Friday, February 19, 2010

Economists Get It Wrong

The dismal "science" of economics has managed to get something wrong again.

This time it has massively underestimated exactly how much in debt the UK economy really is. Economists had expected a January (traditionally a good month for tax receipts) government surplus of about £2.8BN. The reality was in fact a deficit of £4.3BN, the first time since records began in 1993 that the UK was in debt in January.

The Treasury claim that the Government forecasts remain as stated by Darling, namely government borrowing will be £178BN (12.6% of GDP). However, City experts now predict that the debt will overtake the 12.7% recorded by Greece.

Economists are now calling for a more credible plan by the government, to show how it will address this issue.

They should not hold their breath!

Thursday, February 18, 2010

One Month Breathing Space

Greece has been given a one month breathing space by the EU, before a decision is made as to whether to order Greece to introduce more austerity measures.

Greek Prime Minister, George Papandreou, claims that all Greece needs is time and it does not want European taxpayers' money.

"What we want is political support to end profiteering and the defamation of our country."

Fair enough, maybe.

However, given the fact that the previous Greek government committed fraud and was involved in some seriously questionable deals with Goldman Sachs, what does he expect?

The least worst option is for Greece to leave the Euro, and approach the IMF for funding.

Wednesday, February 17, 2010

EU Gets Heavy

The EU started to flex its muscles wrt Greece's fraud and debt scandal.

It has told Greece that it will not be allowed to vote at an upcoming EU meeting, and could lose control over its tax and spending policies, if it fails to meet a March 16 deadline on cost-cutting.

These measures have put some "bottom" under the beleaguered Euro, which has risen from its 9 year low.

However, as long as Greece remains in the Euro the contagion (in the form of a loss of trust and downgrading) will spread to other Euro countries.

The least worst result for the Euro and Greece will be for Greece to be thrown out of the Euro, thus cutting out the contagion and affording Greece the opportunity to go cap in hand to the IMF to bail it out.

Tuesday, February 16, 2010

The Prostrate Cows

The UK credit card industry has long regarded their hapless customers as being akin to prostrate cows, ready and willing to be milked dry.

To some extent, given the appalling naivety of some customers when taking on debts that they cannot afford to pay, it is hardly surprising that the credit card companies hold this view.

However, the card companies are now charging rates that many could argue with some justification are simply "taking the piss" out of the prostrate cows.

Moneyfacts reports that interest rates on credit cards are now at their highest level for 12 years. The average rate charged is now 18.8%, despite the fact that the bank rate (ignored by the financial services industry, apart from when setting savings rates) is at a mere 0.5%.

The card companies, to some extent can argue that the rise in rates is as a result of the increasing levels of defaults. The Bank of England have published figures that show that write offs have doubled to £1.6BN in the third quarter of 2009.

Fair point, maybe.

However, did the banks and credit card companies not conduct a due diligence on their customers before granting them these loans?

Surely they are themselves partially responsible for their losses?

Monday, February 15, 2010

Betting On Failure

Speculators are taking a punt on the Euro falling further, as the fallout from the EU's inability to resolve the Greek tragedy continues.

The Euro is now at a nine month low against the dollar, on the basis of low expectations about the result of a meeting tonight between Eurozone finance ministers.

The Greek austerity plan, formulated by the European Commission last week, is viewed by many as not being austere enough.

The problem is exacerbated by the fact that Greece has knowingly understated its true problems (ie fiddled its figures), and that the Greek government is unable/unwilling to take the necessary measures at home for fear of a backlash from the voters.

It is quite clear that Greece did not meet the conditions necessary for joining the Euro, ie it joined it on the basis of fraudulent information supplied to the EU.

Dishonesty has a price, as the Greeks are now discovering.

The best solution may well be to let it rot and be pushed out of the Euro, thus ensuring that further bailouts will not be necessary.

Friday, February 12, 2010

The Greek Tragedy II

The Euro continues to take a battering, despite a "promise" from the EU that some form of rescue package will be mounted to save Greece from economic implosion.

The offer of solidarity, that contains precious little detail as to what that support actually means, failed to impress the markets.

The fact that the EU has zero experience of rescuing failed states, does not help the situation. The markets would have preferred an intervention by the IMF. However, pride on behalf of the EU prevents them going cap in hand to the IMF.

As to whether any rescue package actually works or not in the long run, is open to question. Saving Greece will guarantee that others line up with their begging bowls; ie Spain, Portugal, Ireland etc.

The rescue will be ruinous, and will most likely cripple the EU for the foreseeable future.

Thursday, February 11, 2010

Taking The Piss

I see that our elected representatives have something of a sense of humour, and are most assuredly taking the piss out of the electorate.

The BBC reports that the Independent Parliamentary Standards Authority (IPSA), the parliamentary body set up to police MPs' expenses, will cost £6.5M (about six times the amount MPs have been ordered to repay).

For why?

Well is seems that aside from paying its chairman, Sir Ian Kennedy, a salary of £100K it feels the need to recruit 80 staff.

Yes, I said 80!

Quite why it needs 80 staff to monitor the expense claims of 600 MPs is beyond me.

Professional well run businesses, that operate in the real world, manage to run payroll and expense departments on but a handful of staff.

Exactly how difficult can it be to monitor our elected representatives' expense claims?

Clearly our MPs are taking the piss!

Wednesday, February 10, 2010

The Greek Tragedy

As Greece is paralysed by series of strikes, whilst its government ministers go cap in hand to the EU for a bailout, Angela Merkel is trying to dampen down hysteria in Germany that there may a bailout on the cards for Europe's most impoverished economy.

Greece's situation is not helped by the fact that last October it transpired that its previous government had been fiddling the official statistics. The level of debt was in fact twice that previously reported.

The good citizens of Germany are quite rightly rather pissed off at having to bailout a fraudster.

Now chickens are coming home to roost. The local citizens of Greece have no intention of succumbing to the austerity package necessary for Greece to live up to its commitments to remain in the Euro.

The solution?

1 The EU bails Greece out, even though there are no formal mechanisms in place for such a bailout (the IMF may well have to intervene), or

2 Greece leaves the Euro.

In the event Greece leaves the Euro the next countries to be forced out will be Spain, Portugal and Ireland.

The EU is caught between two very hard rocks:

- an unpalatable and possibly ruinous bailout, or

- the collapse of the Euro.

Either way the outcome may well be the kiss of the death for the Euro experiment.

As I have noted before, the "one size" fits all approach of the EU (wrt interest rates etc) simply does not work when there are so many economies that are in the EU that are so clearly out of sync.

Maybe the next time that the Euro experiment is resurrected the membership list is kept a little more exclusive, and those who do apply for membership are rigorously tested first to ensure that they have not cheated.

So much for the "United States of Europe"!

Tuesday, February 09, 2010

Hector Sants Resigns

Hector Sants, the CEO of the Financial Services Authority (FSA), has resigned.

Sants will leave the FSA this summer. He will have held the job for 3 years.

He has been in a corner for sometime now and, in the event that the Tories win the next election, knows that the Tories will shut down (or most certainly emasculate) the FSA.

He has chosen a good time to jump ship.

Monday, February 08, 2010

Liquidity Issues

It seems that not every business is finding it impossible to raise funds from the recalcitrant and reluctant banking sector.

The Times reports that De Beers, the world's largest diamond producer, will refinance$1.5BN of debt and will go ahead with a $1BN rights issue.

There had been some doubt about De Deers' ability to refinance $1.5BN of its $3BN debt, due to mature in March. However its banks, a.o. Royal Bank of Scotland and Lloyds Banking Group, have agreed more favourable refinancing terms after De Beers' shareholders (including Anglo American and the Oppenheimer family) said that they would inject more cash into the business.

Other companies, with less illustrious and cash rich shareholders, may well still struggle to raise finance from the moribund banking sector.

Friday, February 05, 2010

BA's Battle For Survival

British Airways (BA), the self styled "world's favourite airline", has announced pre-tax losses of £50M in the three months to December 2009 (an improvement on the £122M loss in the same period in 2008).

BA's pre-tax loss in the nine months to December now stands at £342M (compared with £70M in the same period in 2008).

The results are nonetheless better than analysts expectations.

Does this mean that BA has a rosy future?

No, not if you believe what CEO Willie Walsh has told the BBC (he expects record losses):

"Operating costs are down by 10.5% and show that we've adapted quickly to the new businesses realities created by the global recession.

We still expect to make record losses this year.

Permanent structural change is being introduced in all areas and will return us to sustained profitability

BA also faces a £3.7BN pension funds' deficit.

Walsh's negative outlook in part can be explained by the fact that he is fighting Unite (the cabin crew's union), and that he needs to highlight that the company is facing a struggle for its survival.

However, the BA could still very easily go under:

1 Industrial action will further damage its already poor customer relations.

2 The pension deficit, as mentioned, needs to be addressed.

3 Stabilisation of passenger numbers is not enough, it needs to attract more customers. The only way it can do that is to cut prices, but improve customer care. A very tall order indeed!

Thursday, February 04, 2010

House Price Rise

Halifax, a company with an interest in a buoyant property market, has stated that the annual rise in house prices to January in the UK has almost touched 10% (9.9% in fact).

The low supply of properties, coupled with demand from those with sufficient deposits, has brought about this rise. The question then arises as to whether the recovery is sustainable.



As more people are tempted to sell their properties, on the upswing of a rising property market prices, will fall as there are simply not enough people around with sufficient funds to buy them.

The property market during 2010 will in fact be flat, and the 10% rise be seen as a dead cat bounce.

Wednesday, February 03, 2010

Dodgy Stats

The European Commission (EC), despite supporting Greece's plan to reduce its budget deficit, is none too happy with Greece's less than "reliable" statistics.

In fact, it is starting legal proceedings against Greece for allegedly reporting faulty statistics. This move is based largely on Greece's drastic revision of its figures last October.

The Greek Government has until May 15 to adopt legislation that forces it to produce monthly updated public budget reports. If it does not, the EC may take the government to court.

The EC also told Greece to set aside a 10% (of current expenditure) contingency fund to cover future budgetary pressures.

Greece's 2009 deficit was 12.7% of GDP, three times initial estimates and more than four times the 3% limit set by the EU.

Greece is attempting to resist pressure from the EU to reorganise its finances. This resistance may be understandable from a domestic point of view. However, given that they knew what they were signing up to when they joined the EU, what did they expect?

Greece is learning the hard lesson, that the EU's "one size fits all" approach to monetary and fiscal policy simply does not work at a local level.

In the event Greece collapses financially; Portugal, Spain and Ireland will be next.

Tuesday, February 02, 2010

Political Ploy

Unsurprisingly the government is finally waking up to the fact that its 50% rate of tax will not reap the revenues that it had hoped for.

Lord Myners, the City Minister, said that the Treasury had "significantly reduced" its estimate of the revenue (originally set at £1.1BN for 2012 and £2.5BN).

Rather lamely he belated that:

"We still believe it will be beneficial."

Hardly inspiring is it?

Why do it then?


It has nothing to do with economics, but is a political ploy.

The only surprise is that the government has taken this long to wake up to the fact that people are not prepared to pay it.