The Great Railway Seasonal Con Trick

The train companies this Christmas are once again showing their utter contempt for their customers.

In order to meet punctuality targets they are running reduced and amended services, thus ensuring that their pockets are lined (by avoiding fines) but making our journeys even more miserable and tedious than they were before.

Much like the turkey, these companies can get stuffed!

Santander Screws Up

Santander, the bank with the highest proportion of customer complaints in the UK (216,158 complaints in the first half of 2010, has decided to end the year on a "high" by sending out 35,000 customer statements to the wrong customers.

Well done lads!

Cable Denuded of Powers

Vince Cable, the Business Secretary, has come spectacularly unstuck this week by falling for the charms of two young female reporters posing as constituents.

His fall from grace began with his boasted belief that his resignation could bring down the coalition, his self implosion was completed later in the day when the BBC leaked part of the Telegraph "complete expose" (that the Telegraph had "mysteriously" chosen not to publish) where he stated that he had declared war on Rupert Murdoch.

Cable has now been denuded of his responsibility for media regulation, something that he was passionate about and that was a major part of his office.

It is unlikely nthat he will remain in this severely diminshed role for much longer.

RBS Pushes For Bonuses

Despite the fact that it is now a state owned bank (one that almost destroyed the UK financial services sector during its previous existence as a private bank), RBS is trying to push the government to allow it to pay bonuses.

Maybe the government and the hard pressed taxpayer might look upon this request a little more favourably, if the FSA first published a full report into its 18 month "investigation" in to RBS.

However, the FSA is very reluctant to do this and indeed has handed editorial control over to RBS for whatever whitewash is published.

EU Crisis Mechanism

The EU have come up with plans for an EU financial crisis mechanism that, in theory, will avoid piecemeal solutions to future financial shocks threatening the Euro.

All very well, maybe. However, the mechanism requires an adjustment to the Lisbon Treaty (this will mean some members of the EU will have to hold referenda).

FSA "Investigation" Outed as Useless

The failed financial regulator, the FSA, has been having something of tough time recently owing to its own incompetence and crass handling of its 18 month investigation into RBS.

Having exonerated the board of RBS and company, the FSA steadfastly refused to publish any form of report. Clearly the concept of "transparency" is not understood by those who inhabit the ivory towers of the FSA.

However, having been subjected to a barrage of well deserved ridicule and criticism, the FSA "relented" and agreed to publish a redacted report in March 2011.

Needless to say, expectations about the quality of the report should not be raised too high. In order to publish anything, the FSA claim that they will need to garner the permission of RBS first (ie RBS will have editorial rights over the report).

Impressed so far?

I'm not!

However, this litany of incompetence does not not end here. It transpires that the FSA exoneration of the RBS board may in fact be nonsense, and that the investigation nothing more than an incompetent whitewash.

For why?

WikiLeaks have published a cable that summaries a meeting between Sir Philip Hampton, the new chairman of RBS, and 3 US politicians.

During the meeting Sir Philip allegedly noted that he thought that the previous RBS had failed to live up to their "fiduciary duties", and did not conduct adequate due diligence before buying part of ABN Amro in 2007.

That hardly fits in with the FSA whitewash that exonerates the previous board.

Could someone please tell me why the FSA is still in existence?

FSA Digs Itself Deeper Into The Mire

The beleaguered and failed regulatory body, the FSA, has managed through further ineptitude to dig itself (as if that could be possible) further into the mire.

Having steadfastly refused to publish its report into RBS (the report that exonerated the directors and company of any wrongdoing), it has now agreed (under intense pressure) to publish a heavily redacted version of the report.

Good enough?

Not really:

1 The report will be heavily redacted.

2 It won't be published until March 2011.

The FSA really doesn't get it, and is demonstrating why it has become an irrelevancy.

The Country's Debt Burden

As the country faces cuts in government expenditure that are, "apparently", swingeing and ruthless it is worth putting a number of issues into context:

1 The overall debt burden of the country is a staggering £4.8 Trillion.

2 The cuts are cuts in planned inflationary increases in government expenditure, not cuts in actual amounts being spent.

3 The deficit in the Local Government Pension Scheme in England has more than doubled in the past three years to £100BN (7% of the UK's annual economic output).

Despite whatever the politicians might claim, the "cuts" when taken into context are but a pin prick in the backside of the shocking level of debt burden that is crippling the country.

As regards the pension black hole, the solution that the politicians will force on us is going to be increased taxes and increased contributions from members.

Neither of the above solutions will be popular, and will be delayed thus exacerbating the problem. The correct solution should be to change the pensions provided to the public sector to that of defined contribution (as per many in the private sector).

House Price Gloom

Those who rather foolishly rely on the capital appreciation of property (ie house price rises) to provide them with a psychological feeling of being wealthy, are set to be rather disappointed this Christmas.

The Royal Institution of Chartered Surveyors (RICS) reports that house prices kept falling in November, as a result of the slow economy and lack of funding for first-time buyers.

The number of transactions is very low and the overall market subdued.

This moribund market is expecting to continue into 2011.

Buy Like Hell?

Mike Slade CEO of Helical Bar is advising people to buy investment property "like hell", as he claims never to have seen such a gap between yields and borrowing costs.

All very well, maybe, if you are a professional property company with many years experience. However, the rest of the country may well be advised not to follow that advice:

1 Borrowing the money from the banks, at a decent rate of interest, is not that easy.

2 Interest rates in the next year will most likely rise.

3 There are buying opportunities (eg distressed sales etc). However, these are most likely to be snapped up by companies such as Helical Bar.

4 Helical Bar doubtless has a greater cash cushion than most, to enable it to ride out a crisis in the event that they are wrong.

Iceland Leads The Way

Iceland has turned the corner of its recession, its economy grew by 1.2% in the three months to the end of September.

How has this been achieved?

It defaulted on its debts, allowed banks to fail and let its currency slide.

Meanwhile, Ireland has passed an austerity budget that will increase its debts and ensure that its economy will stagnate for years to come.

Why cannot Ireland emulate Iceland?

Simple, it is shackled to the Euro. As long as it chooses to put politics above economics its economy will remain moribund.

The Euro itself, despite achieving the political "success" of bailing out Ireland, is under renewed pressure.

For why?

The markets do not accept, quite rightly, that applying sticking plasters to individual failing states is a policy that will work. A Euro wide policy is required to resolve the crisis, eg the issuance of Eurobonds. However, the members of the Eurozone have neither the political will or economic strength to enact such a policy.

Minuscule Chance Of Euro Collpase

Stephen Nickell, a member of the Office for Budget Responsibility (OBR), told the Treasury Select Committee that there was a minuscule (1.7%) chance of the Euro collapsing.

Ireland, despite initial fears of it not being able to pass its budget package, looks like it has gained enough support for it to be able to approve its budget this afternoon; thus offering much needed respite to the beleaguered Euro.

Time will tell as to whether the 1.7% (such a precise figure!) odds quoted by Mr Nickell reflect reality.

History is littered with the corpses of previous attempts at currency unions.

FSA Humiliated

Unsurprisingly the FSA's attempt to hide the details of its 18 month "investigation" into the near collapse of RBS, via a pathetic one paragraph "a series of bad decisions was made" fig leaf, has brought down upon it the scorn it so richly deserves.

Sir Fred "the shred" Goodwin is said to be perfectly happy for the report to be published (not that his approval or disapproval needs to be sought), and indeed George Osborne is pushing for the report to be published. RBS is, after all, a public asset.

However, the FSA are defiantly sticking to its guns and refusing to publish until a "legal view" could be established that it could do so within the exemptions of the law.

A nice "excuse" clause such as that may well be appropriate for certain private organisations. However, as noted, RBS is a public asset it is in the public's interest to see the results of the FSA's labours.

Quite why the FSA is so determined to keep the report hidden from public view is causing many people to wonder as to whether it is protecting RBS, or itself and its investigation, from rigorous scrutiny.

Either way the FSA, by this shameful episode, have demonstrated that it has no future.

FSA Ridiculed

Unsurprisingly the FSA's pathetic refusal to publish details of its investigation into RBS (which let management off the hook, and only mildly rebuked them by saying that the near collapse of RBS was the result of a series of "bad decisions") has received the scorn that it so rightly deserves.

The Telegraph quotes Lord Oakeshott, a Liberal Democrat Treasury spokesman:

"We cannot learn the lessons of the worst corporate crash in British history if we can't see the evidence."

Lord Oakshott went on to say:

"Most people, taxpayers and City experts alike, simply will not accept there was no failure of corporate governance on the part of the management, board and regulator of RBS."

One wonders if the FSA's reluctance to publish the details of its investigation is designed to save the blushes of the ex board members of RBS, or to save itself and its pathetic report/"findings" from rigorous scrutiny.

Why is the FSA still in existence?

If someone has a copy of the report, I suggest that they leak it to WikiLeaks (currently accessible via this domain http://213.251.145.96)

A "Series of Bad Decisions"

The FSA has announced that it will not take any enforcement action against the ex CEO of RBS, Fred "The Shred" Goodwin; the FSA has now closed its 18-month probe into the conduct of RBS executives, the acquisition of ABN Amro in 2007 and a 2008 rights offering.

The Telegraph quotes the FSA:

"The review confirmed that RBS made a series of bad decisions in the years immediately before the financial crisis, most significantly the acquisition of ABN AMRO.

The review concluded that these bad decisions were not the result of a lack of integrity by any individual and we did not identify any instances of fraud or dishonest activity.

The competence of RBS individuals can, and will, be taken into account in any future applications made by them to work at FSA regulated firms.."

The last sentence is the FSA's attempt to add "stones" to their statement of the "bleedin' obvious", namely that "a series of bad decisions" had been made.

The FSA won't disclose details of its investigation, they expect people to blithely accept their opinion and move on.

Not really very much to show for 18 months of "investigation"!

Did not our government, during the run up to the election, say that they were going to shut down the FSA?

Mervyn King Under Pressure

Mervyn King, Governor of The Bank of England, is the latest prominent figure to be embarrassed by the Wikileaks saga.

A cable sent by Louis Susman (US Ambassador) to Hillary Clinton in February 2010 summarises Mr King's views about David Cameron and George Osborne, expressed during meeting that he held with the ambassador.

The Governor opined that Cameron and Osborne "had a tendency to think about issues only in terms of politics, and how they might affect Tory electorability", and was worried about their lack of experience.

There are some who are now calling for King's resignation, citing his alleged "thirst for power". Quite why a private conversation with the US ambassador, albeit embarrassing now that it is leaked, should force him to resign is beyond me.

I suspect those who are making this call are doing so based on their personal dislike of the man, rather than on any specific "offence" and alleged "breach of neutrality" that they claim that he has made.

Euro Worries Persist

The Euro continues to take a battering, as markets focus on the structural problems of the Eurozone.

The focus is now on the Spanish and Italian economies, and their ability to roll over their debt.

Were either Spain or Italy to need a bailout, the ability of the Eurozone to provide the necessary funds is in doubt. Needless to say the real danger is that the requirement for a bailout of these two countries, now that the markets are focusing on them, is becoming a very real possibility.

The Irish Bailout

Ajai Chopra, the head of the International Monetary Fund's mission in Ireland, has been forced to defend the terms of the Euro 85BN bailout agreed with Ireland over the weekend.

Ireland will be paying 5.8% interest on the loan which, according to the IMF, is a better deal than Ireland would have secured elsewhere.

The short term reaction of the markets has been cautiously positive. However, it is clear that the structural problems within the Eurozone remain. Until these issues are addressed, the pressure on the Euro and weaker members of the Eurozone will continue.

Contagion

The fears of the contagion, from the Irish sovereign debt crisis, spreading appear to be justified. Spain is now the target of the market's fear and greed.

Spanish bond prices are rising, and the Euro is falling.

The EU's bailout fund of Euro 1 Trillion will not be enough to prop up Spain, Greece, Ireland and Portugal.

Something has got to give.

No Risk!

The EU, seriously spooked that the Euro remains under siege, has issued a statement insisting that the Euro will not collapse.

Klaus Regling, CEO of European Financial Stability Facility (EFSF), told the Bild:

"There is zero danger

It is inconceivable that the euro fails."

Nonsense, it is perfectly conceivable that the Euro will collapse.

The pressure on Greece, Ireland, Portugal and Spain is increasing day by day. At some stage, if these countries are to avoid total political and social collapse, they will have to free themselves from the constraining yoke of the Euro.

Whatever the Europhiles would like to believe, the markets simply do not see it the same way. The markets know that the the current situation is unsustainable and that something has to give.

Irish Hold All The Cards

Irish households are coming to grips with the true cost of accepting the EU/IMF bailout, and of remaining in the Euro (nothing in life comes free), if the Irish accept the terms dictated by the EU.

It is estimated that the austerity package that the government will have to force through, in order to receive the bailout on the EU's terms, will cost the average Irish household £3K in increased taxes.

What people don't seem to realise is that the Irish government can, to some extent, stick two fingers up to the EU wrt the terms and conditions being placed on the bailout package.

The EU is desperate to avoid the contagion spreading, and to prop up the faltering Euro. Come hell or high water it will do evreything it can to keep the Euro afloat.

The Telegraph quotes Wolfgang Schaeuble, the German finance minister, who let the cat out of the bag:

"The uncertainty puts the future of our currency at stake.

If we cannot defend our common currency as a sustainably stable currency the consequences would be incalculable."

The Irish should dictate the terms of the deal to the EU, not the other way around.

The Sea of Hope

Now that Ireland has formally admitted that it will accept a bailout from the EU/IMF, the real game can begin.

Irish banks, despite the fact that they will receive a capital injection, are now effectively up for sale - all bidders welcome.

The EU has warned the Irish government about the possible deal breaking problems of an election (to be held early next year). However, the Irish know full well (as does the EU) that the name of the game is "contagion avoidance". The EU cannot afford for this bailout to fail, if it did the risk of contagion spreading (already very high) would rise even further.

Once the bailout is agreed, and short term stability of the Irish economy restored, the speculators and markets will focus their attention on the next in line for a bailout (Portugal).

Make no mistake, the game is not over. One by one the weaker members of the Eurozone will be targeted, and the EU will have to continue to stump up more cash until either its patience runs out or the money does.

The final result will be one of the following:

1 The Euro collapses.

2 Some members of the Eurozone leave the Euro.

3 The Euro is split into two, a weak floating Euro for poorer countries and a strong stable Euro for the rest.

None of these prospects is exactly what the "founding fathers" of the Eurozone had in mind when they floated the Euro on a sea of hope and hubris.

Money Rolling In

Hot on the heels of securing an EU/IMF bailout package (estimated at being around Euro 80BN), the Irish government has also been promised approximately £7BN in the form of bilateral aid from the UK.

George Osborne claims that this is because Ireland is our "closest economic neighbour".

Many are asking why the UK needs to put money into Ireland on top of the EU/IMF bailout.

Does this mean that the bailout from the EU/IMF is not going to be enough?

Be that as it may, once Ireland is "sorted" next comes Portugal and Spain.

The Bailout That Dare Not Speak Its Name

Ireland has finally bitten the bullet wrt the asking for a bailout from the IMF/EU. Negotiations over the terms of that bailout started today.

Key to those negotiations will be the 12.5% rate of corporation tax that has been the heart heart of Ireland's growing economy.

Whilst it will come under immense pressure from the EU to raise that rate (as the EU believes that it distorts the market), Ireland should bear in mind that the EU is desperate to shore up the Euro. The longer the uncertainty over the Irish economy continues, the greater the damage done the Euro.

All Ireland has to do is refuse to accept any bailout that ties a rise in corporation tax into the terms and conditons of the bailout. The EU is on the back foot here, like it or not it cannot afford to allow the Irish economy to go under.

The Irish people should not fret so much as their media is doing, Ireland is in a far better negotiating position than Greece was.

Endgame

Despite the fact that Ireland has yet to formally ask for an EU/IMF bailout, to rescue its banks from collapse, it has in all but form accepted that it will ask for a bailout and that it will need that money within days.

Bloomberg report that the Irish central bank Governor, Patrick Honohan, said during an interview with RTW today that he expects Ireland to ask for a bailout.

"It is my expectation that will happen, absolutely."

He went on to estimate that the interest rate on the loan would be around 5%.

There may well of course be other costs (the real reason why Ireland has been so reluctant to ask for a bailout), such as the demand by the EU that Ireland raise its corporation tax rates (currently the lowest in Europe) from 12.5%.

The Germans are, in particular, furious that Ireland has such a low rate. The Germans view this as a major distortion in the EU, sucking investment away from Germany.

Others might argue that as a sovereign country, Ireland has the right to set its taxation policy in whatever way it wishes. However, as we know, the EU's prime objective is financial and political hegemony (even if that is impractical). Supporters of the EU most certainly want countries within the EU to lose their right to set their own taxes.

It is therefore a "blessing" to those who support further EU integration that the financial crisis in Ireland can be used to push for greater hegemony, and to crush Ireland's sovereign status.

ECB President, Jean-Claude Trichet, is expected to speak on the issue later today.

Ireland's Last Stand

Despite the fact that Ireland is publicly making a spirited stand against having to go "cap in hand" to the EU for a bailout, the mechanisms are already being set in place to provide that bailout.

The European Union and International Monetary Fund will start auditing the accounts of Irish banks tomorrow. The purpose of this "assessment" is to determine whether Ireland is capable of handling the crisis itself, or whether it will be forced to accept a bailout.

It is reasonable to assume that the conclusion (ie Ireland is not capable of handling the crisis) has already been determined.

The UK, normally disdainful of the Euro, has also offered to help Ireland; as it is well aware that any blowback from Irish banks will hit British banks very hard indeed.

It seems that the matter is now, more or less, out of the hands of the Irish government and that the bailout (estimated by some at being around Euro 80BN) will be imposed upon it within a matter of days.

Were the Irish government to still to refuse to kowtow, then all the EU has to do is leak a damaging assessment of the Irish economy and push it over the edge.

That message will have been given loud and clear (behind the scenes) to the Irish government.

Next will come Portugal and Spain.

Good Luck To The Irish

Good luck to the government and people of Ireland who are being bullied by the EU into accepting an EU bailout, in order top stop the contagion spreading to other countries in the Eurozone.

A "small matter" worth repeating is the fact that it is down to the crass public comments made recently by certain EU ministers (see my earlier article on the subject) that Irish yields have risen, thus pushing up the cost of their debt.

EU Digs Itself Deeper

I wrote yesterday that markets have a "herd mentality" that reacts to situations with a mixture of fear and greed (depending on the nature of those situations).

Whilst this observation may be "obvious" to many people, it seems that those who claim to lead the EU have not yet understood it.

European finance ministers are now engaged in a massive damage limitation exercise following recent pronouncements from the German Chancellor, Angela Merkel, who sought to to make bondholders contribute to future bailouts. Unsurprisingly the markets have been "royally spooked" by this, and bond yields have been forced up.

Does this matter?

Very much so if you are a heavily indebted nation (such as Ireland), as yields increase so does the the cost of servicing the debt.

Sadly EU minister have only realised, post the EU summit, exactly what damage their agreement on bailouts has done to market confidence. One is tempted to ask why certain people hold the positions that they do, given that it is clear that they do not understand how markets work?

That is a question that needs to be answered at some point.

However, in the meantime, EU ministers have been furiously backpedaling. They have issued a statement from the tense and divided G20 in South Korea saying that the crisis resolution mechanism that they are discussing, that may force bondholders to share the cost of a bailout, won't apply to outstanding debt.

All very well, except for two problems:

1 This clearly shows that the EU is making up economic policy and plans "on the hoof"

2 The application of this "shared responsibility" to future debt will simply increase future yields (as the markets will need to price in the extra risk)

Like it or not, the EU have managed to undermine a future source of revenue and seriously destabilise and unnerve the bond markets. The result being that countries such as Ireland have been pushed closer to the edge of financial meltdown, as the costs of servicing their debt has risen.

It is hardly surprising that the Irish Prime Minister, Brian Cowen, views Merkel's comments as being less than "helpful"!

Ireland Wobbles

RBS, the people's bank, fell in value on the FTSE by approximately 5% in early trading as a result of fears over its exposure to Ireland.

Ulster Bank, part of RBS, made a loss of £176M in Q3 and there are worries that Ireland may be forced to ask for a "Greek" bailout from the European Union/IMF.

Markets have a "herd mentality" and react to certain situations with fear and greed, depending on the nature of the situation. In this particular case market sentiment towards Ireland has not been helped by European commission president, Jose Manuel Barroso, who said:

"What is important to know is that we have all the necessary instruments in place now to support Ireland if necessary."

Doubtless well intentioned, but it will exacerbate fears (found or unfounded) over Ireland's economy. The IMF was forced to deny yesterday that Ireland has asked for a bailout.

To add to the EU's woes, Greek public finances showed a deficit of Euro 17.4BN in October (a fall of 30% compared to the same period in 2009). However, the target reduction was 32%.

Inflation Near To 2% In Two years

The Bank of England has stated that, in its view, inflation will be near to the 2% mark within the next two years.

This view is contrary to some of the prophets of doom who have recently been predicting (for media sound bite purposes) that interest rates will have to be raised significantly (8%), in order to counteract an inflationary disaster.

Additionally, given the better than expected growth figures for the UK economy, the Bank has held back from another round of quantitative easing (unlike the Federal Reserve).

This, in terms or international politics, is probably no bad thing. The US QE2 package of $600BN has provoked a barrage of criticism from both Europe and Asia Pacific, and brought the world one step closer towards "currency wars" (capital restrictions, protectionism etc).

The Curate's Egg

Barclays plc has delivered something of a curate's egg wrt it Q3 financials released today.

Pretax profit in the three months to the end of September fell from £1.36BN (Q3 2009) to £327M million pounds, a fall of 76%.

Analysts had expected profits of around £700-800M.

A large chunk of the fall was due to poor results from the investment arm of the bank, which posted a pretax loss of £182M compared with a profit of £369M the year earlier.

That being said Barclays state that their capital ratio is strong, which will enable it to weather any future storms.

Outlook - Stormy G20 Predicted

The atmosphere at the forthcoming G20 summit in Seoul later this week is likely to be somewhat heated, following on from pre summit soundbites issued by the Chinese and then Barack Obama over the recent move by the US Federal reserve to print $600BN (Quantitative Easing 2).

China, and some other countries, are not happy that this tactic pushes the Dollar lower, thus making their exports to the US more expensive and the lessening the value of their Dollar based investments.

Barack Obama responded, during a press conference in India, by saying that QE2 would bring about higher US growth rates which would be "good for the world as a whole". The US is also of the view that the Chinese Yuan is undervalued, and are pressing the Chinese to let it float higher.

The G20 will see an intensification of this "spat", as various countries begin to draw battle lines over possible future "currency wars".

RBS Makes Loss

RBS, one of the "people's banks", has reported a Q3 loss of £1.4BN compared with a pre-tax profit of £1.2BN in Q2.

The swing back to loss is blamed on further bad debt write offs of £1.7BN.

Stephen Hester, CEO, has stated that he expects to more or less break even for the full year. However, in a warning to customers and the government, he noted that the current margins were not high enough to cover the increased capital requirements placed on it and other banks.

In a nut shell, either the capital requirements will have to be reduced or banks will increase again the interest rates they charge borrowers.

In the meantime, despite running on "low margins", RBS has managed to find the spare cash to increase staff pay and bonuses for investment bankers in the third quarter.

So that's alright then!

Steady As She Goes?

Despite the fact that the US has launched a new round of quantitative easing ($600BN), the Bank of England has decided not yet to follow the American lead.

The Bank of England's monetary policy committee (MPC) has kept interest rates at 0.5%, and has not increased quantitative easing.

The "steady as she goes" approach is a consequence of better than expected UK economic data. As to whether the economy continues to recover, once government cuts and the new VAT rate kicks in next year, remains to be seen.

It should also be noted that the $600BN quantitative easing package in the US may not actually be enough to kick start that economy which, if it doesn't pick up, will have ramifications in the UK and the rest of the world.

Lloyds Loses Touch With Reality

Lloyds Banking Group has appointed Santander's UK head, Antonio Horta-Osorio, as its chief executive. He will replace the current CEO, Eric Daniels, early next year.

Financial analysts, and so called "financial experts", seem on the whole to be delighted with this appointment.

All very well, maybe.

However, is this not the same Santander bank with the highest proportion of customer complaints in the UK (216,158 complaints in the first half of 2010), where complaints came in at the rate of one per minute in the first half of this year?

Jeff Prestridge wrote in the FT is September:

"..administrative problems at Santander including customers not being able to review their accounts online, customers’ savings accounts not set up promptly, as well as suddenly inoperable accounts even though they were set up on an enduring power of attorney.

There's more.

Customers have been designated dead when they are very much alive, customers' accounts have been set up in the wrong name, customers have been held on expensive telephone lines for ages, and branch staff have contradicted instructions given by the bank's call centres.

In terms of administrative meltdown, I've never seen anything like it in more than 25 years of personal finance journalism.."

Has Lloyds (one of the "people's banks") taken leave of its senses?

The Stench of Putrefaction

Despite some signs that the economy is beginning to grow again, all in the garden is not yet rosy and there is a decidedly strong whiff of putrefaction in the air.

Aside from the survey by the Chartered Institute of Personnel and Development (CIPD) that predicts a total loss of 1.6M public and private sector jobs by 2015 (resulting from government cuts), there is also the danger of the spread of the disease of "zombie households".

A "zombie household" is where a household is trapped in its property because the mortgage exceeds the value, the home owner is barely able to pay the interest payments at today's record near zero rates and the bank has not written down the value of the loan to its "true market value".

In the event that rates rise, as they most certainly will do so in the future, the debtor defaults and the banks are unable to recover the full value of the debt; ie everyone suffers.

Fathom Consulting have recommended that the Bank of England uses a new tranche of quantitative easing to buy lenders' worst mortgages, and place them in a specially created "bad bank".

Until the banks are rid of the fear of a collapse of the value of their current loans, the lending market (needed to power the economy) and the economy will stagnate.

Like it or not, another bailout is required.

Growth Detected

Financial "experts" have been pleasantly surprised by the Purchasing Managers Index (PMI), which shows that the UK manufacturing sector experienced an accelerated pace of growth from a level of 53.52 in September to 54.93 in October.

To add to the positive news, the PMI survey also showed that the "sub-index" of jobs rose from 48.97 to 54.97 during the same period; ie employment in the manufacturing sector has increased.

However, before the champagne is cracked open, several caveats need to be made:

1 The UK is hauling itself out of a deep and prolonged recession, it is not unexpected that initial figures will show a strong bounce back (as they are coming from a low level).

2 The government's plans for reducing the public sector debt (ie government cuts) may well dampen down future growth prospect.

3 The better than expected figures may, perversely, negatively impact the economy by putting the "brakes on" plans by the Bank of England for further quantitative easing.

Time will tell as to whether these figures are merely a "dead cat bounce".

The Curate's Egg

The leaders of the EU have managed to create for themselves, and the people of Europe (whom they claim to represent), something of a curate's egg wrt the agreement to revise (in limited fashion) the EU rulebook.

There will be a "limited treaty change" (so as to avoid countries having to ask their voters to endorse it), that will ensure a legally watertight underpinning of the Euro110BN bailout for Greece and the Euro750BN bailout for others.

However, those countries that do not stay within EU deficit budget limits will not lose their vote (as Chancellor Merkel from Germany had been pressing for).

Despite the fact that Europe is still stuck in recession (with a staggering 10% unemployed) the EU budget will still rise by at least 2.9% (seemingly "necessities" such as an 85% rise in the EU entertainment budget cannot be denied our "respected" MEPs and their acolytes).

Were the EU a private corporation it would have, quite rightly, gone to the wall years ago.

EU Loses Touch With Reality

David Cameron has thrown in the towel in his fight to resist an EU imposed increase of £435M in Britain's contribution to the EU (based on an EU budget increase overall of 2.9% to £110BN).

Ironically, if this 2.9% rise is approved, it will in fact be a modest "victory" for Cameron who has been fighting a rearguard action (calling all EU heads of state) to prevent the implementation of a budget increase of 5.9% which is being demanded by MEPs. These MEPs are clearly a bunch of individuals who have not set foot on "real world planet Europe" for many years, and are unaware that Europe/the world is in the depths of a recession.

The health warning here is very real, 2.9% is the minimum rise that will go through.

The fact that budget rises of this kind are being pushed through, during a time when national governments are being forced to reduce their own budget deficits, shows just how out of touch with reality the EU has become.

The EU, by acts of folly such as this, will eventually engineer its own self destruction. Unfortunately, in the meantime the citizens of its member states will pay the price for the greed and intransigence of the MEPs.

The Dog That Didn't Bark

The House of Lords is conducting an enquiry into the audit profession, and has been told that accounting rules were a significant contributing factor to the banking crisis.

Tim Bush, a member of the Accounting Standards Board's (ASB) Urgent Issues Task Force, told the Lords that international accounting standards forced auditors to abandon the principle of prudence in their audits.

Lord Lawson accused the profession as being "one of the dogs that didn't bark."

He quite rightly uses the phrase "one of".

As noted many times before on this site, the tripartite regulatory system set up by Gordon Brown failed primarily because no one body that belonged to it (ie Bank of England, Treasury and FSA) was deemed to actually be in charge of it.

Push for Growth

As David Cameron at the CBI promises that the government will push for growth and implement a national infrastructure plan (whatever that really means), these promises need to be set against the backdrop of a subdued mortgage/loan market.

The British Bankers' Association (BBA) reports that the downward trend in mortgage approvals continued in September, along with a low demand for personal loans.

The BBA attribute this to personal economic uncertainties.

Fair comment, however, they should also look to their own members' tightening of credit lines (and extortionate interest rates when compared to the Bank of England rate) as another reason for the fall in lending.

Whatever "push for growth" the government may promise/aspire to, the strength of the British economy is based on debt/property; until these areas are stimulated, eg via greater bank lending, significant growth will not occur during the course of this parliament.

More Quantitative Easing

Judging by signals from both the Chancellor and the MPC, the Bank of England is gearing up to increase its level of quantitative easing (currently around £200BN).

The Telegraph quotes George Osborne:

"The country needs a decisive plan, we've set out the decisive plan.

It has some caution built into it, there is of course the freedom for the Bank of England to deploy monetary policy tools as well."

QE is where the government "prints" new money and uses it to purchase gilts, corporate bonds and commercial paper. Thus it ends up paying the interest owed on the government debt purchased to itself.

As and when the cuts cause excessive political problems, or simply do not work, the government (in the guise of the Bank of England) will print money.

Bank Levy

The government has published draft legislation for its levy on bank balance sheets.

The levy (less than 0.1%) will be applied from 2012 on the global balance sheets of UK banks, and the UK operations of banks from other countries.

In theory, it will raise approximately £2.5BN per annum.

It will be interesting to see how the banks "shuffle" their worldwide assets and liabilities in the run up to the introduction of this tax, and indeed how they "reassess" the value of their assets and liabilities.

George Osborne is anticipating some "creative accounting", and is pressuring the banks to sign an anti tax avoidance pledge.

A nice idea, in theory.

However, as any first year accounting student will tell you, tax avoidance is perfectly legal (evasion is illegal). I fail to see how the pledge, if signed, can be enforced.

The SOBER Decade

Welcome to the "SOBER Decade", as George Osborne announces a £83BN spendings cut package that will (according to the much publicised photo of the Treasury briefing document) cost 490,000 public sector jobs by 2014/15.

Savings
Orderly
Budgets
Equitable
Rebalancing

Some leaders of the private sector claim that it can absorb the unemployed fleeing from the public sector. A tad optimistic to my view, given that many in the public sector have zero experience of working in the private sector and that there is considerable "prejudice" within the private sector to those from the public sector.

As ever there will be a chasm of reality between economic "plans" and political reality.

The next decade may well be "sober", but will the patient survive the withdrawal symptoms?

Lah Lah Land

The Chartered Institute of Personnel and Development have conducted a survey of a sample of people who work in the public sector.

Forty nine percent of those sampled agreed with the statement "workers have to do what's necessary to protect their jobs and if that disrupts public services, that's the price of living in a democratic society".

Quite how going on strike will actually protect their jobs and current terms/conditions of employment eludes me. Like it or not, the country cannot afford the current level of debt bequeathed to it by the previous administration.

The Bank of England's Credibility

Andrew Sentance, a member of the MPC of the Bank of England, has warned that the Bank risks losing its credibility over inflation worries.

Sentance has long argued for the 0.5% interest rates to be raised, in order the slay that inflationary monster that he perceives to be lurking in the economy.

Sentance is wrong:

1 The credibility of the Bank is not an important factor at this point in the economic cycle (ie a slow return to growth after a debilitating period of recession), restoring growth is the important issue.

2 The economy is not yet in a position to withstand an increase in rates.

Work Longer, Contribute More

Lord Hutton has published an initial recommendation from his ongoing review of final salary public sector pension schemes.

Simply put, public sector employees should work longer and contribute more to their pension schemes (thus taking the burden from the private sector). Lord Hutton wants the final schemes to be changed to a career average basis.

The unions are already "reacting" in a totally expected manner to this recommendation; ie they don't like it.

Lord Hutton's final report will be published before the 2011 Budget.

Currency Wars

Dominique Strauss-Kahn, the head of the IMF, has warned that cuts in interest rates and quantitative easing (as recently announced by the central bank of Japan) could upset the global economy recovery and trigger "currency wars".

The Japanese central bank is reverting to a "zero interest rate" policy (which it abandoned in 2006).

Given that both the US and UK have cut rates and instituted quantitative easing, Mr Strauss-Kahn's comments seem a little "behind the curve".

Prison Work Proposal

Ken Clarke's proposal to make all prisoners work a 40 hour week, and for them to be paid a minimum wage, is a good idea:

- It will alleviate the soul crushing boredom of prison, a recipe for trouble in any institution.

- It will give the prisoners some self respect.

- It will give the prisoners experience of real work, something many of them may never have had.

The downside of this proposal is that for the honest law abiding long term unemployed, it may come across as a bit of a "slap in the face".

Child Benefit Shake Up

I see that George Osborne used the BBC Breakfast show to announce to a bleary eyed "Monday morningish" nation that child benefit for higher rate taxpayers would be axed "by" 2013.

Someone should remind Osborne that announcements such as this should be made to Parliament first. The Tories were always quick to criticise Labour when they indulged in this form of "government via media announcement", sadly they seem to be emulating their foe.

Credit to the interviewer, who was clearly taken by surprise, for trying to press some details out of Osborne. She quite rightly made him admit that "higher rate" includes not just those on 50%, but also those on 40%.

She then asked, in relation to "by 2013", whether this would be phased in over a period of time up to 2013. Osborne gave a rambling, evasive response which did not answer the question.

Quite clearly he intends to start cutting child benefit back (for higher rate taxpayers) now, in phases, rather than leaving it all until 2013.

The "Luck" of The Irish

Commiserations to the people and government of Irleand who, having come to the rescue of their beleaguered banks during the global credit crisis, now have to do it again.

The Irish government will now take control of Allied Irish Banks Plc, and inject extra cash into the previously nationalised Anglo Irish Bank Corp. The cost of the rescue is estimated to be around Euro50BN.

The Irish budget deficit will be approximately 32% of GDP. In order to try to avoid following Greece, and having to ask for an EU/IMF bailout, the government will be making further cuts in its budget.

As to whether this is politically acceptable remains to be seen.

Lloyds Tops List of Shame

I see that, not content with topping the FOS's list of shame, Lloyds has also topped the list of shame published by the Financial Services Authority (FSA).

The FSA report that Lloyds received more than 280,000 complaints in the first six months of 2010.

Barclays received 259,266, and Santander 244,978.

Well done lads!

Lloyds are unapologetic, they claim that its their size that generates the volume of complaints and note that the complaints came from less than 1% of their 30 million customers.

So that's alright then!

The British Bankers' Association (BBA) also tried to weasel out of the criticism, the BBC quote them:

"The banking industry welcomes greater transparency but is concerned that the separate publication of complaints data by the Ombudsman and the regulator could lead to data overload. What should be a useful overall summary could become a complex and confusing exercise."

Pathetic!

Ohh Lah! Lah!

France's ex-justice minister Rachida Dati MEP mixed up the words "fellatio" and "inflation" - which sound similar in French - during a TV interview.

Wolseley To Leave The UK

Wolseley the world's largest plumbing, heating and building materials supplier, will leave the UK and relocate to Switzerland, where it regards the tax regime to be less "uncertain".

Corporate tax rates in Switzerland are regarded as being more "competitive" than the UK.

Wolseley expects its underlying tax rate to come down from 34% to 28%.

Breaking Up Is Hard To Do

The Independent Commission on Banking (ICB), which was set up three months ago to assess the power of Britain's banks and how to boost competition, has issued its first report.

In the report the ICB sates that it will look at separating banks' retail and investment divisions, will look at imposing limits on proprietary trading and investing and look at reforming market infrastructure.

The FT reports that the British Bankers Association (BBA) welcomed the report, always a sure sign of discomfort.

Despite this "experts" predict that enforced break ups would be unlikely, as "niche" banks are viewed as being less resilient during times of crisis.

The ICB has until the end of 2011 to issue its final report.

The bottom line is that those who expect a major shake up of the banking industry are going to have to wait sometime, and may well be disappointed with the final outcome.

Mortgage Lending Falls

The British Bankers' Association (BBA) report that new mortgage approvals fell in August to 31,767 during the month, a 16 month low.

Gross mortgage lending fell to £8.1BN, 7.6% lower than August 2009.

The BBA are of the view that lower demand for mortgages is the reason for the decline. That in itself may be the case. However, they may care to consider why demand is falling.

Could it be that the terms/conditions that the banks are attaching to mortgage offers are simply not attractive/viable for potential borrowers?

Murky

Despite Vince Cable's speech to the Liberal Democrat conference today, in which he refers to "murky corporate practices" and notes that "capitalism kills competition"; the capitalist world to which he refers is the world that he, and the rest of us, live in and rely upon for our survival.

To this end, ie the survival of our capitalist economy, the Bank of England are considering a further economic stimulus.

The recent Monetary Policy Committee (MPC) minutes show that there is a gradual movement within the committee towards doing more to support the economy. Given that interest rates are at 0.5%, the main alternative open to the Bank is that of further quantitative easing.

The US Federal Reserve has already signaled that it may restart purchases of government debt, ie quantitative easing. Given that the US and UK central banks are coordinating their monetary policy, it is highly likely the the Bank of England will follow suit.

Clegg Plays To The Gallery

The coalition Deputy PM, Nick Clegg, has used his party's conference as an opportunity on BBC radio to play to the gallery and indulge in "bashing" banks' bonus schemes.

The Independent reports that he warned the banks that the government would not stand idly by if they paid senior staff "gratuitously offensive" bonuses. He has raised the prospect of a new levy on banks, insisting that the government reserved the right to take "serious action" if banks went ahead with "ludicrous, sky-high bonuses".

All very well as a soundbite.

However, in reality were the government to continue down the path of "punishing" the banks and trying to regulate bonuses schemes, the banks will simply "up sticks" and move their offices and staff to other less "hostile" regions. The resultant fall in tax revenues will far outstrip any revenues that a bank levy might hope to raise.

AAA Rating Stays

Not everything about the UK economy is doom and gloom, that at least is the verdict of Moody's who have kept Britain's credit rating at AAA.

Moody's is of the view that the British economy is strong enough to withstand George Osborne's austerity package.

Had Moody's downgraded their rating, the cost of servicing the UK's debt would have risen.

However, Moody's did issue a cautionary "sting in the tail" of their rating. They noted, quite correctly, that the UK has used up its protective "cushion"; ie the "rainy day" money has more or less gone.

This means that if the UK suffers another economic shock, it may not be in a position to withstand it.

Time will tell as to whether Moody's are right, and as to whether the government can manage the economy and the political backlash from the austerity measures.

Unemployment Rises

The Office for National Statistics (ONS) has reported that the number of people claiming unemployment benefit has risen by 2,300 in August, the first rise since January.

Whilst the rise may seem "small" (unless you are of course one of the 2,300), it goes against the expectations of the "experts" who had predicted a fall of 3,000.

On the face of it, this of course is not good news. However, it kicks in the teeth the nonsense being spouted by some sections of the media recently that within 2 years Britain will be luxuriating in a boom that will drive interest rates up to 8%.

Well Done Lloyds!

Lloyds Banking Group, which is partly owned by the taxpayer, has achieved a new accolade by being on the receiving end of over 25% of new complaints received by the Financial Ombudsman Service (FOS).

The FT reports that in the first 6 months of 2010, the FOS received 84,000 new complaints, of which over 22,000 related to Lloyds and its subsidiaries.

Well done lads!

Bank Capital Base Deal Reached

A deal has been reached in Basel this weekend, between 27 "heads of supervision" of the world's banks, as to the capital base requirements of banks.

It has been decided that, in order to reduce the risks of future banking failures, banks will be required to more than double their reserves (common equity and retained earnings) from a minimum of 2% to 4.5%.

Additionally, banks will be required to build up an extra buffer that will take their total capital reserves to 7%.

This of course means that banks will have less money to lend, hence those trying to borrow money will find it harder to obtain a loan at an affordable rate.

Royal Mail To Be Sold/Privatised

Unsurprisingly the government, in the form of Vince Cable no less, has announced that the Royal Mail will be sold/privatised.

Also unsurprisingly, the unions representing post office workers have reacted with "irritation" to the announcement.

I recommend that you post your Christmas cards now, if you want them to arrive in time for the festive season!

Interest Rates Remain At 0.5%

The Bank of England's Monetary Policy Committee (MPC) has left interest rates unchanged at 0.5%, they have been at this level since March 2009.

Ironically, as those with debts or who are trying to borrow money may have noticed the cost of borrowing has not remained static during this period but in fact risen.

Funny that, isn't it?

Still, the banks have to make money somehow!

Additionally, the MPC has left its £200BN quantitative easing programme unchanged.

So much for the media hysterics who have been talking up interest rates of 8% within 2 years.

Banks and Casinos

The Business Secretary, Vince Cable, is not very happy with the appointment of Bob Diamond currently head of Barclays Capital as CEO of the Barclays next year when the current CEO (John Varley) steps down.

Mr Cable was quoted on the BBC as saying:

"We are worried about this combination of the casinos and the traditional banking."

Having made the criticism, he then tried to suggest it was not his business to comment on the appointment:

"It isn't government's job to appoint the head of a private bank."

Irrespective of the government's feelings about the appointment, the markets have not exactly jumped for joy (possibly detecting that the bank's future relationship with the government will be "stressful"), as the share price fell by around 3% today on top of yesterday's 2.7% fall.

However, the proof of the pudding will be in the eating. Mr Diamond is no fool, and will doubtless do his best to prove his detractors wrong.

Time will tell.

Trade Minister Role Finally Confirmed

The government has finally filled the role of Trade Minister (unpaid) that has lain vacant for for months since the formation of the new government.

The role will be taken by the current chairman of HSBC, Stephen Green, who will step down from HSBC before the end of the year in order to take up the position.

Several other leading business figures had turned down the role; aside from working for free, Mr Green will have to put his assets into a "blind trust" during the period of tenure.

Mr Green will report to the Business Secretary Vince Cable and to the Foreign Secretary William Hague.

Pillocks!

Millions of commuters face travel chaos from Monday evening as 10,000 London Underground staff stage a 24-hour strike causing widespread disruption to Tube services.

Source The Telegraph

Growth

As ever, figures provided by the ONS have had to be revised.

This time the figures for growth in Q2 2010 have been revised upwards, from 1.1% to 1.2%. This is the fastest quarterly growth in the UK since 1999. However, the economy had contracted by more than 6% before this.

A large part of this growth is made up of inventory building by companies, therefore it is presumed not necessarily to be sustainable.

Ed Balls, a Labour leadership candidate, used the revised figures to warn of an economic hurricane hitting the UK if the government cuts public expenditure.

The government, on the other hand, notes that the improved growth figures give them a sound base from which to cut excess public expenditure.

Doubtless both are right, but both will also be proven wrong.

Such is the nature of economics and politics!

14% Mortgage Rates? The Silly Season Continues

Further to my recent article about 8% interest rates being talked up by a story drought riven media, it seems that further "silliness" abounds; there is now talk about 14% mortgage rates within two years.

Darren Cook, of Moneyfacts, is quoted in The Telegraph (which should know better than to spread nonsense like this):

"It is unlikely that the banks will have fully repaired their balance sheets before 2012 and even more likely that some of the banks will have not repaid their debt to the taxpayer. If this warning of a Bank Rate at 8 per cent does materialize and banks retain large margins on lending, it will not be a surprise to see mortgage rates go up to 12 or 14 per cent.

I would hate to think what overdraft, credit cards and personal loan interest rates will look like at the same time."

Interest rates will not hit 8% in two years...PERIOD!

The economy is fucked, and will remain weak for some considerable period of time.

This is a scare story being whipped up by the media, who have nothing else to write about.

8% Interest Rates?

There has been some "fevered" speculation in the media, based on a forecast from Andrew Lilico chief economist at the Policy Exchange think tank, that UK interest rates may hit 8% within the next two years.

Evidently the summer "silly season" for reporting is still with us.

Aside from the fact that economic predictions are as about as reliable as the UK weather forecasts, I personally do not see this scenario happening.

The theory is that the UK will enter a period of boom, that will in fact run out of control, thus necessitating the Bank of England to aggressively raise rates in order to kill off the inflation beast.

Given the fact that housing market is currently running out of steam, and that the government is going to cut public spending (and by definition public sector jobs) extremely aggressively, an out of control boom in just two years is fantasy.

Those savers who have been dreaming of such a fantasy coming true should also bear in mind that the banks most certainly will not be paying 8% rates to savers in two years, even if the fantasy of 8% interest rates comes true.

For why?

Banks never pass on full rate changes to savers, as they need to take their cut on the margin between the rates they use for lending and saving.

As noted, this is a fantasy story whipped up by the media during the traditional "real news drought" of the "silly season".

Greek Economy Continues To Deteriorate

As most people in Europe enjoy their holidays, the Greek economy continues to plunge new depths.

A report by HSBC notes that Greek banks had lost 8% of their entire deposit base in the five months to May.

Savings are being used to get by, and the Telegraph notes that the Athens Chamber of Commerce has warned that its members are in "dire straits", with a majority facing a liquidity threat.

The European Central Bank (ECB) has now loaned Greece a record Euro96BN as at July. The question on everyone's lips is how much more will it be able to lend, and what happens next?

Once people return from holiday, and the financial markets face reality, there will be a reckoning.

The Greek economy is now in a tailspin, once the markets "post holiday" wake up to this fact the rest of Europe (those in the Euro) will feel Greece's pain.

Mortgage Drought Continues

The Council of Mortgage Lenders (CML) report that the total amount of money lent in new mortgages stood at £13.6BN in July.

This represents a fall of 3% when compared with July 2009.

The banks, despite returning to profit, have tightened their mortgage lending criteria.

Beware Food Price Inflation

The Office for National Statistics (ONS) have released figures that show that food prices have risen by 3.4% over the last year.

This has prompted Mervyn King, the Governor of The Bank of England, to express some surprise over the size of the rise.

He should not read too much into the numbers, especially as they are unexpectedly high, ONS figures are notoriously unreliable and we may well see contrary ones next month.

China Rising

China has now overtaken Japan as the world's second largest economy, as per data relating to Q2 2010.

Japan's GDP for that period was $1.288 trillion, whilst China's was $1.337 trillion.

According to Goldman Sachs, China will overtake the USA as the world's largest economy by 2027.

Germany Motors Ahead

The German economy surged by a record 2.2% in Q2 of this year. That is the fastest rate of growth since unification.

However, it should be remembered that this is growth from a very poor 2009. In 2009 the economy shrank by 4.9%, the worst performance since World War II.

Online Fraud

Despite the repeated assurances by banks that their online banking systems are secure, it would seem that reality is proving these "assurances" to be less than sound.

The Press Association reports:

"British online banking customers have fallen victim to a sophisticated attack by cyber criminals who have stolen hundreds of pounds from their accounts, an internet security company has warned."

You have been warned!

Trade Deficit Improves

Unexpectedly good news relating to the trade deficit has been reported by the Office for National Statistics (ONS).

Britain's trade deficit narrowed in June to £7.4BN, as a result of exports rising at four times the pace of imports.

However, the country still has a trade deficit and the figures are somewhat out of date (ie they are June's). Additionally, the ONS is not renowned for its accuracy and it is likely the the figures will be revised at some point in the future.

As I have noted before, using out of date inaccurate figures to run the economy (or even to try to make people "feel good") is questionable to say the least.

Credit Task Froce

It has been announced that the CEOs of the UK's leading banks will lead a new taskforce, to help boost the flow of credit to small firms.

The ever "popular" British Bankers' Association's has set up a new group to assess credit demand from firms, and put forward recommendations to boost funding in the banking sector and aid recovery.

The media omnipresent BBA chief executive, Angela Knight, claims that the taskforce (to be chaired by BBA and HSBC chairman Stephen Green) would look to address "pinch points" in the system as recovery and the demand for working capital gradually takes hold.

The taskforce will report its initial findings to Chancellor George Osborne, in early October.

It strikes me that this is likely to be as effective as putting foxes in charge of the hen house, and is nothing more than a "sop" (in the manner of Edward VIII's "something must be done") to try to convey the image that the banks are "concerned".

FSA Investigate Coutts

In its dying days, the Financial Services Authority (FSA) has decided to try to show some teeth.

RBS has announced that the FSA has launched an investigation into Coutts (the Queen's bank which is also, ironically, part of RBS the "people's bank"), over the sale of AIG bonds in the years before AIG's collapse.

RBS issued the following statement:

"In July 2010, the FSA notified RBS Group that it was commencing an investigation into the sale by Coutts & Co of the ALICO (American Life Insurance Company) Premier Access Bond Enhanced Variable Rate Fund to customers between 2001 and 2008 as well as its subsequent review of those sales."

The FSA investigation may be of interest to Keith Mills, who has mounted a high profile publicity campaign against Coutts, including placing billboard advertisements criticising the bank close to its headquarters. He also has launched court proceedings against the bank.

Beware The Hype of The Double Dipper

There are fears, being stoked by the media, that Britain may be heading for a double dip recession.

The service sector, that accounts for the bulk of Britain's economic output, showed that its growth fell to its slowest since the end of the recession last year.

The blame is being laid at the feet of the government, for cancelling public sector contracts.

All very well, but the size of the public sector debt and the fact that certain service sector companies were milking the government for every penny that they could get over many years is reason enough for the government to call a halt to the free for all.

The reality is that the UK has relied for far too long on the public sector to prop up the economy.

Economies cannot survive forever by merely passing one bundle of money from one part of the economy to the other, money must be earned from productive industries and services that sell outside the economy.

Interest Rates May Rise

Despite Mervyn King, Governor of The Bank of England, stating last week that interest rates are likely to stay low for quite sometime, two former colleagues have contradicted him.

Sir John Gieve, an ex-deputy Governor, and Charles Goodhart, a previous member of the Monetary Policy Committee addressed Fathom Financial Consulting's Monetary Policy Forum.

The Telegraph quotes Sir John as saying:

"I am expecting a recovery – when that is strongly established I'd expect rates to start rising faster than the market currently expects. I wouldn't be at all surprised to see interest rates at 2.5% a year from now."

Mr Goodhart was worried about the effects of food price inflation on the overall economy.

"We're going to have subdued growth for five or six quarters but a temporary increase in inflation. What do you do when inflation is still above the upper limit when the economy is looking extremely soggy?"

Were the MPC et al always 100% accurate with their forecasts, then we would not be in the mess that we are in now. Therefore, these predictions should be taken with a large pinch of salt.

The Good, The Bad...

In a rather amusing display of "irony" the results for the two offshoots of Northern Rock (the once proud bank that, owing to its greed and stupidity, self imploded at the start of the financial crisis) have confounded expectations and their nicknames.

Northern Rock (Asset Management), the "bad bank", which houses the mortgage portfolio posted a first-half pre tax profit of £349.7M.

Meanwhile Northern Rock, the "good bank", which houses its savings accounts and undertakes new mortgage lending posted a £142.6M pre-tax loss.

How ironic!

Bank Bashing

Citywire reports that the new chairman of the Treasury Select Committee, Andrew Tyrie, has told the Times that bank-bashing by ministers is 'unconstructive'.

What planet does this man live on?

Banks have failed the British people and the British economy. They continue to offer lousy service, and treat their customers with contempt.

Until they improve their ways, "bank bashing" is exactly what is required.

Goldman Sachs Bans Swearing

Goldman Sachs, known by some as the "giant blood sucking squid", has issued a rather bizarre directive to employees banning them from swearing in internal emails.

Employees emails will be censored, and unacceptable words removed. Employees are also banned from using swear words with asterisks and shorthand for expletives.

Is this due to a sudden twinge of morality?

Errrmm...no.

Goldman Sachs have been highly embarrassed by the release of emails, during investigations into the bank's conduct, that contained a fair number of swear words.

Given human nature, and particularly the aggressive nature of those who work for Goldman Sachs, I doubt that this ruling will have much effect. Their staff will find ways around it.

I suspect that the next release of emails from Goldmans (if there is one) will doubtless emulate the Nixon tape transcripts "expletive deleted", which is just as bad.

I would suggest that they devote their energies, and morality, to more pressing matters.

Metro Bank Opens Its Doors

Britain's financial services industry has, without a doubt, a well deserved lousy reputation for customer care, honesty, service and providing reliable decent products.

Therefore it is to be welcomed that Metro Bank, the first new high street bank in 100 years, has opened its doors today.

Metro Bank claims that it will revolutionise British banking by offering retail opening hours, unparalleled service (eg toilets in branches) and a simple range of products that will be suitable for everyone.

The first branch has been opened in Holborn. It plans to have 200 branches within 10 years.

The bank will keep its branches open from 8am to 8pm Monday to Friday, as well as from 8am to 6pm on Saturday and from 11am to 4pm on Sunday. The bank will be closed on four days of the year; Christmas Day, New Year's Day, Good Friday and Easter Sunday.

However, as with all matters financial, it pays to look at the fine print.

Sadly the products offered are not yet competitive enough to appear on the best-buy tables, many in fact pay below the industry average.

The question is will this bank survive ten years to grow and prosper, or is it just a short term gimmick?

Interest Rates To Stay Low

Mervyn King, Governor of The Bank of England, has told the Treasury Select Committee that given that risks posed to the economic recovery there will be no rush to raise interest rates.

King also gave the Chancellor, George Osborne, a mild vote of support noting that the recent emergency budget had not made a "significant difference" to the chances of Britain suffering a double-dip recession.

Hardly a ringing endorsement!

£1M Payoff

Tony Hayward, the outgoing CEO of BP, has negotiated a £1M payoff and a £10M pension pot.

As a result of the oil spill BP reported in its Q2 results a provision for $32.2BN and a loss of $17BN, the largest loss in British corporate history.

Quite why BP's all but invisible chairman, Carl-Henric Svanberg, who described the residents of the Gulf Coast as "small people" remains in situ is a mystery.

Stress Test

Unsurprisingly most of the banks subjected to the rather modest "stress test" imposed by the EU Committee of European Banking Supervisors passed.

Only 7 of the 91 tested actually failed.

All in all a damp squib, that has achieved absolutely nothing.

A Straw In The Wind

Britain's truly lousy banking system (appalling service, arrogant treatment of customers, extortionate charges etc) has been ridiculed and criticised for years, without any apparent effect on its performance or attitude.

The only way that the hapless and long suffering customers will ever see an improvement, is for a new "customer focused" competitor to enter the market and shake things up.

The BBC note that straws in the wind, in the form of Project New Bank and others, may be about to start the ball rolling:

"Project New Bank, is reported to be preparing to bid for 600 branches which Lloyds is being forced to sell off as the price for accepting tax-payer aid during the 2008 banking crisis.

The US-based JC Flowers is in talks to take over the building society Kent Reliance in a bid to acquire a foothold into the UK market.

And on 29 July, a new venture called Metro Bank is due to open its first branch in Holborn, central London, before rolling out across the capital and, backers hope, the rest of the UK.

In a bid to take on the established players by focusing on consumers, branches of Metro Bank will be open from 0800 until 2000 and at weekends. Cashiers will not be shielded from the public by security screens, and managers hope that free services like coin-counting machines, toilets and biscuits for the dogs of passers-by will attract new customers through their doors.

We shall see.

Tomorrow Is Stress Test Day

The EU have asked 91 banks based in the EU to show how much additional capital they would need in the event that economic conditions worsen over the next two years, or in the event of a "sovereign shock".

The results will be published tomorrow.

Despite the fact that some countries are hinting that their banks have passed, analysts have cast doubt on the rigour of the tests.

Farking Crazy

I see that the government, despite claiming that it wishes to simplify taxes, is planning to increase stamp duty on homes deemed to be energy inefficient.

I understand that at one stage the government had considered banning the sale of energy inefficient homes.

The new tax, which will most assuredly negatively impact the housing market, will theoretically come into force in 2012.

They must be farking mad!

Moody's Puts The Boot In

Moody's, the credit rating agency, has put the boot into the Eurozone by downgrading Ireland's credit rating to Aa2.

The agency notes the country's weak growth prospects and shattered banking system as the rationale for the downgrade.

This comes at a "difficult" time for the Eurozone, as this weekend the International Monetary Fund (IMF) and the European Union retracted a Euro 5BN tranche of a 20BN line of credit for Hungary, as talks between the lenders and Hungary broke down over the country's budget plans.

Stress tests on 91 European banks will be published this Friday.

The Euro has a "bumpy" week lying ahead of it!

Windfall For RBS

RBS, the "people's bank", will collect a nice little windfall as result of the decision by Goldman Sachs to take a $550M hit to settle civil fraud charges over how it marketed the sub prime mortgage product.

RBS is due to pick up $100M from this, because marketing materials for the Abacus 2007-ACI transaction allegedly contained incomplete information. RBS lost $841M from the deal with Goldman.

However, rumours abound that RBS may sue Goldman for the remaining loss.

Position Vacant

Those of you with a penchant for foreign travel and a desire to promote British business abroad may care to apply for the position of Trade Minister, which has been vacant since the formation of the new government.

It seems that David Cameron has offered the role to a number of high profile figures. However, they have all turned him down flat.

Still interested?

Well, before you rush to post your CV's to the PM, you might like to know that the post is unremunerated (the government has already hit its limit of salaried ministers).

Aside from working for free, you will also have to put your assets into a "blind trust" during your period of tenure; in order to avoid issues wrt conflict of interest.

Still interested?

No?

I thought not!

The Orifice Of Budget Responsibility

Sir Alan Budd, who is leaving as Chairman of the Office for Budget Responsibility after a mere 3 months in the role, appeared before the Treasury Select Committee (TSC) yesterday.

The TSC was keen to probe beneath the public perception that the OBR is not as "independent" as the government, and indeed OBR, would have us believe.

Sir Alan claimed that he had not come under political pressure recently, even though he released public sector jobs data early. He claimed that this was to correct a misinterpretation of figures leaked to the media, the fact that this was of benefit to David Cameron who used the data with glee was (of course) irrelevant.

Sir Alan, who has yet has no successor to replace him, has issued advice to the successor as to the future of the OBR eg:

- the need to relocate it outside the Treasury,
- allow Parliament a role in appointments to the OBR's key committee
- employ both external and Treasury staff to produce its forecasts and analysis.

He neglected to add that his future successor needs to be put on a contract longer than 3 months, allegedly the length of Sir Alan's contract (one wonders why, if that is truly the case, there is no successor lined up yet?) if he/she is to be effective.

As to whether the government and Treasury actually want a truly independent OBR, remains to be seen. Doubtless their choice of Sir Alan's successor may shed some light on that.

We await the announcement with interest!

FSA Takes Aim At Reckless Mortgages

As the housing market looks set to fall again, the soon to be emasculated Financial Service Authority (FSA) is using its last moments on earth to take a pot shot at "reckless" mortgages.

The FSA has put forward proposals for new rules wrt mortgages, and is "adamant" that the new rules will include a ban on lending without proof of income.

It wants to ban self-certification mortgages.

The FSA wants to "go back to basics" of responsible lending.

The FSA claims that it wants to prevent people falling into debt as a result of overburdening their finances when buying property.

All very well, maybe, but was it not during the "watch" of the FSA that self certification mortgages took off?

Why this sudden change of heart?

Have the banks not already significantly tightened up their lending rules, as buisinesses and propsective house buyers can attest to?

Is this not really a case of the FSA trying to make themselves look useful in their dying days?

Recession Worse Than Thought

The ever "reliable" Office of National Statistics (ONS) has issued revised data for the UK economy for Q1 2010.

The revised data shows a decline in output of 6.4%, compared with the original data that showed a 6.2% decline in output.

However, the ONS has left its earlier estimate for Q1 growth of 0.3% unchanged.

The bad news is that the "growth" was on the back of a revised increased in government consumption of 1.5%, rather than the original increase estimate of 0.5%.

Quite what use these statistics, and indeed the ONS, are to anyone given that they are subject to regular revision and that they are after the event eludes me.

Level Playing Field

The government has announced that it will switch the index linking of private sector final salary pension schemes from the Retail Price Index (RPI) to the consumer price index (CPI).

This is in line with the similar measure announced in last month's emergency Budget relating to public sector pensions.

CPI excludes house prices and mortgage payments, is consistently lower than RPI. It is estimated that private pension incomes will fall between 10%-25% in retirement.

The CBI is pressing for legislation to allow those schemes who are specifically required to use RPI to be able to use CPI.

Bankers' Bonuses

The European Parliament has approved a plan to place limits on bankers' bonuses from as from next year, the rule will be applicable to all 27 EU members.

Bankers will receive no more than 30% of their bonus immediately and in cash, the limit falls to 20% for larger bonuses.

The remaining payments will be deferred, and linked to long-term performance.

There will be no cap on what bankers can be paid.

This will have precious little effect on bankers:

1 The rules will not be enforced until next year. Therefore this year bankers will ensure that bonus payments are front end loaded, to avoid the limit next year.

2 Pay levels will be increased to avoid the limits.

3 Banks will circumvent the rules by paying bonuses offshore.

Public Sector Pensions

Trouble is brewing in the public sector, the Institute of Directors (IOD) and the Institute of Economic Affairs (IEA) have (via a joint commission) called for a radical overhaul of public sector pensions in addition to the pay freeze that is to be implemented by the government for all but the lower paid.

As a starting point they have called for a 2% increase in contributions from public sector employees.

The commission also wants other major changes, as they argue that the true value of the main unfunded public service pension schemes is over 40%, yet the combined value of employer and employee contributions is approximately 20%.

Needless to say the unions representing the public sector do not buy into this argument. They point out that the pay levels of the majority of the public sector is so low, that the pension is the "reward" for accepting low levels of pay.

All very well, maybe, if the country can actually afford the cost.

Cuts

The Chancellor, George Osborne, is using zero based budgeting to reset the country's battered finances.

He has ordered a purge of capital spending, and review of every single capital expenditure project, to run alongside the annual expenditure cuts demanded of every department of between 25% and 40%.

It is likely that the 40% target is being used as an exercise to "scare the chickens" into grudgingly rolling over and accepting 25% cuts.

Nervous Markets

The markets displayed nerves today, ie indexes fell, as a result of disappointing Chinese financial data that showed a slowing of growth, and a warning that Moodys may downgrade Spain's debt rating in the coming months.

Meanwhile there are riots on the streets of Athens, as people protest about government plans to impose austerity measures.

My advice to the protesters is to focus your anger (peacefully I might add) not against your government's austerity measures, but against your government's decision to remain in the Euro; which is preventing the government from using monetary policy to ease the debt crisis.

Prat

"It was 7.45am on June 30 2009 when Steve Perkins a senior, longstanding broker for PVM Oil Futures was contacted by an admin clerk querying why he'd bought 7m barrels of crude in the middle of the night.

The 34-year old broker at first claimed he had spent the night trading alongside a client. But the story began to fall apart when he refused to put the customer in touch with his desk for official approval of the trades.

By 10am it emerged that Mr Perkins had single-handedly moved the global price of oil to an eight-month high during a "drunken blackout".....

The FSA will consider re-approving him as a broker after the ban, if he has recovered from his alcohol problem, but noted "Mr Perkins poses an extreme risk to the market when drunk"."

Source The Telegraph.

It is hardly surprising that the City and the financial services industry are held in such contempt, and despised, by the rest of the country.

Banks on Life Support

The Bank for International Settlements (BIS) has warned that European banks are still "on life support", and that they need to "come clean" about their bad loans.

The Telegraph quotes the BIS annual report:

"Losses on European bank balance sheets are expected to mount over the next few years. Some banks are rolling over existing loans rather than inducing foreclosures, thus delaying loss recognition."

Rather bizarrely BIS then state that low interest rates and fiscal stimuli by governments is exacerbating matters, causing "moral hazard".

I would venture to suggest that were the rates and stimuli packages reversed, the slump caused would be far more detrimental to the economic health of Europe than the "moral hazard" issue.

I would also note that the low rates and fiscal stimuli do not in themselves cause banks to behave "immorally". Banks behave either "morally" or "immorally", depending on their culture and internal controls; to blame others for the failings of banks is shortsighted.

BIS do, correctly point out that Europe and the US are unlikely to be able afford to bail out the banks again, and that a Greek sovereign debt crisis is more than likely.

In view of this, to suggest that fiscal and monetary conditions should be tightened at the very time that the US and Europe are struggling to drag themselves out of recession is foolhardy in the extreme.

G20 Flexibility

The low key G20 meeting in Canada produced a communique that took negotiators 45 hours to draft.

The final communique endorsed a flexible timeline for each country to build up higher levels of banking capital and liquidity.

The result may well be favourable to some countries. However, as the banks are now global players they will simply use this flexibility in their own interests and simply pick and choose their best options and best countries in which to operate from.

Bank of England Expresses Little Faith in Europe

The Bank of England has issued its regular stability report, in which it warns that the European debt crisis is a "key risk" to the UK's banking sector.

It warns that British banks' exposure to other European lenders is making them vulnerable and, as such, British banks should build up their cash reserves.

In other words, the Bank of England believes that there is going to be at least one major default by either a major European bank or sovereign debt default (most likely Greece).

Baton down the hatches, it's going to be a long hot summer!

Pension Age Rises

As part of the plans to put the country's finances back in order, the government have announced that the state pension age for men will rise to 66 from 2016 (ten years earlier than originally planned).

Additionally, the default retirement age (when companies can force employees to retire at age 65) will also be scrapped.

These plans kill two birds with one stone:

1 Pension payments are deferred/lessened.

2 The longer people work, the earlier they die.

Potty!

Minutes of the last Bank of England MPC meeting show that one member of the committee, Andrew Sentance, voted to raise interest rates to 0.75% from 0.5%.

That most assuredly would kill the very modest recovery that we are beginning to experience.

Happy Emergency Budget Day!

Happy Emergency Budget Day everyone.

George Osborne kicks off at 12:30 today.

This will be the last time that Gladstone's budget box will be used, it will be retired after today's appearance.

China Gives Markets a Boost

China's announcement that it is to end its two year peg of the Yuan against the Dollar, and effectively to allow a managed rise in the value of the Yuan, has given world stock markets a much needed boost.

Any rise in the Yuan will be gradual, as the Chinese will manage its rise carefully. However, markets have taken the announcement as a sign that China is confident about its economy.

Estonia To Join Euro

Estonia has been granted permission to join the Euro in January 2011.

The granting of entry is to be seen a political decision, rather than an economic one, as the ECB has warned that Estonia risks higher inflation.

The question is will the Euro still be a feasible currency in 2011?

The Death Knell Of The Tripartite System

As predicted on this site, George Osborne has sounded the death knell of the ineffectual and inept FSA (ironically, despite its lousy performance, FSA staff were paid nearly £22M in bonuses last year).

Osborne has stated that it will cease to exist in its current form, and a "Consumer Protection and Markets Authority" will be created.

Hector Sants, the CEO of the FSA, will stay to become the new deputy governor and chief executive of the new regulator. That announcement is to be treated with a degree of scepticism. The new body will be considerably less powerful than the FSA, and it is likely that as soon as the transition has occurred Sants will depart (as this in effect a demotion).

The widely derided tripartite system, set up by Brown, is to be terminated and the Bank of the England given wide ranging powers to prevent another financial crisis; ie the Bank is now in charge of regulation.

The Bank will become one of the most powerful regulatory bodies in the world, with responsibility for both monetary policy and financial regulation.

EU Denies Spanish Bailout

As Spain continues to "tank", a Spanish newspaper "El Economista" has reported today that a Euro 250M had been discussed at a special IMF board directors meeting.

The report drew a response from Amadeu Altafaj, a spokesman for the EU executive, who is quoted in the Telegraph as saying that the report was "very bizarre"

"I can firmly deny it."

Be that as it may, Francisco Gonzalez, chairman of BBVA, admitted this week that "the majority of the Spanish companies and financial groups are shut out of the international capital markets".

Without the means to devalue, and by being forced to accept excessive German fiscal restraints, the weaker countries of the Eurozone have now reached the stage where politically further austerity measures are impossible (their populations will not accept them).

Therefore something has to "give".

They will either exit the Euro voluntarily, or be forced from it by bankruptcy and domestic turmoil.

Sir Fred's Private Meeting

Sir Fred "The Shred" Goodwin, the disgraced ex head of RBS, has attempted to avoid publicity by requesting that a meeting called for today by the FSA be held in the office of his lawyers rather than at the FSA's own offices.

Clearly, as with RBS's financial strategy during Goodwin's tenure, that idea has come rather unstuck as the media have picked up the story.

The adverse publicity about the meeting has now called into question the actual timing, lest there be any "naughty" journalists waiting outside the offices keen to ask Goodwin a question.

Ad to whether this meeting actually yields anything tangible (aside from a slap on the wrist fine for Goodwin) remains to be seen:

1 RBS is now effectively owned by the taxpayer, yet the banking sector itself has no reformed and continues to pay itself very generously and trade in high risk derivatives despite bringing this country close to financial collapse.

2 The FSA is likely to be shut down by the government.

3 Sir Fred appears to be enjoying the fruits of his labours. He recently met with the Duke of York (one assume that Fergie didn't arrange that), and has bought £3.5M "fortress" in Edinburgh.

Let us trust that the banking sector is reformed in time, before we are hit with the next crisis which will most assuredly bankrupt this nation.

Betting on Failure

The Bank of England has warned that investors are taking a "punt" on there being a 20% fall in the value of the FTSE 100, arising from the possible collapse of a sovereign debtor, such as Greece and Portugal.

The Bank for International Settlements (BIS), coincidentally, reports that Britain has major exposure to the Irish and Spanish banking systems (also feared to be at risk).

Having reported the problem, it is likely that the Bank's warnings will be a catalyst for more bets to be taken out on such a fall.

The "Can't Do" Nation - The Empire Strikes Back

Full marks to John Napier, the chairman of the insurer RSA, who wrote an open letter to President Barack Obama accusing him of being anti-British and "prejudicial and personal" in his dealings with BP.

The Times quotes the letter:

"Your comments towards BP and its CEO as reported here are coming across as somewhat prejudicial and personal. There is no doubt that BP, as a UK plc, is totally committed to do everything possible to contain the oil leak and meet all its obligations in the USA.

The existing CEO is the best person to deliver that effort and has made that personal commitment and made himself available in the USA. In your words, ‘he has taken the heat' and not hidden in his office. The real response has been total. You could argue a poor PR performance, but BP are not alone in that. There is a sense here that these attacks are being made because BP is British. If you compare the damage inflicted on the economies of the Western world by polluted securities from the irresponsible, unchecked greed and avarice of leading USA international banks, there has not been the same personalised response in or from countries beyond the US. Perhaps a case of double standards?

Deep-sea oil exploration was pushed forward as part of a USA oil security strategy, as have a number of foreign policy initiatives where we are standing shoulder to shoulder."

The President would do well to remember that BP employs far more US personnel than British, and 40% of BP's shares are held by US citizens. In the event that the President's ongoing vitriol pushes BP over the edge, there will be many US victims of its demise.

The demise of BP would send shock waves through the City of London and cause a financial crisis in the UK that would reignite the world's recent financial version of the "oil spill".

Can America really afford to start that fire again?

Oh, and by the way, re the knee jerk rantings to BP demanding that it holds back its dividend; why are these same rantings not being made towards Transco (an American company that has some part to play in all of this), which has announced that it will be paying a $1BN dividend?

As noted yesterday, what goes around comes around!

The "Can't Do" Nation

Faced with looking impotent, as a result of not mobilising any of the USA's considerable military or civilian resources to help staunch the ongoing oil spill, Barack Obama has resorted to shrill attacks on BP and the CEO of BP (Tony Hayward).

Unsurprisingly BP's share price continues to tumble, falling a further 10% today.

Doubtless it is very easy to try to pass the buck to what the US keeps claiming is a British company.

However, the States would do well to remember that the part of BP that is handling the spill is in fact American. It would also do well to remember that several other companies, including Halliburton (a US company with links to Cheney and Bush), were also involved.

What goes around comes around.

Jean-Claude Speaks

The markets will focus today on a speech to be made by Jean-Claude Trichet (the president of the European Central Bank).

In the event that he fails to firm up sentiment over the Eurozone and Euro experiment, further falls in the Euro will occur.

As to whether he is able to assuage the market's fears, or display a grasp of reality, it remains to be seen.

In a recent interview with Le Monde he was asked

"If, for some reason, Greece does not honour its commitments, might there be a need for a 'plan B'?"

His answer shows that there is no "plan B" and that, in the eyes of the ECB, Greece will honour its commitments.

"That is not part of our working assumption. Greece must and will honour its commitments. The European Commission, together with the ECB on the one hand and the IMF on the other, is following developments in the recovery programme very closely."

Clearly he and the ECB are disconnected from reality.

When asked about an "Anglo Saxon plot" (please remember these were French journalists) he very politely said no, but then went on to ask for fiscal union.

"Sometimes, one imagines a sort of Anglo-Saxon plot against the euro. What do you think of this?

No, one should be wary of any conspiracy theories. I simply believe that some international investors struggle to understand Europe and its decision-making mechanisms. They have difficulty in gauging the historical size of the European construction and in anticipating the capacity of Europeans to take decisions that are just as important as those taken a few days ago.

Having said that, one should not be complacent: we have some very serious problems and we need to draw some serious lessons. The supervision of fiscal policies, of developments in competitiveness in the euro area economies and of structural reforms needs to be radically improved. We are a monetary union. We now need the equivalent of a fiscal union in terms of monitoring and supervising the implementation of policies on public finances."

Clearly the ECB regards its role as political as well as financial.

It may be all very well for the ECB to think that it should play at politics, if the ECB were a competent and democratically elected body accountable to the people of Europe.

The trouble is, it is neither.