Are financial ties with the US close to breaking point?

Posted on: 15 June 2010 by Mark O'haire

The BP oil spill, the failed Prudential/AIG merger and Kraft's takeover of Cadbury's have all put a strain on UK/US financial relations.

Anglo American 'special relationship'A slew of key events are putting an unprecedented level of strain on US and UK financial relations.

In recent months, some hackles have arisen over the Kraft acquisition of Cadbury, which culminated in the UK takeover panel criticising Kraft, in particular over the closure of Cadbury's UK plant in Somerdale, near Bristol.

This was followed by an abortive attempt by Prudential to buy the Asian arm of the US giant AIG (AIA), although the breakdown appeared to be for financial reasons following dissent from Prudential's shareholders as to the price being paid.

BP is the big problem

The most awkward situation, however, is one which remains unresolved and looks likely to linger for some time: the BP spill in the Gulf of Mexico, which has caused consternation in the US, all the way up to the President.

The use of the term "British Petroleum" to describe the company has been seen as slightly incendiary, particularly as the name was shortened to BP more than a decade ago.

This latest round of apparent jingoism prompted Barack Obama to assure David Cameron at the weekend that "his unequivocal view was that BP was a multinational global company and that frustrations about the oil spill had nothing to do with national identity".

Dividend could be sacrificed

For BP itself, the most recent pressure on the share price has in particular been linked to the dividend.

The current view is that the company is still in a strong financial situation and well able to maintain the level of its traditionally high dividend payments.

However, the amount of negative news accompanying the leak in the US means the company may decide to postpone the next dividend as a political rather than financial gesture.

If this were to be the case, there would be a marked impact on institutions, individuals and funds that hold BP shares for income rather than capital growth.

Of course, the dividend payment could later be reinstated - perhaps even to reflect the missed payment - and business could continue as usual.

Costs are staggering

BP announced on Monday that the cost of the spill has already risen to $1.6 billion (£1.09 billion) and there could be significant costs to come.

For example, it has been reported that the US congress wants BP to set up a specific account to begin to ring-fence funds required to meet claims.

Unfortunately, the financial cost in terms of the environmental clean-up and litigation cannot yet be quantified and a cloud will hang over the shares until it can be accurately estimated.

In the meantime, although the shares are seen as higher risk than before, the general market consensus is that the share price fall has been overdone and that the shares remain a buy.

Steps to ease tensions

As for the special relationship between the two countries, matters may indeed be more fraught than before, although it appears that the diplomatic intervention over the weekend is an attempt to diffuse a difficult situation.

The interconnection of the two economies is historic and widespread, even the BP situation should not be sufficient to sully the relationship.

It may well appear that the stalemate that the two countries' football teams provided on Saturday was an honourable draw that hopefully mirrors the wider concerns at the current time.

Has BP damaged Britain's reputation?

London's major Boris Johnson has said "there's something slightly worrying about the anti-British rhetoric that seems to be permeating from America". Has Britain's reputation been dented by the oil leak?

Let us know your views by leaving a comment in the box below or join in the debate on the 50connect forums.

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