice.’
Rafi put his hand into his pocket and pulled out a tape. ‘I have here the interview between a junior minister and me. He was sent with a press entourage by the stand-in Home Secretary to interview me valuable minutes before the Stratford missiles were launched – no doubt to use his actions as spin to deflect what was going on elsewhere. This is the original tape. There are no copies.’
Rafi hesitated. ‘The contents, I believe, are political dynamite. On second thoughts, Prime Minister, you would be better off not listening to it. Hypothetically speaking, if it transpired that the Stratford missile attack could have been averted had it not been for an obsession with spin which fatally delayed key information getting through, it would damage politicians and politics irreparably. And currently, there’s more than enough to sort out – starting a blame game would only be counterproductive.’ Rafi hesitated. ‘As I see it, a growing number of politicians spout forth initiatives and policies, but have little or no idea of change management and the workings of the real world. They’ve become obsessed with spin and looking good in the eyes of the media and have forgotten about implementation.’
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