Horta-Osório is betting on UK recovery

EARLIER this month, we spotted Antonio Horta-Osório and Danny Alexander, the chief secretary to the Treasury, deep in conspiratorial conversation at a Mansion House dinner. When they realised that certain guests were trying to eavesdrop, they moved on to an empty room.

For both men, success depends entirely on the health of the British economy. If there is a double-dip, unlikely in our view, then Alexander’s Lib Dems and their Tory coalition partners will almost certainly lose the next election. There are other, more probable, economic shocks that could also dent their chances. Persistently high inflation combined with ultra-loose monetary policy may lead to sharper rate rises in the future, meaning some voters could struggle to keep their homes. A significant correction in house prices, overdue in our view, would push others into negative equity.

For Horta-Osório, either of these events – sharply higher rates or sharply lower house prices – could make it impossible to hit the targets he set out yesterday. The targets themselves, to be reached by 2014, are sensible: reduce the loan-to-value ratio of its book from 146 per cent to 130 per cent (still too high, but better nonetheless); and increase the net interest margin to 215-230 basis points (more realistic than Eric Daniels’ 250bps target).

A play on Lloyds, then, is essentially a play on the health of the UK economy. While we’re not among the bears, the bank is still being too optimistic about the housing market. Horta-Osório says he expects house prices to fall by just two per cent before the end of the year.

It is little wonder Alexander and Osório were as thick as thieves at Mansion House: their fates are inextricably linked.