BANKS, DEBTS AND SHARES PLUNGE

 

             Yesterday was another bad day as the Euro crisis rolls on.  Italian borrowing rates rose again, despite recent strong intervention by the European Central Bank to keep these rates down.  The German Stock market, led by the banks, fell 5% .  Taxpayers in the Uk lost more money again on RBS shares.  Reports of the markets speak of investor worries about the state of some European bank balance sheets given the amount of sovereign debt they own, the current weakness of several Euroland country bonds, the large issue programme needed for Italian and Spanish debt, and the general slowdown in economies as confidence wanes. The decision of the UIS authorities to sue various banks for past mortgage losses did not help either.

             German politics is helping disrupt the Euro. Whilst the government probably intends to carry on with bail outs and general support for the Euro scheme, delays in putting in place the European bail out fund does not help. The German authorities are probably still reluctant to allow the ECB to print and lend too much more. Markets feel too little is being done too late. As a result the EU does not get much benefit out of all the various moves it is already making.

               Last week Euroland was pleased to confirm that Italy had succeeded in raising Euro 7.7 billion in the market at a rate close to 5%. Yesterday we learnt that the ECB bought more than 13 billion euros of sovereign bonds last week  to bolster the markets. This may not have all been Italian, but it does make you wonder whether this is a sensible tactic. Why doesn’t Euroland simply lend the money directly to Italy, if it is so costly to create conditions in which Italy can borrow at lower rates?  The ECB is expanding its holdings of sovereign bonds very rapidly, buying Euro 22 billion in the first couple of weeks of the programme. Euroland needs to fix the underlying problem, the market scepticism about the overall levels of debt incurred by some of these countries.

            I have been highlighting for a long time  time the folly of weak banks propping up weak sovereigns which in turn prop up weak banks. The Regulators made banks buy larger quantities of their own country’s sovereign bonds, and regarded this as safe money which helped the banks hit their cash and capital targets. Where the country itself had weak finances, this has simply set those banks up for losses as markets sell the government bonds and force the prices down. The Regulators did not include large write downs of sovereign debts in their stress tests, further undermining confidence in the process.

               Now the only way out is for the weak countries to do enough to restore confidence in their own  budgets and borrowing levels. Meanwhile, the blow to confidence may mean still lower growth, which in turn weakens state finances more.

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75 Comments

  1. lifelogic
    Posted September 6, 2011 at 6:31 am | Permalink

    An entirely predictable slow motion car crash. When will the Germans and the French finally decide what to do and hit the brakes or start to steer round? How many of the current MP’s wanted to join the ERM and then join the Euro can we see a list again how many are still in government with the same views?

    How does Cameron’s pathetically tiny “growth” look now in view of this further collapse in confidence? It is reported in the Telegraph that Cameron may dilute the new employment laws (needless to say they think it will be opposed by Vince Cable). Yet more employment laws are needed at this point like a hole in the head or yet more dis-functional banks. He should be getting rid of the existing employment rules not minor diluting of any new ones.

    Will the EU let him dilute anyway?

    Could Vince Cable (indeed all future business secretaries) perhaps go and help run a small, cash strapped, business for a while. It would be a good work experience, sabbatical. He might perhaps return with a slight understanding of what is actually needed in the real world you never know.

    • norman
      Posted September 6, 2011 at 7:03 am | Permalink

      Even if the EU do deign to allow us to modify our new regulations slightly they know they can play the long game. Like every other opt-out and dilution we’ve had in the past they (and our political class including Cameron) know that at some point in the future we’ll toe the line and harmonise with the rest of the partners.

    • Mick Anderson
      Posted September 6, 2011 at 7:07 am | Permalink

      Yet more employment laws are needed – no, we don’t need more laws. Look how many the previous administration added, and to what effect. We need better laws – some changed, some removed, then when there is a more simple system you could see what might be added. The end total should still be far less legislation than now.

      Could Vince Cable …. run a small, cash strapped, business for a while – only into the ground.

      • lifelogic
        Posted September 6, 2011 at 9:04 am | Permalink

        I though that too about Vince Cable and the business and so I added the word “help” to run a business.

        • Mike Stallard
          Posted September 6, 2011 at 3:41 pm | Permalink

          In fairness, he was an economics advisor for Shell when still in his prime.

          • alexmews
            Posted September 7, 2011 at 8:30 am | Permalink

            Hardly a cash-strapped small business then. And even there, I assume his role was more academic than commercial – advising on long term trends in oil prices / demand / macro econmic risk. Not how to run the retail forecourt.

    • lifelogic
      Posted September 6, 2011 at 7:18 am | Permalink

      You say “The Regulators did not include large write downs of sovereign debts in their stress tests, further undermining confidence in the process.”

      Nor I understand did they really look fully at the interactions between banks, insurance companies and countries properly. It is rather like engineering a bridge, where they have tested all the components individually – but not considered the interactions or the overall structure. Structural analysis and safety walls are needed so that a problem with one bank will not infect another.

      In the mean time business, industry and the country needs some new safe banks who could actually lend sensibly. Rather than just demanding borrowing back. Surely excessive taxation, regulation and collapsing confidence is enough for business to bear without the government starving them of lending as well. Do they want any growth or not?

    • A.Sedgwick
      Posted September 6, 2011 at 8:34 am | Permalink

      The vacuous job of Business Secretary should be made redundant along with the Department.

      Culture and overseas aid are two other Departments that spring to mind as worthy for the chop and probably the Bank of England.

    • Sebastian Weetabix
      Posted September 6, 2011 at 12:14 pm | Permalink

      It is curious to me that these new laws only now come into the news. We have known they were coming for at least 3 years; indeed, I wrote to my(then Labour) consituency MP, only to receive the usual bland acknowledgement disengaged from the facts. (At least he replied; the present incumbent, Mr Richard Fuller, has so far not replied to any communications.)

      Since neither the then government nor the official opposition made any effort to oppose the measures back then, I can only assume they do not mean it now and it is just posturing before the party conference season.

      This kind of dire nonsense reminds me of the old maxim about trying to find honest men in parliament. I exempt our present host from that stricture – at least Mr Redwood is trying. It’s a shame the rest of his party is so bloody useless.

    • uanime5
      Posted September 6, 2011 at 3:22 pm | Permalink

      Given that every other European country is able to cope with these laws the UK should be able to as well. Given that Germany has some of the harshest labour laws, yet the strongest economy it’s possible that more labour laws may be good for businesses.

      • lifelogic
        Posted September 6, 2011 at 6:11 pm | Permalink

        I do not think is is true that they have harsh labour laws in practice and the balance of costs in court cases is I understand rather different from the absurd heads you win tails you do not loose anyway system that is in the UK.

        Excessive employment laws clearly make business less competitive and less flexible and less willing to take people on how on earth can it therefore help anyone.

        Not even the employees as it restrict alternative jobs.

        • lifelogic
          Posted September 6, 2011 at 7:39 pm | Permalink

          Sorry it does of course help the legal profession and employment consultants, tribunal staff and people running employment law seminars and the like.

        • Bazman
          Posted September 6, 2011 at 10:08 pm | Permalink

          Specific excessive unemployment laws please. You are talking like a Priest again.
          Cleaners and the like including myself, more often than not do not have alternative career options and pathways leading to greater remuneration, job satisfaction and enhanced lifestyle through greater labour flexibility in the labour market and less rights in the workplace implemented by the abolition of restrictive employment laws such as health and safety, discrimination, low wage legislation. If I am sacked for claiming some of these rights or an incident damaging my health/future career prospects/pay. I would like some way of gaining recompense as I am sure the company bosses will have this and it will not be in any way linked to performance as their pay is often not either.
          I could sum up your angle in two words, but would be edited out.

      • Bazman
        Posted September 6, 2011 at 8:34 pm | Permalink

        Not everyone can have a strike their employer will understand. BYE!
        Does anyone seriously think that the people who are against this policy are in jobs as ‘flexible’ as the ones they advocate. What they mean, but are unable to say without crawling from under their stones. Is that they believe there should be an underclass that should be forced to work under any conditions and if they do not like it then to be replaced by someone even more desperate, but when the desperate are immigrants do not want this and think British people should be made more desperate as competition. The idea that an employer cannot employ someone on a day to day basis is false and a lie. It is all about not having to pay anything and cutting costs to increase profits. Profits that will not be shared in any way with the workforce. The idea that these profits somehow increase job security for the employees is laughable. Does anyone seriously think an agency worker should not have the same rights as a full time employee? I have worked with temporary workers who have been employed by the same employer, an agency, doing the same work and hours as a full time employee in the client company for three years. A temporary worker after three years? Anyone think this is acceptable? It is a sham and like bogus self employment should be stamped on.

      • lifelogic
        Posted September 9, 2011 at 7:50 am | Permalink

        People may be able to “cope” with one leg but it is not a very good argument for getting the bone saw out.

    • Bazman
      Posted September 6, 2011 at 7:45 pm | Permalink

      Maybe you could tell us why you are against this?
      Fixed and part time work including employment contracts.
      The Directive establishes in particular:
      • a minimum daily rest period of eleven consecutive hours a day
      • a rest break when the working day is longer than six hours
      • a minimum rest period of one day a week
      • a maximum working week of 48 hours on average including overtime
      • a right to four weeks of paid annual leave
      • normal hours of work for night workers may not exceed an average of eight hours in any 24-hour period
      Or this.
      Equal treatment of men and women in the workplace.
      This Directive specifies that an employer is not allowed to pay persons doing the same work or work of equal value differently due to their sex. If a job qualification or evaluation is used to determine the pay, it must use the same criteria for men and women and it has to be designed in such a way that it does not discriminate between the two sexes.
      Or maybe you could specifically tell us which areas you disagree on or do you think employers should entirely be allowed to make their own rules on these areas. Without any interference from anyone or the state?

      • lifelogic
        Posted September 7, 2011 at 9:49 am | Permalink

        Indeed employers and employees should indeed be entirely be allowed to agree their own rules on these areas with only minimal interference from government (perhaps where a real significant health or other risk might need control). Why do you want to restrict employees from doing things that they might want to freely choose to do? Would you ban them from voluntary work for example.

        • Bazman
          Posted September 7, 2011 at 7:03 pm | Permalink

          Read my comment on the employment of cleaners and how much influence they can have on employers. How much influence do you think they have when as you laughably imply that they in some way negotiate with potential employers and their conditions/pay with their current one.

      • Winston Smith
        Posted September 7, 2011 at 3:49 pm | Permalink

        More to the point Bazman, can you give any examples of any employees who were dismissed for refusing any unreasonable demand listed above or who were discrimminated against on the grounds of sex or race, that were unable to bring a case against their employer under previous legislation?

        If you cannot, then you prove the point that there is already sufficient legislation protecting workers from unscrupulous and dangerous employers and this is a bearucatic waste of time and money and burden on businesses, who have to examine the latest regualtions/legislation, consult on, check with their own T&Cs and make unnecessary minor changes to protect themselves from opportunist employees and parasitical, greedy lawyers.

        If you really gave a fig about the pay and conditions of the low paid and unskilled then you would oppose mass immigration of cheap labour tot he UK, which has driven down wages (to the advantage of middle-class lefties like yourself) and created poor working conditions. But, you don’t, do you?

        • zorro
          Posted September 7, 2011 at 5:52 pm | Permalink

          Well said Winston…Unfortunately Bazman thinks that people with those types of views (opposing excessive labour legislation or, god forbid, opposing the minimum wage) are bigots with no place in modern society. At least that’s what he said on a recent blog….

          zorro

        • Bazman
          Posted September 7, 2011 at 7:12 pm | Permalink

          Mass immigration from poorer European countries is one of the main reasons for the drop in rates along with a boss culture that thinks it is OK the pay low wages. They never pay the’ right rate’ to attract the right people when it applies to jobs below themselves.
          There is insufficient regulation because as I have mentioned you can have a temporary worker doing the same job for years As an example. Is this acceptable?

          • lifelogic
            Posted September 8, 2011 at 9:04 am | Permalink

            If a company wants to survive it has, pretty much, got to pay the going rate. If it pay much higher it will not compete long term make losses and ultimately go out of business.

            All the workers will loose their jobs (that they have freely chosen to do) is that your solution?

          • Bazman
            Posted September 8, 2011 at 7:09 pm | Permalink

            Would this ‘logic’ apply to a company making large profits paying poverty wages?

      • A different Simon
        Posted September 7, 2011 at 4:30 pm | Permalink

        I agree that the answer is not for everyone to work longer hours or more days a week .

        Most of us end up spending much to much time working and not enough enjoying life .

        I think legislation is a very inneffective tool for improving the lot of workers and can actually do damage .

        The only type of job security which counts is being able to get another job when one ends .

        With high unemployment you are going to get miserable employers and no amount of legislation will change that .

        With full employment people a bad employer won’t be able to keep people .

        For this reason I think employment laws should be written for the benefit of the unemployed and getting them back to work .

        You cannot have easy-hire without easy-hire .

        Employment legislation has to be biased towards either creating new jobs or making it difficult to get wrid of existing ones .

        You talk about sharing profits , many companies do little more than break even and staff end up working harder/longer taking pay cuts just to keep them going a bit longer .

        With regards to the specifics you list , the first five bullet points seem to be something to aspire to . I’ve not done enough night work to be able to comment on the sixth .

        I object to directives which try to equalise pay between people because there are hardly any situations when two people do exactly the same job .

        • Bazman
          Posted September 7, 2011 at 7:29 pm | Permalink

          Many temporary worker work next to people doing exactly the same work and receive less pay the agency being technically their employer. The agency being used to circumvent employment laws. The business can easily afford to employ the agency worker and costs are the same, but want ‘flexibility.’ As in being able to sack at will. After three years the agency worker has by default became an employee of the company and deserves some recognition in status and law. If you think they do not you are wrong. Personally after three months they could ram it, but not everyone can do this and needs some protection. To say the job would not exist without the current situation is also wrong as it clearly does.
          The alternative to the agency worker as this is often to permanent is to flog the (under)staff(ed) with almost forced overtime. The employees need protection from this too which is again not sufficiently covered in British law. and
          more often than not from middle class dreamers in cushy management jobs.

  2. norman
    Posted September 6, 2011 at 6:58 am | Permalink

    So, banks are now being sued for selling AAA rated, government backed in the case of the USA, products and we’re being told how unethical they were, grasping after profit, only seeking self advancement at the cost of the general well-being when it turned out these products were not really AAA and shouldn’t have been bought and sold blind as banks had every right to do under the regulations.

    Politicians, eager for self preservation, have been, let’s face it, forcing banks to buy AAA rated government bonds and now it turns out that perhaps these shouldn’t have been rated AAA and taxpayers are losing and are going to be losing shedloads of money.

    A couple of questions:

    Have the banks sold any of these bonds on, and if so who can the purchasers sue and will the banks be prosecuted for selling these bonds on as they are with derivatives?

    Who will prosecute the politicians who have committed this act and who are so quick to heap scorn and blame on bankers?

    You couldn’t make this stuff up.

    Actually that’s a lie, when it comes to the political class no amount of brass neckery is beyond them.

    • APL
      Posted September 6, 2011 at 9:55 am | Permalink

      Norman: “Actually that’s a lie, when it comes to the political class no amount of brass neckery is beyond them.”

      Yep. For example, the removal of hereditary peers from the Lords was nothing less than the removal of one privileged class, the aristocracy with another, our new kleptocracy, vide ante

      (names removed as the people concerned are not convicted thieves-ed)

      • APL
        Posted September 7, 2011 at 9:13 am | Permalink

        JR: (names removed as the people concerned are not convicted thieves-ed)

        Yep, it’s so easy to amass several million for each of yourself, your wife and adult children, get yourself and your spouse into the Lords all on the basis of absolutely no talent whatsoever.

        It’s a wonder everyone isn’t doing it!

    • Gary
      Posted September 6, 2011 at 10:14 am | Permalink

      The banks are being prosecuted for selling mortgages that were self-certified by the borrower and a blind eye was turned by the banks. These so called Liar Loans are deemed by some experienced prosecutors, to be fraudulent. That the banks built a monster derivative mountain on top of these mortgages , is one of the main reasons that we find ourselves in a crisis that is too big to be bailed out by sovereigns. Instead it is taking the sovereigns down.

      What we have to find out is 1) why are govts , including ours, still committed to throwing taxpayer money down this bottomless pit, and b) trying to prop up the housing bubble underpinning this, instead of bailing out the depositors and letting the banks go ?

      Belatedly , in the USA, the prosecutors are finally doing their job. I wonder if they will do their job here ? Our politicians should be embarassed.

      • norman
        Posted September 6, 2011 at 2:57 pm | Permalink

        The banks were forced to accept these ‘self certified loans’ by an instrument known as the ‘Community Reinvestment Act’ which is a piece of legislation first introduced in the 1970’s but later blown up massively to encourage ownership of property amongst ‘persecuted minorities’ (the report this persuction was based on was later analysed and found to be absolute rubbish, banks declined loans on risk and the refusals were more or less uniform across all demographics).

        Any bank that refused these was threatened with the charge of ‘red-lining’ which basically amounts to calling them institutionally racist, which is probably the most toxic charge that can be brought against any business.

        Are the banks absolved of all blame? Of course not, they filled their boots when the going was good but it’s completely baffling that prosecutors now appear to singling out the banks. If there was any justice they’d be joined by equal numbers of politicians.

  3. lojolondon
    Posted September 6, 2011 at 7:21 am | Permalink

    Dear John, yesterday was NOT a bad day. Yesterday was another great day, that gives all British patriots hope, after 40 years of tyranny.
    When I see the former great countries of Europe in line, one after the other, each with a massive begging bowl, and the only person who donates is their father – the ECB, not giving money, but writing worthless cheques – then I KNOW the end is near, and thank god!!

    Let us be massively grateful that Crash Gordon accidentally kept us out of the Euro, and who cares what the farce costs the fools next door, at least it is not costing us (anymore). The sooner the whole corrupt organisation collapses the better, and I will vote for anyone who promises me that.

    • BobE
      Posted September 6, 2011 at 8:08 pm | Permalink

      Agreed with spades

  4. Javelin
    Posted September 6, 2011 at 8:19 am | Permalink

    Every body now is seeking to find the end game – and it’s going to be mark-to-Market. For some time we’ve been waiting for reality to set in and the banks to value their bond portfolios in line with reality. Greek banks so far have only managed to mark them down by 20%. The UK banks have managed a more realistic figure. The Italian banks are as opaque as ever. It was over a year ago that I posted a 50% hair cut on PIG bonds would be needed. It didn’t happen then and now bonds have naturally fallen to that level the accountants – and not central bankers – will have to face up to the task. Alot of weak banks will not survive and there will be runs on banks. The crisis can only accelerate from here.

    Understanding what has happened is quite interesting. Basically there was the construction of an economic model of cheap debt and over spending in the form of a circle. In one direction flow deposits in the other direction flow promise of payments. Governments, regulators, banks and the public are in the circle. Money flowed from Governments to the public in order to win votes. Now the payments have dried up the Governments are trying to prop the flows up using tax payers money. That has now run out. All that has to happen now is for reality to sink in. The flows around the circle have stopped. The votes are being lost, the austerity measures are being dropped, the regulations are being delayed, the bailouts are being resisted. Now the momentum is reversing. There is pressure for accountants to mark to Market, pressure on politicians to change their policies, pressure on regulators to regulate.

    These reverse pressures will build up over the near term and eventually cause a correction. Banks will go bust, politicial parties will lose, policies will change, taxes will go up, austerity measures will be enforced. The flows in the circle will reverse. As a consequence assets will fall in value, standards of living will fall.

    Prediction is only possible when you 1) see the system for what it is and 2) see the events for WHERE they are in the system and 3) see the events for WHEN they are in the system.

    • Robert
      Posted September 6, 2011 at 3:27 pm | Permalink

      Spot on!

  5. Bill
    Posted September 6, 2011 at 8:50 am | Permalink

    There was such a strong political will to form the euro (lib dems) are quiet about it now, but there is now a lack of political leadership in Europe.

    The markets hate this.

    Best to accept that Greece will default and leave the euro zone. In the absence of euro bonds this has to happen.
    Those countries in the zone then need to bind economically and politically.

    Even then the markets won’t believe it and wont rest until they have tested Italy, Spain and others.
    Perhaps only strong growth can save the euro zone.

  6. Nick
    Posted September 6, 2011 at 8:58 am | Permalink

    Blame the Euro. Distract from the UK’s problems.

    It’s very simple. Saying growth works is a lie. Pure and simple. It’s lying because it can’t work and its lying by omission.

    Here is why.

    1. Draw a boundary round the government. Taxes coming in are lower than the money leaving, spending.

    2. You can only get that back in balance by spending less or taxing more. Borrowing just moves it forward in time.

    3. You’re not prepared to cut 30% off the state.

    4. So that leaves more taxes.

    Growth is just another word, spin, for growth in taxation.

    Now, the second lie kicks in. If we grow we get people back to work, and they pay tax, and we don’t pay them benefits.

    Ok, lets see how that works. 1 Person on benefits gets a job. It’s likely to be minimum wage. So we get 2.5K a year in taxes from them, and say 12.5K not paid out in benefits. 15K total. So for each million (and that’s not going to happen quickly), we get 15 billion in savings.

    So how does that compare with the size of the problem? The deficit is 150 bn. So we need 10 million unemployed to find jobs. There aren’t 10 million unemployed.

    Even the assumptions are wrong, because government’s plan is to spend lots more money trying to get them back to work. You won’t get the savings.

    So what’s going to happen. You’re going to penalise other people and tax them more. Primarily by fiscal drag. Lots on inflation. Freeze the allowances, and get more people onto 40% taxation.

    In other words we pay more and more for less and less. Inflation, big time inflation, and all hidden as usual because government services aren’t included in inflation. That’s the next lie.

    Then in a desperate attempt to keep it going, defaults will start.

    1. Means testing of the state pension.

    2. Abolishment and top slicing of the state second pension (payouts capped, government keeps the cash

    3. Outright theft like Hungary, Argentina of private pensions.

    It’s very simple. You’ve run up bills of 7 trillion, and that doesn’t include bailing out the feckless. All those rioters aren’t going to work, but will insist on a bailout in retirement.

    • norman
      Posted September 6, 2011 at 9:38 am | Permalink

      Completely agree, I’ve always thought that by the time I come to retire in 35 odd years that I won’t receive a penny of state pension, to think otherwise is taking a very optimistic view.

      Don’t you know that inflation is going to be 2% in 2 years time? Or is it 1 years or 6 months time by now, one loses track of these forecasts. Also, deflation is the real danger, if we don’t start those presses within the next year we’ll be deflated into poverty!

      I’ll have some of what the central bankers are having please, I need an escape from reality.

    • Electro-Kevin
      Posted September 6, 2011 at 10:08 am | Permalink

      “…and get more people onto 40% taxation.”

      Already here at a surprisingly low entry level in terms of real personal spending power.

      • Electro-Kevin
        Posted September 6, 2011 at 12:18 pm | Permalink

        …but then 40% taxation is what we’re going to have to put up with to stop our neighbours burgling us.

        • Stephen
          Posted September 8, 2011 at 2:29 am | Permalink

          Do you mean 40% helps because we will not have anything worth taking?

          It worked for me!

    • Gary
      Posted September 6, 2011 at 10:40 am | Permalink

      You are correct, Nick. This blaming of the EU, as diabolical as the EU is, is wearing thin. This is a banking crisis without borders. When new money is created for 90% of the loans (in a 10% fractional reserve system, we currently have about 3%) , then the loans that don’t lead to productive increases, that grow the GDP, are inflationary by definition. That is most of the loans, especially housing loans. This model has theft via inflation built into it. It is unsustainable, unfair, and a recipe for disaster. History shows us this. It works as long as more loans can be made, it collapses when debt saturation has been reached. Then it collapses, with no stopping it. All the central bank and the govt are trying to do now is increase that which is crucial to this banking pyramid scheme’s survival : inflation. At our expense. It will fail, and so will we.

    • uanime5
      Posted September 6, 2011 at 3:34 pm | Permalink

      As long as we can make more than £42 billion each year we can pay off the interest on the debt. This would require getting 3 million more people into employment, which is theoretically possible.

  7. Mike Stallard
    Posted September 6, 2011 at 9:13 am | Permalink

    Oh dear. The Italians have been Italian for years now and they are not going to change for a few banking problems are they?
    The coming crisis could be dire when the dear old ECB goes bust.

  8. Iain
    Posted September 6, 2011 at 9:47 am | Permalink

    I don’t believe confidence is the heart of the problem there are problems much more critical which probably is undermining confidence , but it will need these problems being sorted out before we will get any growth.

    The ‘growth’ we had in the last decade was debt fuelled growth, where consuming countries hocked everything to buy the goods of Germany , Japan , and China. It seems we have a world economy similar to that which Douglas Adams described in his Hitchhikers guide to the galaxy, where Magrathea was so good at producing its product it had bankrupted the economy of the galaxy, so decided to go into hibernation until the galaxy could afford their goods. Unfortunately China, Germany and Japan are not going to go into hibernation, with the result any attempt to reflate our economy will result in that money haemorrhaging to them, and all we will be left with after the reflating exercise are a few more BMWs plasma TV,s etc, no sustainable growth, and more debt. As we cannot reflate, it means waiting and hoping that the producing countries change their ways and consume a little more and save a little less, but that seems unlikely , so we are left with this contracting economy spiralling downwards.

    A second problem I see that is much more local, but similar in nature to the one above. Where the economic power has shifted to a very small group, we see this in the gulf that opened up between the wages at the bottom and wealth at the top. Here if you are a producer of luxury goods times are good, every where else the high street is going bankrupt. I don’t see how we are going to get any economic recovery while the majority of the population are getting poorer, yet any attempt for people at the bottom to get better terms and conditions is met with yet more waves of immigration.

    I know it might he heretical to suggest this but I feel part of the problem is globalisation, as with any economic policy a little is fine but fanatical adherence is destructive, this I feel is where we have got to with globalisation. Remember China Germany and Japan didn’t get to where they are at the moment with out some form of protectionism and still do.

  9. javelin
    Posted September 6, 2011 at 10:02 am | Permalink

    As aspect of the Euro crisis that hasnt really be discussed is printing banks notes if a country withdraws from the Euro.

    So here are a few companies

    De La Rue – Currency – UK
    Royal Mint – one of the most famous banknote factories in the world
    Giesecke & Devreint – Germany
    Orell Fussli Security Printing – Switzerland
    Joh Enschede – Holland
    Francois Charles Oberthur Fiduciaire – France

    What’s interesting is the German company Giesecke & Devreint – they have new concepts in durablity of bank notes and intergration in the “Cash Management Cycle” . I wonder which countries they are selling this new technology to? If Germany was to withdraw from the Euro they may well use this company and may well be looking to gain a secondary advantage from a new hi-tech currency that integrates better with technology.

    • Mike Stallard
      Posted September 6, 2011 at 3:48 pm | Permalink

      Allow me to say that I always read your comments with interest. Thank you.

    • APL
      Posted September 7, 2011 at 9:17 am | Permalink

      javelin: “… may well be looking to gain a secondary advantage from a new hi-tech currency that integrates better with technology.”

      I can see the benefit of notes with digital encryption on board. Should help reduce the incidence of counterfiting.

      What concerns me is that they may include time limited notes, that is you have to spend the note within a preset time or it will expire.

      All to improve the ‘velocity of money’ don’t ya know!

  10. Denis Cooper
    Posted September 6, 2011 at 10:26 am | Permalink

    “Why doesn’t Euroland simply lend the money directly to Italy, if it is so costly to create conditions in which Italy can borrow at lower rates?”

    If by “Euroland” you mean the EFSF, the first part of the answer is that Italy has not yet got to the point of asking for loans from the EFSF, or having such loans foisted on it; the second part is that the EFSF does not yet have the capacity to bail out Italy and potentially Spain as well; and the third part is that the AAA rating of the bonds issued by the EFSF to borrow money from investors and lend on to the governments of distressed eurozone states mainly depends upon the credit-worthiness of Germany, France and the other four AAA rated eurozone states, and their own credit-worthiness is not inexhaustible.

    http://ftalphaville.ft.com/blog/2011/06/21/600681/europe-calibrates-its-bailouts-comforts-markets/

    “The shares of the six AAA rated Euro area countries (Germany, France, NL, Austria, Finland and Luxembourg) amounts to 62.4% if you exclude Greece, Ireland and Portugal. Given the 120% ratio, almost three-quarters of each bond issue currently benefit from AAA guarantees. Taking into account the new 165% guarantee ratio, 102.9% of any issue would be guaranteed by AAA countries making any additional credit enhancements unnecessary.”

    Whether at the current 120% guarantee ratio, or at the proposed 165%, this “credit enhancement mechanism” adopted by the EFSF brazenly contravenes Article 125 TFEU, but otherwise the credit rating of the bonds issued by the EFSF would be that of the country providing the weakest guarantee that the bondholders will be paid what they are due in full and on time.

    http://www.reuters.com/article/2011/09/03/europe-sp-idUSL5E7K30Z020110903

    “Kraemer said his understanding was that joint euro bonds would be structured along the lines of Germany’s jumbo bonds, in which federal states team up to issue debt and each guarantees its own bit.

    “If the euro bond is structured like this and we have public criteria out there then the answer is very simple. If we have a euro bond where Germany guarantees 27 percent, France 20 and Greece 2 percent then the rating of the euro bond would be CC, which is the rating of Greece,” he said.

    “If it is a joint and not a several guarantee then it would be the weakest-link approach, as we call it,” he added.”

    I have to say that his last sentence doesn’t square with my own understanding of a) joint liability, b) several liability and c) joint and several liability.

    • Gary
      Posted September 6, 2011 at 3:15 pm | Permalink

      Looks like they have gone for fiscal unity, which may make the current EFSF moot. Breaking up is out of the question. Shroeder ex-German president wants the “United States of Europe”, and they will probably get it , regardless of Merkle’s recent election failure. The DAX is down over 6% now and the Swiss peg to the EURO, seems to be signalling this. The German people will not take kindly to this at all. It may be sold to them as the price to pay for true EU domination ?

  11. oldtimer
    Posted September 6, 2011 at 10:39 am | Permalink

    Yesterday evening Geoff Randall interviewed a former German finance minister. He took the establishment view that Germany (ie the German people) had to pay up. His reasoning: Germany`s actual inflation at c1% for the past ten years versus the EU target of 2% (and the reality of 2.5% in Greece) had compounded to give German exporters to the eurozone a 25% cost advantage over their rivals, enabling them to sell more products and to build a huge trade surplus. Germany now had an obligation to return some of this. This is not, of course, how German voters see it.

    Meantime, I hope that the UK government has contingency plans in hand both to deal with risks to the UK financial system and the change the UK relationship with Europe to claw back lost sovereignty. Somehow, though, I do not feel at all reassured that it has. Are you?

    • Gary
      Posted September 6, 2011 at 3:05 pm | Permalink

      So, because a country manages itself relatively well and keeps inflation low it is punished in this Alice in Wonderland economics ? The BBC shows its hand. Why is the inflation target 2% and not 0% ? Because the Fractional Reserve System requires inflation in which to operate. The honest inflation target should be zero. 2% represents the amount that is transferred from the saver to the creators of the money/loans. The total transfer is larger if the amount skimmed is smaller and the operation lasts longer and goes largely unnoticed. The colloquialism is “boil the frog slowly”

  12. Denis Cooper
    Posted September 6, 2011 at 10:51 am | Permalink

    “Why doesn’t Euroland simply lend the money directly to Italy, if it is so costly to create conditions in which Italy can borrow at lower rates?”

    But if by “Euroland” you mean the ECB, then notionally at least it’s constrained by Article 123 TFEU, as was the Bank of England when its services were enlisted to fund the Labour government’s budget deficit.

    On page 99 here:

    http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:083:0047:0200:EN:PDF

    “Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”

    Of course apart from being illegal under the EU treaties it would also have been much more obvious, far too obvious, if the Bank of England had simply created £198 billion and lent it directly to the Treasury, so instead it used the £198 billion to do what the ECB has been doing – ie propping up (rigging) the market in government bonds by buying up previously issued bonds, so that the government could continue to borrow by selling new bonds at much the same rate.

    While the media obligingly pretended that the Bank was doing commercial banks a big favour by relieving them of hard-to-sell assets, gilts, and that it was all about “injecting liquidity into the economy”.

    Given that the UK government is presently having no problem borrowing at low rates by selling new gilts, it would be interesting to see what assets the Bank of England bought if there was another round of “quantitative easing” as is being mooted.

    Reply: Yes for the ECB to do it requires a change of law. Euroland thinks it has the power to do it directly, as under bail out funds, but this also needs a Treaty change to make it clearly legal.

    • lojolondon
      Posted September 6, 2011 at 4:37 pm | Permalink

      John, this is good news, and time to collect on something that David Cameron DID promise us – a referendum when the Lisbon treaty is renegotiated. Not so??

      • zorro
        Posted September 6, 2011 at 6:32 pm | Permalink

        lojolondon, ‘cast iron’ Dave has new thinking…you see all you chaps and chapesses had a vote in 1975, 36 years ago. We don’t need another vote now, go away, you’re messing up my chances for my next job….

        zorro

      • Denis Cooper
        Posted September 6, 2011 at 8:40 pm | Permalink

        It’s already been renegotiated, and the resulting treaty amendment agreed on March 25th is here:

        http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:091:0001:0002:EN:PDF

        and ministers have already said that it will not be put a referendum.

        • APL
          Posted September 7, 2011 at 11:04 am | Permalink

          Denis Cooper: “and ministers have already said that it will not be put a referendum.”

          There really is no reason on earth to vote conservative.

  13. Acorn
    Posted September 6, 2011 at 11:39 am | Permalink

    Reading my favourite fund managers, I see a little bit of consensus for the way out of this mess. For instance:-

    “The global economy is at a crossroad that demands a decision – whom will our leaders defend? One choice is to defend bondholders – existing owners of mismanaged banks, unserviceable peripheral European debt, and lenders who misallocated capital by reaching for yield and fees by making mortgage loans to anyone with a pulse. Defending bondholders will require forced austerity in government spending of already depressed economies, continued monetary distortions, and the use of public funds to recapitalize poor stewards of capital. It will do nothing for job creation, foreclosure reduction, or economic recovery.

    The alternative is to defend the public by focusing on the reduction of unserviceable debt burdens by restructuring mortgages and peripheral sovereign debt, recognizing that most financial institutions have more than enough shareholder capital and debt to their own bondholders to absorb losses without hurting customers or counterparties – but also recognizing that properly restructuring debt will wipe out many existing holders of mismanaged financials and will require a transfer of ownership and recapitalization by better stewards. That alternative also requires fiscal policy that couples the willingness to accept larger deficits in the near term with significant changes in the trajectory of long-term spending.” (Hussman: Weekly Market Comment)

    What say you JR?

    If allowed, this link is well worth a read http://www.hussmanfunds.com/wmc/wmc110905.htm

  14. sm
    Posted September 6, 2011 at 11:46 am | Permalink

    Who created the debt money that now cannot be repaid and why? Why don’t banks collect on their valuations take their losses and restructure, why is this not plausible? (Is it just a liquidity issue? or is it solvency and structure related as others have questioned)

    The money supply in the real economy is shrinking. The QE money is probably sitting in a bank (probably with an investment bank involved being used for short term speculation) offsetting some of the banks debt (deflation) problems. I read snippets about pension funds lending shares out where does that managed risk sit with the regulators.

    How is the coalition going to address the real economy? It can’t imho with the current banking structure trade imbalances, immigration, tax and labour policies.

    We probably need debt free money spent into the economy on preferably needed infrastructure projects. (Power plants, CHP plants, river bridges,sewerage,water).

    Interest rates and or taxes (from growth) could rise slowly, to counter any inflation from prior devaluation and the effects of debt free money. Full reserve banks should be the aim and be encouraged with near zero regulation.

    The ICB can then set to work on managing the dysfunctional fractional reserve banks so that the bad debt can be purged in a fair manner.

    Perhaps we need to discourage leverage via the tax system for large companies. Leaving more finance from the banks for small companies.

    Is the plan to retain a large fractional reserve banking sector in the EU (in a full union) or balance our economy within what we the UK can guarantee in the same system? (Perhaps agreements have been made, regarding manufacturing,fishing,energy etc.)

    Please google positive money and read its fascinating and depressing.

  15. Mactheknife
    Posted September 6, 2011 at 11:52 am | Permalink

    I predict the Swiss action of pegging the Frank to the Euro to protect itself against Euro debt will have a major impact events. Currency wars are predicted.

  16. john east
    Posted September 6, 2011 at 1:36 pm | Permalink

    In my humble opinion, John, you continue to underestimate the size of this problem.

    Austerity might have worked when the crisis first emerged in 2008, when almost unimaginal GDP cuts of 10%, together with bank bankrupcies, and real public sector austerity measures rather thanpromised austerity measures might have set Europe on the path of reducing financial, personal and sovereign debts. A severe depression would have occured, but now three years later there would certainly have been light at the end of the tunnel.

    Now, after three wasted years, the situation is dire. Three wasted years have seen little significant deleveraging, merely transferring some of the debts from the banks to the sovereigns (i.e. to us the tax payers). The banks still have mountains of debt in the form of securities marked to fantasy rather than marked to market.

    I cannot see how things can be peacefully resolved at this late stage, but I certainly disagree that a concerted effort to boost austerity by a few more billion euros is going to cut the mustard.

  17. Martyn
    Posted September 6, 2011 at 3:18 pm | Permalink

    To my simple mind all this is the economics of a madhouse but, despite that, I think that the Euro is simply too big to be let fail. I suspect that quite soon we shall see Germany and France quite literally dictate to all Euro countries what they are to do and what maddens me is that Cameron, despite what he says to the contrary, will no doubt throw even more of our money at the Euro problem (which he will have to first raise or borrow)thinly disguised as a subscription to the IMF.
    No doubt the greatest desire of the Federal United States of Europe (see today’s DT!) is to be able to remove the financial markets from the equation. Now, that would be a battle worth watching, if it were not for the inevitable dismal outcome for the citizens of Europe…

  18. Robert
    Posted September 6, 2011 at 3:32 pm | Permalink

    Re Swiss Frank and competative devaluation – Hat tip ZeroHedge:Holy Red Screen, Batman! If you haven’t seen the news, the Swiss National Bank has just announced that it is putting a ceiling on the franc’s appreciation against the euro… effectively abandoning its economic sovereignty and putting its future in the hands of woefully corrupt and incompetent bureaucrats. On the news, the franc fell off a cliff, dropping almost 10% INSTANTLY. Gold priced in Swiss francs jumped from 1497 to 1620 per troy ounce, all in about 45 seconds. Precious metals are now all alone as the only forms of sound money that are truly safe havens. Since then gold has soared roughly 20%, and as of this morning, the SNB has imposed capital controls to thwart the rise of its currency. This is just the beginning. The Swiss government has basically told the world that they will print as much money as it takes, and buy up as much crap sovereign debt as they can, to competitively devalue the currency. This essentially puts Switzerland in the same sinking boat as Italy, Greece, and Portugal… with one key difference: Switzerland has 0% interest rates. In other words, you can now borrow in francs at 0% and buy government-backed euro garbage yielding 5%, 10%, 30%…. with absolutely no downside currency risk.

    • zorro
      Posted September 6, 2011 at 6:38 pm | Permalink

      My gold account looks nice…..

      zorro

    • Mark
      Posted September 6, 2011 at 8:32 pm | Permalink

      I trust you can spot the flaw in that argument. EU bonds are hardly risk-free, and the Swiss won’t accept hyperinflation just to “stay competitive”. The devaluation has posed a haircut on foreign investors. If it doesn’t prove to be sufficient disincentive then the Swiss will have to put up the shutters at their banks and impose exchange controls.

  19. javelin
    Posted September 6, 2011 at 3:47 pm | Permalink

    A Trading Note from (a named bank I cannot check-ed) is interesting. (the named bank-ed) has the view that the Greek default will come on either the 11th of September (next Sunday) – really the Government would implement the default over this weekend. Alternatively on December 11th – again another weekend. I was due to go on holiday 2 weeks ago with a ex-FX trader who consults for the Greek Treasury, but that got pulled.

    “… our base case that the default of Greece will centre around the Dec-11 review is still plausible and our arguments on why it can not come around the Sep-11 review are only tactical. In any case, a Greek default is coming … In event of default expect … markets could be stuck in limbo for some time and markets will fear that a Greek EMU exit is the next phase.”

    There are two views on this in the market and they depend on whether the Greeks carry out a short-term bond default only and stay in the EMU or default in long term bonds and exit the EMU.

    Reply: The official line is no default, no exit from Euro. The market prices of Greek debt show markets have a different view.

  20. lojolondon
    Posted September 6, 2011 at 4:35 pm | Permalink

    John, on a slightly related matter, can it really, honestly be true that the Conservatives are considering Quantitative Easing (printing money) at this moment?? Considering how poorly the UK and USA have been treated by this crazy policy, and bearing in mind that one of the very few differences between Gordon and Dave has been the beserk knee-jerk printing of far too much money – surely he is not going to let Labour off so easily, by doing the same thing??

    • zorro
      Posted September 6, 2011 at 6:44 pm | Permalink

      This, I thought, was inevitable after the government came in. It became clear that they were not going to come good on low tax growth policies and were trying to string the markets along. I know think it is very likely within the next year depending on events in Europe and probably again in 2013/4 (again dependent on growth which will be non-existent). Once they start QE with government debts like they have, they start to run out of options which they can find politically palatable. It is far easier for them to print and inflate away the debt. I am in no doubt that there will be high inflation for the next 10 years, and am putting my money where my mouth is…

      zorro

      • Jer
        Posted September 7, 2011 at 11:26 am | Permalink

        Sad, but true.

        The only alternatives to monitising the debt are income growth in excess of spending or spending cuts in excess of income decline.
        Neither of those look likely, as you say. Pity.

  21. Martin
    Posted September 6, 2011 at 5:05 pm | Permalink

    There are of two long term problems

    1) inflexible public sector spending – we all meed to link our public sector spending including public sector wages to the real world.
    2) asset price bubbles – these need to be tackled before they overwhelm economies.

    I can’t help but think that the media froth about the alleged problem countries is distracting attention from the need to sort out the UK. Why else is the Pound Sterling so weak against the Euro that some on here are so negative about!

    Short term we also have our own messed up Banks to sort out with overexposure problems to US mortgages, UK housing and assorted government debts.

    If our banks had been half as willing to lend to start-up businesses instead of playing at houses we might just have had a couple of extra large UK companies in our economy. Let’s hope they can at least live and learn.

    • zorro
      Posted September 6, 2011 at 6:48 pm | Permalink

      The government and its supporters are scared witless by the thought of crashing house prices, and this is why they will print and inflate (one way or the other) in order to keep nominal prices on housing and stealth default through inflation.

      As you say, the national obsession with home casino ownership has badly distorted the productive economy. The money should have been invested in productive capacity. The B of E and MPC have performed very poorly in their duty to maintain price stability.

      zorro

      • Electro-Kevin
        Posted September 6, 2011 at 11:51 pm | Permalink

        Agreed Zorro.

        If you want to know why NuLab got away with so much and what the Coalition are afraid of losing then you need look no further:

        – inflated house prices

        Add to this the distraction of Premiership football and the large number of potato-heads that read the newspapers from back-to-front …

        Panem et circenses.

  22. Bazman
    Posted September 6, 2011 at 8:50 pm | Permalink

    Whatever happens Germany and France will not be dragged down to the living standards and levels of infrastructure as Britain. You only have to use your eyes to see how much more advanced Germany and France is to Britain despite their very real and large problems. No danger of them not using the advantages of the EU whilst protecting their own industries and workforce. At least the ones with a job. A bit tough if you are young and skint, but Hey! they are young. A youth tax no less. That’ll teach ’em.

    • Winston Smith
      Posted September 7, 2011 at 11:20 am | Permalink

      Travel outside the centre of Paris and the subsidised idyllic rural areas of France and you will get a very different impression. Prospects for the young in France are even worse than here and its a very corrupt society, where progress is very much based on who you know, who you father knows and your social background. A bit like the BBC.

      • Bazman
        Posted September 7, 2011 at 8:38 pm | Permalink

        Sound like an excellent middle class social security system, and as most people in this country think they are middle class, should be imported here to replace ours in which any oik think they can join if they suck up enough to the boss in the office to get a pay rise so they do not have to eat packet soup as a main meal to save money for the bus or a packet of fags.

  23. BobE
    Posted September 6, 2011 at 11:13 pm | Permalink

    Government borrowing is the anticipation of future tax revenues.
    When will you daft people wake up to the fact that low growth means low borrowing.
    Why are we led by donkeys?

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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