Carillion goes into liquidation - UK Government’s Costly Mistake

The FTSE has had a rather miserable start to the new week, opening lower despite Asian shares hitting a new historic high overnight following an impressive close in the US on Friday. After a strong two week run, European bourses were looking more than a little tired.

There was little doubt what was dragging the FTSE lower and weighing on sentiment this morning as British construction and services firm Carillion goes into liquidation. The firm is over 200 years old and employees around 43,000 worldwide, including 20,000 in the UK. Rumours over the health of the constructor, which is used extensively by the government winning many construction contracts for the UK public sector service, have been rife for a while.

It has been more than surprising, possibly even negligent that the UK government continued to dish out contracts to Carillion even though their future has looked uncertain for some time. Over £2 billion worth of government contracts were handed to Carillion during the time that the firm gave three profit warnings. This screams negligence on the behalf of the government and is a costly mistake that the UK government can ill afford. 

The government refused to bail -out the firm, which had over £1.5 billion in debt and the banks refused to rescue the construction giant at the 11th hour. As a result of the compulsory liquidation thousands of jobs as risk and potentially public services could be impacted. This is yet another huge embarrassment for the UK government, which appears to be moving from mishap to mishap.

Whilst the government has promised to continue paying Carillion workers to ensure public services delivered by Carillion continue to operate, they need to make sure they get a grasp on the unfolding situation quickly. will be a very costly mistake made by the government as they could be paying maintenance contract workers providing public services for some time. The very fact that Carillion have gone into liquidation rather than administration scream volumes over the state of the financials at the firm; there were no assets to sell so no administration.

The knock-on effect on the broader economy could be large, given that the potential number of job losses are in the thousands. Whilst trading in Carillion has been suspended, sector peers such as Kier Group, Balfour Betty, Serco and Interserve are trading higher, on the assumption of picking up some of the contracts being left behind by Carillion. 

Pound charges higher versus dollar

Despite the potential negative impact on the broader UK economy, the impact has been confined to the stock market. The pound continues to rally hard versus the dollar as investors continue to cheer support of soft Brexit rumours from Spain and Holland and as investors look ahead to UK inflation data tomorrow.