Loans and Finance

Loans and Finance

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News and information about loans, money, debt, finance and business issues.

Tuesday, November 30, 2010

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.

Monday, November 29, 2010

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.

Friday, November 26, 2010

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.

Thursday, November 25, 2010

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.

Wednesday, November 24, 2010

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.

Tuesday, November 23, 2010

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.

Monday, November 22, 2010

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.

Friday, November 19, 2010

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.

Thursday, November 18, 2010

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.

Wednesday, November 17, 2010

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.

Tuesday, November 16, 2010

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.

Friday, November 12, 2010

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"!

Thursday, November 11, 2010

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%.

Wednesday, November 10, 2010

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).

Tuesday, November 09, 2010

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.

Monday, November 08, 2010

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".

Friday, November 05, 2010

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!

Thursday, November 04, 2010

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.

Wednesday, November 03, 2010

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?

Tuesday, November 02, 2010

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.

Monday, November 01, 2010

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".