Kicking The Can Down The Road

"We'll see further debt crises," ex-Bank of England governor Mervyn King says. Watch live https://t.co/otlPc1shgx https://t.co/mxXL8XMKx1

— Bloomberg TV (@BloombergTV) April 20, 2016

The Dangers Posed By Rising Interest Rates

The Bank of England's Financial Stability reports arises a red flag about the dangers from a rise in interest rates.

The Executive Summary notes:

"In the near term, risks could crystallise if global long-term interest rates were to rise abruptly from current still historically low levels.."

Hidden away in the report itself, the Bank notes that:

"The impact of higher global interest rates on borrowers will depend on the cause of the increase....a significant cohort of UK borrowers could experience financial difficulties if interest rates were to rise during a period of subdued income growth.."

Will interest rates rise?

Sir Mervyn King, thinks not (not at least in the foreseeable future).

Farewell Sir Mervyn

Sir Mervyn King is giving evidence to the Commons Treasury committee for the last time as governor of the Bank of England.

During his valedictory appearance he hinted that Jane Austen will appear on future £10 notes, he also welcomed the responsibility for bank supervision being returned to the Bank of England.

He is no fan of austerity for countries with no other means of promoting growth, and noted that it had been a disaster for those countries; in the meantime QE in the UK, in his opinion, will continue to run for the foreseeable future as will the current low levels of interest rates.

Basel III - Kicking The Can Down The Road?

Banks have been given several years to meet new rules governing the amount of liquid assets they must hold on their books to see them through a short-term market crash.

The Basel Committee on Bank Supervision has stated that banks would only need to have 60% of the necessary short-term funding in place when the rules become effective in January 2015, and would have until 2019 to fully implement the liquidity coverage ratio (LCR).

The new rules also widen the range of assets that banks can put in the buffer; these now include shares and retail mortgage-backed securities (RMBS), as well as lower rated company bonds. Despite the fact that these can only be included at a hefty discount, this is an indication that the Committee recognises that there are problems within the banks' balance sheets.

The rationale for this easing of the rules was explained by Sir Mervyn King, who told the Telegraph that it had decided to opt for a “graduated approach” to avoid “disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity”.

In other words the Committee was worried that the rules would knock any nascent recovery for six. As to whether this slackening of rules actually helps banks and the global economy recover, or simply kicks the can further down the road, remains to be seen.

Mark Carney Named As Governor of The Bank of England

Mark Carney, the Governor of the Bank of Canada, has been named the new Governor of the Bank of England.

He will take over from Sir Mervyn King next June.

Mervyn King Chides US Authorities

Mervyn King is less than impressed with the US over its "shoot first, ask questions later" approach to financial regulation, wrt dragging Standard Chartered through the mire of public opinion before even completing its investigation.

King is quoted in Boston.com:

"I think all that the U.K. authorities would ask is that various regulatory bodies that are investigating a particular case try to work together and refrain from making too many public statements until the investigation is completed."

King is too polite to say that this is in fact a trade war between the US and UK.

King Denies Fed Warning

In the understatement of the decade, Mervyn King (Governor of The Bank of England) has told the Treasury Committee that there needs to be change of culture at Barclays.

"Barclays has to create a new bank with a new culture to take it forward."

He also denied that the Fed had warned the Bank of England that Libor was being manipulated:

"If the Fed had regulatory concerns they would have shared that with the regulator, [not the Bank of England].

They didn't pass any information to us that Libor was being manipulated.

The Fed could have shared that with us and they did not, all we would have done was pass it on. The Fed is a regulator, we were not; the Fed asked us for advice on how to interact with the BBA."

This denial is rather odd given the following:

"Writing to the head of the Bank of England, among others, Geithner made six recommendations, which included eliminating incentives that could encourage banks to manipulate the rate and establishing a “credible reporting procedure.” 

Not least the fact that King responded and thanked him for his recommendations.

Notwithstanding that apparent conflict between what King said and reality, his statement that the Bank of England was not the regulator may well be technically correct given the appalling tripartite system set up by Brown. However, it surely had more than a passing interest in what was going on with the banking system and, now that it will have "beefed up" powers, most certainly has an even greater "interest".

Whither Project Merlin? - Osborne's Maxed Out Plan A

Kudos to Mervyn King and George Osborne for gamely trying to shore up the British economy, against the oncoming Eurozone tsunami, with a £100BN support programme.

The FT reports that:

"the chancellor told a City audience on Thursday night that he was working with Sir Mervyn King, the Bank of England governor, to “deploy new firepower” amid fears that turmoil in the Eurozone could lead to a severe credit crunch and higher interest rates in Britain.

Mr Osborne’s aides spoke of a “maxing out of Plan A” – taking advantage of the country’s record of fiscal discipline and credibility with the markets to unleash an aggressive monetary policy offering cheaper loans to businesses and households."

The markets have reacted favourably (as they always do) to "hopeful" news.

This is all very well, if one could trust the banks to lend the money on to companies and individuals. However, all that the banks will do it use the £100BN to shore up their own balance sheets.

Not one penny of this will reach the business or individuals who need it, and would be the engines of growth for the British economy.

It would be better of Osborne took the £100BN and simply dropped it from a helicopter over the UK, that way he could be sure that it will have some positive effect on the economy.

Am I being too cynical?

I don't think so, have you all forgotten the hopes and hype wrt Project Merlin?

Whatever happened to that then?

Major Problems Ahead

The head of the Bank of England, Mervyn King, has said today that the Euro crisis is likely to get worse and that the UK and Bank of England are developing "contingency plans" to be implemented should the crisis spiral out of control.

He is quoted by Bloomberg:

"There are major problems ahead.

There are major credit losses to be realized. Whatever happens there will be difficulties ahead that will undoubtedly affect us."

Tin hats everyone!

King Rewrites History

Sir Mervyn King, Governor of The Bank of England, has stirred up a hornets nest after his recent BBC radio lecture in which he rewrote history and his/the Bank's role in the financial crisis.

Amongst other things, King said that the Bank would be very happy to co-operate with another inquiry into the collapse of Northern Rock (the bank that the Bank of England refused to bailout).

This willingness to co-operate rather took the breath away of Andew Tyrie, chairman of the Treasury Select Committee, who said that the Bank "should get on with it at the first available opportunity".

Others on the Select Committee expressed astonishment at the Governor's comments, given that the Committee has asked the Bank on numerous occasions to co-operate with an inquiry only to have their requests refused. The Bank remains the only member of the tri-partite system not to have published a review into its role in the crisis.

Contingency Plans For Greek Exit From Eurozone

Sir Mervyn King, Governor of the Bank of England, as just sated that there are contingency plans for a Greek exit from the Eurozone.

Olly Barratt @ollybarratt

'contingency plans' in place for #grexit says sir mervyn of BOE"

The Threat from Europe

Sir Mervyn king, Governor of The Bank England, has spoken forthrightly this morning about the threat from Europe.

Using phrases such as:

- "Exceptionally perilous conditions";
- "Major solvency concerns";
- "Systemic crisis"

Clearly shows that he is very worried, and that the threat to the UK from the Eurozone crisis is worsening.

Sir Mervyn has called for UK banks to increase their capital reserves (via cutting dividends and bonuses, not cutting lending), not because they are under capitalised (they are better capitalised than European banks) but because it is "sensible and desirable to build resilience to threats to UK stability."

The "threat" of course comes from Europe.

How will this all end?

Here are six possible scenarios:

1 The Euro is devalued in order to keep all member states together and ease the pain on PIIGS.

2 PIIGS leave the Euro en masse, and in an "orderly" fashion. The Euro remains relatively stable as remaining countries in it are stable

3 PIIGS leave the Euro one by one in a disorderly fashion, as markets push Euro down and yields up.

4 Eurozone leaders create a "big bazooka" to deal with the short term confidence issue, and move towards full fiscal/political union in medium term (the Euro stabilises).

5 Eurozone leaders fail to create big bazooka but continue to work towards medium term fiscal union, markets tear Eurozone apart.

6 Germany leaves Eurozone and the remaining members devalue Euro.

To my view options 3, 5 or 6 are the most likely.

A Continent of SPIVs - Kicking The Can Down The Road

Sir Mervyn King, governor of the Bank of England, is appearing before the Treasury Select Committee (TSC) today.

He has told them that he has little faith in whatever "plan" is agreed by the Eurozone "leaders" (aka "Clown College"). In his view, whatever is decided at tomorrow's EU summit will not solve the region's underlying problems; it will only buy one or two years of breathing space.

Quite!

In the unlikely event that Clown College can come up with a plan to "kick the can down the road" for a year or so, how will this be financed?

It seems that, as Europe is skint, they will be tapping the IMF (funded by the USA) for the money which will be provided via a Special Purpose Investment Vehicle - aka SPIV.

How very appropriate!

Now repeat after me, and learn this for prep:

- There is no plan
- There was no plan
- There will never be a plan

King Warns On Rate Rise

Mervyn King, Governor of the Bank of England and deputy chair of the European Systemic Risk Board (ESRB), issued a warning whilst speaking yesterday at the European Parliament that a rise in long-term interest rates would have "severe" consequences.

King's rationale being that the level of indebtedness would be increased by any rise in rates.

Given that the comments come ahead of this week's MPC rate setting meeting, it is being interpreted as a signal that UK rates will remain at 0.5% for the time being.

Whilst the MPC may well see the dangers of an increase in rates, no such "real world" understanding is apparent in the actions and attitude of the ECB who fear only inflation and ignore recession. Sadly for the people of Europe, the ECB are determined to press forward with higher rates irrespective of the damage that these increases will do the the European economy and to the citizens of Europe.

Inflation

Andrew Sentance, a member of the Bank of England's Monetary Policy Committee (MPC), has broken ranks and publicly accused (at a speech at the Institute for Economic Affairs) Mervyn King and fellow members of the MPC of "selling Britain by the pound".

Sentance is of the view that King and the Bank are far too optimistic about how quickly inflation will fall back to its 2% target, and believes that the MPC has delayed for too long raising interest rates.

He is to my view wrong, any rise in interest rates now before the effects of Osborne's austerity budget kicks in will risk pushing the British economy "over the edge" into another recession. The economy can withstand a short term inflation rate of between 4%-5%, most certainly as there will be strong downward pressure brought to bear on it by the austerity budget.

The MPC should hold its nerve, and keep interest rates as they are for the foreseeable future.

King Hints At Rate Rises

Mervyn King, Governor of the Bank of England, has hinted in his letter to the Chancellor that there will be interest rate rises (in line with market expectations) during the course of the year.

On the assumption that the "goat's entrails" have been correctly read, then "experts" are predicting three rate rises during the year bringing rates to 1.5%.

We shall see.

King Under Fire In USA

The New York Times has launched an extraordinary personal attack on Mervyn King (Governor of The Bank of England).

"A central banker need not be loved, but at the least he should command respect — and in Britain these days Mervyn King cannot count on either."

"... His January speech, while carrying all the quirky earmarks of a King address — he began and ended with quotes from “Anna Karenina” — came across to many analysts as unusually prickly rather than as a measured analysis of the British economy..."

One has to ask, who in the New York Times has Mr King upset and what is the "game being played" here?

There is more to this than meets the eye.

Dark Days Coming

Yesterday's lousy "growth" figures (a fall of 0.5% in GDP) have heralded further bad news. Minutes from January's MPC meeting show that two members voted for an increase in rates, they must be mad.

The mood of gloom surrounding the economy was further depressed by a speech made last night by Mervyn King (Governor of the Bank of England), in which he said that wages will have to fall and that we are facing the worst economic conditions for 90 years.

I wonder if George Osborne has actually factored all of this into his economic plans?

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.

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.