Outlook: Wallace's head must roll before C&W can clear the air

M&S/Selfridges; US Treasury team

Three weeks ago, I wrote that Cable & Wireless showed every sign of turning into a corporate débâcle of Marconi-like proportions. Even as a wrote it, I thought it perhaps a little over the top. Things were bad and getting worse at C&W, but it did have the cushion of £2.2bn of net cash sitting in its balance sheet, so it had to be worth at least that to its shareholders.

As it turns out, I was being too charitable. That cash mountain is looking more like an illusion by the day. Previously unsuspected liabilities keep leaping out of the cupboard with a frequency that would do credit to the latest Scooby-Doo DVD.

After the weekend's revelation that the group may be forced to ring-fence £1.5bn of its cash to meet a potential tax liability, there's only one real mystery left to solve. What on earth is Graham Wallace, the beleaguered chief executive, still doing sitting in the hot seat? All vestiges of credibility have now gone. The argument that he needs to be kept in place at least until a new chairman is found because he knows the business better than anyone else and can begin the necessary restructuring looks entirely hollow.

It is now clear beyond doubt that the board has no adequate grip on the business, and indeed seems to have been guilty of serious lapses in disclosure. It beggars belief that the company could have thought it unnecessary to tell the stock market that it was bound to ring-fence £1.5bn of its cash if its debt lost investment grade rating. Even the City Editor of The Independent can see that this is a material fact, likely to be of more than passing interest to shareholders. In fact, the shares lost 43 per cent of their value on the news yesterday, making their exit from the FTSE 100 later this week highly likely.

C&W insists that there is very little likelihood of the tax liability crystallising, but it has no way of knowing for sure, or indeed when the Inland Revenue might make a final decision on the matter. In the meantime, the group barely has enough money to pay the £800m estimated costs of its restructuring, the success of which shareholders cannot rely on. Enough is enough. In the steady drip feed of bad news, the company has already revised up its lease liabilities from £897m to £2.2bn. What other nasties lie hidden? The air needs to be cleared, and the process must start with the chief executive.

M&S/Selfridges

We've known for a while that Marks & Spencer is deadly serious about its push into the home furnishings market. The appointment of Vittorio Radice to the new post of director of the company's home business, on a package that would make most overall chief executives green with envy, confirms it beyond doubt.

Mr Radice is thought in the City to have done an excellent job in revitalising Selfridges. True, he had a following wind. The flagship store in London's Oxford Street was refurbished at a cost of more than £100m by the company's former owner, Sears, just as it was floated, but, none the less, Mr Radice cuts quite a dash on the London retailing scene. He's used his Italian charms to maximum effect in winning over the City and perhaps more importantly, the customer too. Strong on vision, not so hot on the financials, he's started the process of expanding the company away from its London home, and so far the results have been encouraging.

So why's he going to Marks & Spencer, besides the money that is? M&S's home furnishing sales are already not that far off the total sales of the Selfridges group, and it sees an excellent opportunity to develop further the market through what the chief executive, Roger Holmes, calls "an authoritative mid-market home furnishings offering". Over the next 18 months, the company plans two pilot stores. The idea is to find out whether the concept works. If it doesn't, then it's curtains for Mr Radice, since M&S cannot see further scope for pursuing the home furnishings market through the existing stores base. Still, it's a reasonable gamble for Mr Radice. The two pilots are the pre-cursor to already well-developed plans for a substantial roll out. Things will have to go substantially wrong for M&S to back away from these plans.

By Mr Holmes's reckoning, the home furnishings market in the UK could be worth as much as £30bn a year once all its various elements are included, but as things stand it is fragmented and relatively unbranded. Unfortunately, M&S is not alone in spotting the opportunity for profitable growth. GUS has just paid top dollar for Homebase with the specific purpose of greatly expanding its home furnishings business. B&Q and others are chasing hard. What's more, the competition seems to be hotting up just as the housing market is topping out. Nobody believes consumer spending can carry on growing as it has been.

It'll be fascinating to see how Mr Radice develops M&S's ambitions. Ikea has more than demonstrated that the market is there. The difficulty is in the execution.

US Treasury team

The Bush administration appears to have moved with lightening speed to fill the hole left by the sudden resignations of Paul O'Neill and Lawrence Lindsey. Except, of course, that these were sackings, not resignations, so you would expect the administration to have lined up successors. Mr O'Neill, the US Treasury Secretary, was informed that his services were no longer required on Thursday by the Vice-President, Dick Cheney. He reacted in characteristic fashion by pre-emptively announcing his resignation, thus in his parting shot staying true to the record he had established for continually embarrassing the Bush administration. President George Bush had wanted it to be done cleanly, with the succession announced coincidentally with the departures.

Are the new appointments going to make a difference? In the sense that they seem more credible figures than the old incumbents, with better connections on Capitol Hill and on Wall Street, then it must help. None the less, to the outside world, John Snow as the US Treasury Secretary seems an unknown quantity. Like Mr O'Neill, he's no career politician and his most recent post has been in corporate America as chairman of CSX, the US railroad company. Stephen Friedman, a former chairman of Goldman Sachs and Mr Lindsey's likely successor as chief economic adviser, is better known, but again he's yet to prove his pedigree as a public servant and politician.

The real significance of the changes is less in who the new appointments are but that it shows that President Bush is finally beginning to take the economy seriously. His father and namesake, George Bush Snr, lost his presidency over the economy, and George W. doesn't intend to repeat the mistake. Forget the gaffes and the embarrassments, there was a feeling of drift developing under Mr O'Neill that could have cost the President dear.

Big challenges await the newcomers. After a period of stability in the public finances, the US budget deficit has begun to rise precipitously. With more big tax cuts planned and the prospect of a hugely expensive war in the Middle East, that situation can only get worse. Meanwhile, many individual US states are in crisis, California being only the latest to teeter on the brink of bankruptcy. The problems they face is familiar enough the world over – rising expenditure at a time of declining tax receipts. Most US states are legally required to run balanced budgets, so in many cases the only option will be to raise taxes, thus cancelling out some of the reflationary effect of Mr Bush's planned cuts in Federal taxation.

The US economy seems to be faring better than most others right now, but like Britain, the trick is being achieved on a rising tide of household debt. Mr Snow would be unwise to think he's joining at the bottom, with the worst of the economic difficulties now over. In fact, they may only just be beginning.

jeremy.warner@independent.co.uk