Sunday, May 18, 2008

Debt Rattle, May 18 2008: No money, ten children

Dorothea Lange: No money, ten children, March 1937
'Stalled in the Southern California desert. 'No money, ten children'. From Chickasaw, Oklahoma"

Ilargi: Our Sundays always seem to be a bit more international than usual. A lot from England today, where reality finally seems to be seeping through. When the real estate industry itself starts talking about a downturn of at least 30%, maybe the cheerleading phase is over.

But first: a look at the desert.

Middle East countries are in the grip of interesting, though troubling, developments. Oil revenues soar, which would at first glance seem to make them rich. But 'be careful what you wish for': those revenues come in US dollars, and have thus lost a lot of their -relative- value.

Moreover, their own currencies, mostly pegged to the dollar, lose value just as fast. And to top off the injuries and insults, the rapidly increasing dollar influx in their economies leads to runaway inflation.

But that’s not even all: the weak dollar makes food and commodities prices rise globally, much faster than wages increase, even in the Middle East. The only way to keep their people from storming the barricades will likely be to keep those wages rising fast.

But that will inevitably lead to even higher inflation, and more unrest. Don't forget that a large part of the population can best be described with the caption of the photograph above: 'No money, ten children'. Population growth is very high, as is unemployment.

The guys in power are fast becoming powerless. They are caught in an ugly trap, between a Catch 22 and a hard place, and they don’t have the tools to get out of it. They need a stronger US dollar, but they won’t get one anytime soon. A hot summer powder keg in the making.

Inflation to Cloud Mood at Mideast Forum
Mideast business and political leaders are to troop to the seaside resort of Sharm el-Sheikh, Egypt, this weekend for the region's World Economic Forum. It is the Middle East's version of Davos, the Swiss gab-fest that attracts corporate titans, political leaders and international investors.

With the price of oil well over $100 a barrel, the region has reason to be giddy. The petroleum boom has triggered a spending-and-investment splurge. Even the region's oil-poor countries, including heavyweights such as Egypt and Jordan, have seen petrodollars flowing in, in the form of foreign investment.

Many Mideast countries have lowered trade and investment barriers. Real-estate and construction projects -- many of them funded by developers from the oil-rich Persian Gulf -- are going up across the region. But unlike last year's gathering in Jordan, when oil was a bargain at about $65 a barrel, the buoyancy is tempered.

Soaring food prices, a falling U.S. dollar -- to which most of the Gulf economies peg their currencies -- and the ills of rapid growth are testing the region's governments. Average annual inflation for the Middle East and North Africa is projected to hit 10.4% this year, according to the International Monetary Fund. In Cairo and other urban centers in Egypt, annual inflation hit 16.4% last month, according to official Egyptian figures.

It isn't just an economic problem. Rapidly falling purchasing power has sparked unrest across the region -- from violent bread lines in Egypt to riots by expatriate workers in the United Arab Emirates. Governments have scrambled with measures to mitigate the pain. They have boosted government wages, increased state subsidies and removed import duties for everything from cooking oil to concrete.

None of the moves seem to have provided much relief. "The prosperity in the region is being undermined by a number of external factors, but also by the inability of the policy makers to manage them well," says Tarik Yousef, dean of the Dubai School of Government.

Nine heads of state are scheduled to attend the forum, which is to include a Sunday address by President Bush, who is to fly in from Saudi Arabia. That means geopolitics are on the table, too. Lebanese Prime Minster Fuad Siniora had been expected to fly in for a chat with Mr. Bush, but that appears to be on hold. Mr. Bush has been a big booster of Mr. Siniora's government in its efforts -- so far unsuccessful -- to stymie Iranian-backed Hezbollah.

Instead, Mr. Siniora arrived in Qatar, after that country's emir invited the government and Hezbollah-led opposition leaders for talks after a violent flare-up there. Egyptian President Hosni Mubarak, an intermediary in the Israel-Palestinian peace process, is likely to discuss those stalled negotiations with Mr. Bush behind closed doors. And don't be surprised if Mr. Bush throws a few more verbal jabs at Tehran and Damascus. The forum is to conclude on Tuesday.

Ilargi: What can you do as a US citizen to protest the present situation, the bail-outs, the nationalization of debt, the whole scheme? You might want to take a look at this initiative. NOTE: there are a series of video’s hidden behind the MENU button in the first clip.

This June 5th: 10 Day US National Bank Holiday: It's time to withdraw

Ilargi: If and when German and European authorities and media don’t call people like Ackermann on unsubstantiated statements such as this, we will see the same tangled web of lies develop there as we’ve had in the US for the past five years. There is a narrow window left to prevent this, but it’s closing fast.

As people know who read what is published on sites like The Automatic Earth, there is an abundance of indications that an end to the credit crisis is nowhere near. For that matter, it hasn’t even really started yet in Europe. For a bank CEO to say I believe we are getting closer to the end of the financial crisis” is, in the face of these indications, screamingly insufficient.

It’s time for European journalists to step up and ask real questions, and not give up till there are real anwers, not belief systems emanating from those who stand to profit from them.

Deutsche Bank CEO: Financial Market Crisis Drawing To A Close
The end of the global credit crisis is drawing closer and will leave Deutsche Bank AG (DB) relatively unscathed and possibly in a stronger position than before the crisis, Deutsche Bank Chief Executive Josef Ackermann said in two separate interviews published on Sunday. "Yes, I believe we are getting closer to the end of the financial crisis," Josef Ackermann told Swiss Sunday paper Sonntagsblick.

"It is not fully over yet, but the signs from the U.S. are encouraging," he told the paper. Ackermann said he believes the pragmatic approach taken in the U.S. towards limiting the impact of the crisis on the financial system should soon be paying off. "We should feel the effects in the second half of the year already and see a strong recovery on the U.S. real estate market," Ackermann told Sonntagsblick.

The global financial crisis originated from the defaulting of U.S. households on mortgage payments, which affected global credit markets as the risk from the lending was spread internationally through structured products traded among banks. Separately, Ackermann told German Sunday paper Frankfurter Allgemeine Sonntagszeitung he doesn't see the danger of a collapse of the global financial markets.

"This is out of the question," Ackermann said, adding that he believes the impact of the crisis on the real economy will be limited. Ackermann also told Frankfurter Allgemeine Sonntagszeitung that Deutsche Bank has emerged relatively unscathed from the impact of the financial market crisis.

"We have all the chances to come out of this crisis relatively stronger than we were at the beginning of it," Ackermann said, pointing to the fact that Deutsche Bank still earned money over the past three crisis quarters, always had sufficient liquidity and didn't have to ask anybody for fresh capital during the crisis. Ackermann said the bank is sticking to its goal of making a pretax return on equity of 25% on a sustainable level.

Ilargi: We will start see a lot of this sort of predictions. My view is that far too much is bound to happen and change before September for these tea leave readings to have any value.

Lehman Economist: ECB To Start Rate Cuts Around September
The European Central Bank will start cutting interest rates "around September" and will intervene "on various occasions afterwards, bringing rates down by a whole point by the second half of 2009," Paul Sheard, global chief economist at Lehman Brothers, said in an interview Sunday in Il Messaggero newspaper.

"We are optimistic that the ECB's main worry, inflation, has peaked and is destined to drop," said Sheard. Now, he added, the ECB can begin to cut rates, to stimulate the economies. U.S. interest rates are also seen coming down: "We expect the Fed to continue reducing rates by up 0.75%, and stop rate cuts when the rate reaches 1.25%."

In the interview, Sheard said he sees the U.S. economy hitting its worst moment around the end of the year and predicts that the dollar will start strengthening against the euro in the second half of 2009.

Europe remains exposed to the effects of the U.S. subprime crisis, he said. In the interview Sheard sees the effects of the crisis hitting Europe "between now and the end of 2009." The most vulnerable economies are Italy and Spain," while Germany and France are "more vaccinated," he said.

Ilargi: It’s the world on its head: bringing in a new regulator, but first allowing the existing one to let F&F get into ridiculous debt level positions. When the new regulator comes in, it’ll be too late to save the horses. And the barn, for that matter. And they all know it.

Meanwhile, Freddie Mac declares it “.. [is] helping to shore up the wobbly U.S. housing market and has a "strong and sound capital position”.., and gets away with that. Both statements are nonsensical untruths, but who cares about that anymore in a society built on lies?

Fannie, Freddie Called Weak in Capital Base
Fannie Mae and Freddie Mac are "a point of vulnerability for the financial system" because their capital is meager in relation to their mortgage assets and obligations, the companies' main regulator said.

With that skimpy capital cushion, the government-sponsored companies "could pose significant risk to taxpayers as well as to financial institutions and other investors," the regulator, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said at a conference in Chicago.

The Senate Banking Committee is prepared to vote as early as Tuesday on legislation aimed at improving regulation of Fannie and Freddie. That bill would replace Ofheo with a new regulatory agency holding more authority to adjust capital requirements for Fannie and Freddie. The House already has passed a version of that legislation.

Fannie and Freddie each have "core" capital equaling less than 2% of the mortgages they own or guarantee. Fannie's core capital as of March 31 was about $43 billion, and the company has since then raised about $6.5 billion more through sales of common and preferred shares, bringing the total to around $50 billion. If Fannie were a bank, regulators would require it to hold $135 billion of capital to be considered "well-capitalized," estimated Karen Petrou, managing partner at research firm Federal Financial Analytics in Washington.

Fannie and Freddie argue that, as government-backed providers of money for home mortgages, they aren't equivalent to banks. Setting capital requirements promises to be tricky for the new regulator if Congress approves the legislation. The two companies are likely to resist any requirements that they see as unduly reducing their profitability or ability to play a major role in the mortgage market. But some big mortgage lenders say Fannie and Freddie should face capital rules as stiff as those for federally regulated banks.

Responding to Mr. Lockhart's comments, David Palombi, a spokesman for Freddie, said his company is helping to shore up the wobbly U.S. housing market and has a "strong and sound capital position." Mr. Palombi added: "I'd say we've been a primary point of stability for the financial system." Fannie Mae declined to comment.

Sen. Christopher Dodd, a Connecticut Democrat and chairman of the Senate Banking Committee, said Friday that he was cautiously optimistic that lawmakers can approve a package of housing legislation within a week. Aside from creating a new regulator for Fannie and Freddie, the legislation would let the Federal Housing Administration expand its insurance program to help more people refinance into federally backed loans.

In his speech, Mr. Lockhart questioned whether Fannie and Freddie erred in recent years by purchasing too many securities backed by subprime and other riskier types of home loans. Conceding that he was speaking with the benefit of hindsight, Mr. Lockhart suggested that the companies should have seen that prices for such securities in recent years were pushed "above their long-term intrinsic values."

Existing Home Sales Probably Decreased: U.S. Economy Preview
Sales of previously owned U.S. homes probably fell in April and a gauge of the economy's prospects was unchanged, reinforcing concern that growth will stagnate, economists said before reports this week.

Home resales declined 1.6 percent to a 4.85 million annual rate, according to the median estimate of economists surveyed by Bloomberg News before a May 23 report from the National Association of Realtors. No change in the index of leading economic indicators, due from the Conference Board tomorrow, would follow a 0.1 percent gain in March.

Prospective home buyers are waiting for prices to decline further, and defaults on subprime mortgages have caused lenders to tighten loan rules, choking off demand. The deepening housing slump, drop in consumer confidence and increase in firings indicate economic growth may stall.

"A recessionary environment will arise during this year, triggered by housing weakness," said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York. The drop in sales and rising glut of properties on the market are "discouraging construction and depressing home prices."

Repurchases account for 85 percent of the market, while new-home sales account for the rest. The Commerce Department's report on the latter is due next week. Sales of new homes are viewed as a leading indicator because they are tabulated when a contract is signed. Existing- home sales reflect contract closings, which typically come a month or two later.

Prior to March, the leading economic indicator index had fallen for five consecutive months. Growing pessimism among consumers and the slowdown in manufacturing held down the index last month. The glut of unsold homes is likely to continue to weigh on prices most of the year, discouraging construction. Residential building has subtracted from economic growth since the first three months of 2006, culminating in a 25 percent decline last year that was the biggest since 1980.

Homebuilders continue to struggle. Atlanta-based Beazer Homes USA Inc. last week reported a loss for the second straight quarter and belatedly filed its two outstanding quarterly financial reports. Beazer expects reduced housing demand to persist for the rest of the fiscal year that ends Sept. 30, and continue into next fiscal year, Chief Executive Officer Ian McCarthy said on a conference call with analysts.

"In general, most markets are pretty tough," McCarthy said on the May 16 call. "We're still seeing pricing pressure out there and I think for the foreseeable future we're still going to see it." Concern about rising defaults on subprime mortgages and the related fallout on businesses has led lenders to make credit less readily available.

Federal Reserve Chairman Ben S. Bernanke last week pushed banks to keep raising capital in the aftermath of losses from the credit crisis to avert deeper damage to the economy. As institutions are getting more conservative in making new loans, that "has implications for the broader economy," Bernanke said at a conference in Chicago.

On May 21, the Fed will release minutes of its April meeting, which may shed more light on policy makers' decision to cut the benchmark interest rate by a quarter point to 2 percent. At the meeting, policy makers also backed away from previous language signaling a preference for further rate cuts.

The central bank will also issue new economic forecasts that may help provide "some numerical estimates to the Fed's concern now with heightened inflation as well as slowing growth," said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado. "The Fed's inflation projections are going to look a lot less appealing," Englund said. "I expect they will take down their growth forecasts."

FDIC Grows Wary of Brokered Deposits
The federal agency that insures U.S. bank deposits is growing increasingly wary of banks that aggressively sought brokered deposits in order to fund rapid real-estate lending. Brokered deposits are sold through securities firms and allow for much quicker deposit growth than with traditional bank-deposit accounts.

"Broker deposits can be easy to get, and they can fuel rapid growth with institutions that maybe shouldn't be growing that fast," Federal Deposit Insurance Corp. Chairman Sheila Bair said Friday. "Their lending gets ahead of their management -- it's a growth factor that's really of concern."

Those worries were highlighted by federal regulators' decision earlier this month to close ANB Financial, the third bank to fail this year. Management of the $2.1 billion bank had actively sought out brokered deposits. ANB Financial, based in Bentonville, Ark., used these brokered deposits to turn around and fund various real-estate loans that started to deteriorate with the decline in the housing market.

"They relied heavily on broker deposits for very rapid growth, [and] they were doing a lot of out-of-area lending," Ms. Bair said. "This bank did a lot of things it probably shouldn't have been doing." The concern for Ms. Bair and other banking regulators is the likelihood that ANB Financial is not alone. Ms. Bair said the FDIC has a number of pending applications for deposit insurance from financial institutions that rely heavily on brokered deposits.

Those firms are receiving increased scrutiny, she said. "Some level of broker deposits are OK, but if they're going to rely on a lot of broker deposits, I think it needs to be coupled with limits on growth and strong risk management," Ms. Bair said. Despite these concerns, Ms. Bair was quick to note that bank failures are historically low and that financial institutions were in a strong position heading into the current credit and housing market problems.

UK commercial real estate heading for 30% slump - or more
Commercial property will have lost nearly one-third of its value between the start of the credit crunch and the end of this year, leading industry figures have warned.

Robert Peto, chairman of agent DTZ UK, Robert Whitton, chairman of acquisitive asset manager Rom Capital, and Robin Priest, a real estate partner at corporate adviser Deloitte, all believe that commercial property will be worth 30 per cent less in December than it was last August.

Mr Priest said: "Prices are probably 20 per cent down already, so 30 per cent is the minimum. In fact, that would be a good result comparative to where the market is going." Offices and shopping centres that have tenants on short-term leases are particularly susceptible to a decline in value, Mr Peto said.

They cannot provide a guaranteed income stream for the property's owner for the next few years. He added that the "full extent of the market problems has not been mapped in" to current valuations. Mr Whitton predicted that property valuations would not start to pick up until the fourth quarter of next year, saying: "I do subscribe to the view that things will get worse before they get better – that's a fall of at least another 10 per cent."

Rom Capital, the company Mr Whitton runs in partnership with chief executive Daren Burney, has established a £400m vulture fund to take advantage of low property prices in the current climate. Mr Whitton revealed on Thursday that he had bought Broadwalk Retail Park in Walsall, in the West Midlands, from the CB Richard Ellis pension fund for £22.5m – a saving of £6.5m, or 22.4 per cent, on its initial sale price. He described the deal as "indicative of where the market has gone", adding: "We will see prices hit the floor and then stabilise."

The UK's biggest listed property group, Land Securities, announced on Wednesday that £1.3bn had been wiped off its real estate portfolio – an 8.8 per cent fall to £13.6bn. The news came as the group revealed annual results, with a pre-tax loss of £888.8m against a pre-tax profit of nearly £2bn last year.

For UK banks, selling assets may be better than rights issues
Ignoring Mervyn King's warning that the "nice" decade is behind us, the City story of the week was again banking rights issues – or rather, Barclays' decision, either brave or stupid, not to have one. Meanwhile, Bradford & Bingley, having declared a month ago that it had no intention of tapping its shareholders for more capital, then turned around and launched a cash call anyway.

Forget all the bull market mumbo jumbo about the importance of an efficient balance sheet, we are now in changed circumstances. Today's priority is survival, not return on equity. Remarkably, there even appears to be an appetite for it among investors. Banks that make themselves safer by recapitalising are rewarded with a better rating than those who choose the self-denying ordinance.

Some opted for rights issues, others, after a root and branch re-examination of the business model and spread of interests, for asset sales and balance sheet shrinkage. It was this latter alternative that ultimately proved the more value-creative approach. Virtually all rights issues which are not in pursuit of a specific business opportunity end up being value-destructive.

Deeply discounted rights issues are in any case an exceptionally costly way of raising new capital, which always end up disadvantaging those who don't take them up. Impairment charges associated with the credit crunch have made some banks look critically undercapitalised. In terms of its tier-one equity capital ratio, Barclays appears to be one of the worst of the lot.

The present wave of banking rights issues relies on the questionable premise that banking and banks will return to the way they were as soon as the discomfort of the credit crunch is over and the economy hits calmer waters. This seems rather unlikely, both because markets themselves have become highly suspicious of the old models, and because of the near certainty of much harsher regulation.

The upshot may be enforced separation of banking into its constituent parts, rather in the manner that used to be required in the US under the Glass-Steagall Act before it was finally repealed in the deregulatory frenzy of the late 1990s.

Does it really make sense for Royal Bank of Scotland to launch a distress rights issue, or might not shareholders have been better off with a more root-and-branch break-up of the bank, with asset disposals spreading beyond the planned sale of the insurance arm to the expensively acquired US businesses and other interests that have very little to do with the core, UK retail bank?

This may sound like heresy, but is it any worse than tapping shareholders for billions so that the madness can begin all over again? As it happens, Barclays probably will raise more capital some time soon, but through the mechanism of strategic investors rather than a rights issue. Is this really any better, or should not banks be reining in their global ambitions, and instead focusing on serving their customers and generating value for shareholders? Let the debate begin.

We've only just begun: and it's looking nasty
'I don't qualify for any of the tax credits: I'm completely at the mercy of the taxman, basically. There's absolutely nothing I can do to get extra money, short of robbing a bank.' Duncan Bailey is a 53-year-old ex-soldier who lives in Birchington, Kent, and is a full-time carer for his wife, who has dementia.

With fuel and food costs rising sharply, he finds it tough to make ends meet on his army pension and his wife's benefits; yet he is one of the million or so people on low incomes who will be left marginally worse off this year as a result of the abolition of the 10p tax rate, even after the £2.7bn tax cut Alistair Darling hurriedly announced last week.

'It can be difficult to manage,' Mr Bailey says. 'Holidays are a thing of the past; even saving is a thing of the past. It's a case of cutting everything back.' Those hit by the 10p changes are likely to feel particularly bitter about being forced to tighten their belts over the next 12 months. But the grim assessment of the economic outlook delivered by Mervyn King, the governor of the Bank of England last week, suggested Mr Bailey and his wife will be far from alone.

It has become a truism that a week is a long time in politics, but the events of the past few days have shown that sometimes a week can seem like a very long time in economics, too. Just hours before Darling's dramatic announcement on Tuesday, official figures showed that inflation had jumped to an annual rate of 3 per cent in April on the government's CPI measure.

With oil prices hitting new records almost by the day, inflation had been expected to rise; but the figure was worse than the City had expected, and only a whisker short of the 3.1 per cent that would have forced King to write an explanatory letter to the Chancellor.

The jump in inflation underlined the dilemma facing the Bank, caught between fighting inflation and preventing recession, which its chief economist, Charlie Bean, has likened to 'walking a tightrope'. While the worst of the sub-prime mortgage crisis that has swept through the world's financial system over the past nine months may be drawing to a close, the fallout in Britain's buy-now-pay-later economy has only just begun.

World events make the Bank of England impotent
Sombre – there is no other word for it. One good measure of the seriousness of the economic situation is that the Bank of England governor has stopped making jokes. Gone are the quips about disco dancing or the true meaning of Christmas not being clear until Easter (as far as retail-sales statistics are concerned).

As he moves into his second term, King confesses to waking up each morning worrying about the banking system. He is aware the last thing a miserable, put-upon public wants at this stage is a laugh-a-minute central banker. Long faces are this season’s look at Threadneedle Street. Mind you, there must have been one or two smiles behind closed doors after more than one daily paper chose to lead last week on the governor’s declaration that the “nice” decade was over.

Mine and the Bank’s recollection is that he first declared the nice decade over in October 2004, did so again in October 2006 and has been doing so at regular intervals since. You might ask how nasty it has to get before people decide things are no longer nice. Mind you, as some readers will be aware, “nice” has a special meaning for the governor. To economists, nice stands for “noninflationary, consistently expansionary”. It describes, in other words, the period we have been through of very low inflation and continuous economic growth.

Unlike many in financial markets who are convinced that we are seeing the return of inflation in a big way, I am not persuaded we have broken out of the long run of low inflation. A 3% inflation rate on the consumer prices index (CPI) is not high in the context of a doubling of oil prices in a year and a surge in other commodity prices. Retail price inflation of 4.2% is remarkably low in these circumstances.

Even if both rise by a percentage point or so, we will have escaped a potentially damaging inflationary shock very lightly. The Bank’s remit allows for larger deviations than this from the 2% CPI target because of “external events and temporary difficulties”, which is why 1% to 3% is not a target range, though falling outside it calls for the governor to write a letter of explanation.

The trouble is we have got used to extremely low and very stable inflation; the longest run of low and stable inflation in the postwar period. And this, of course, is what the Bank is judged on. The letters the governor expects to write in the coming months (he has to write one every three months if CPI inflation stays above 3%) will be seen as a failure.

There is another reason why the mood is sombre. After more than a decade in which the Bank and its monetary policy committee (MPC) have come to be seen as the masters of the economic universe, we now see its powers are limited to the point of impotence.

The first area of impotence is interest rates. What we are seeing is not, in the main, an interest-rate shock, but the fact is that three-month Libor (the London interbank offered rate), the most important rate in the economy, is about 5.8%, while Bank rate is 5%. Libor is closer to where it should be if Bank rate was 5.75%, the level reached before the MPC started cutting last year.

But the normal pass-through from rate cuts is not happening, and in many cases official rate cuts have been meaningless for borrowers; the opposite has occurred for them. The Bank has also been powerless to prevent a sharp drop in credit availability at all rates, even if it had wanted to.

The second area of impotence relates to global commodity and energy prices. “Core” inflation in Britain, excluding food and energy, is running at 1.4%. Without the impact of higher global food and energy prices the Bank would be in danger of writing a letter explaining why inflation had dropped below 1%. To be fair to King, he takes this one on the chin. He knows that for much of the “nice” decade the international inflation backdrop was favourable but the Bank got the credit for delivering low inflation.

But the influence of global events means things can change quickly. The inflation picture changed substantially over the past three months and can do so again over the next three or six, in either direction. Headlines about “no rate cuts until 2010” are not sensible. The final area of impotence concerns sterling. The pound’s 14% average fall since January last year – more against the euro – broke the long run of strength that had accompanied the entire independence era since May 1997.

Bradford & Bingley boss has nowhere left to U-turn
In a bad-tempered outburst last week, Steven Crawshaw, chief executive of Bradford & Bingley, accused analysts of looking for "communists under every bed" when questioned about the bank's £300m rights issue.

The normally breezy boss added that, after years of criticism for not being enough like its fast-growing rival from the North East, Northern Rock, now it was being blamed "for the sins of being too much like Northern Rock".

It has been the most difficult week in Crawshaw's four years at the top of B&B. Under the 46-year-old, who trained as a lawyer, B&B has been a stock market darling which concentrated on the booming buy-to-let sector, leaving many in the City convinced that it was going to be snapped up by a bigger rival.

Now, far from having a bid premium in its shares, the bank has pariah status and some analysts are valuing the business as if it has nowhere to go but run off. Crawshaw this week tried to strike an upbeat note about his prospects for staying in his job. "I am exercising the instructions of the board. It is business as usual," he said.

Others believe it could not be further from being business as usual. The talk in the City last week was over whether Crawshaw would manage to hang on to his job, while analysts and investors hit out at the bank over the reasons B&B has given for its capital raising - the equivalent of a third of its market value. Alex Potter, of Collins Stewart, said B&B's explanation that it needed to raise capital in order to maintain its superior capital cushion to its peers was a "weak justification".

Ilargi: Underfunded pension funds are fast becoming a problem around the world. I’ve followed them for years, and I can’t think of one country that has not loosened its regulations to allow the funds to get into riskier assets.

That will lead to huge losses, while the numbers of claims will continue to increase. Governments will try to make up for this initially, but that’s a dead end. My bet is we'll see the end of the whole pension "industry" arrive 50 years after it became a global phenomenon.

UK Treasury reels from £10 billion tax black hole
The Government is staring at a corporation tax black hole of more than £10bn a year, as the pensions crisis ravages companies' balance sheets, a leading investment authority has warned.

Businesses are having to pour money into their pension funds at an almost unprecedented rate in the wake of the credit crisis, effectively requisitioning cash which would otherwise have been paid out in taxes and to shareholders. This could be the final straw which causes Chancellor Alistair Darling to break his borrowing rules, experts warned.

The Government last year forewent £10bn in corporation tax receipts as businesses contributed some £30bn to their pension funds, according to calculations by Danny Truell, chief investment officer at the Wellcome Trust. "This is a growing problem," he said. "The costs for these pension deficits are being met firstly by shareholders and secondly by taxpayers. "It represents a transfer of wealth from employees to senior retirees."

The amount companies have transferred into their pension funds has more than tripled from the £10bn total in 2000, and Mr Truell warned that this pattern looks set to continue, eating further into the Government accounts. Pension deficits have soared by more than £100bn in the past year, the Pension Protection Fund said recently.

The funds have been hit on both sides of their balance sheets: equity prices have slumped in the wake of the financial crisis, affecting their asset values, while at the same time their liabilities have soared because a sharp fall in long bond yields, which one money market trader described as "horrendous news" for UK Pension Funds.

The National Association of Pension Funds attacked the pensions regulator this week, saying its proposals to use higher longevity assumptions will lead to even more defined benefit schemes closing, and higher deficits across the board.

The warning on deficits comes amid growing fears that the Treasury is close to breaking its sustainable investment rule, which says it must keep the total level of government net debt below 40 per cent of gross domestic product.

Mr Darling's surprise £2.7bn tax cut has brought the Government to within a whisker of breaking the rule, and even a small drop in revenues could leave it awry, according to Robert Chote, director of the Institute for Fiscal Studies. Treasury sources said the department was aware of the pensions contributions issue but insisted the increase this year should be manageable and not significant.

New wave of UK estate agency closures
Another big estate agency is embarking on a round of branch closures in response to the housing market slowdown and the credit crunch. Reeds Rains, part of property group LSL that also owns the Your Move estate agency network, will confirm tomorrow that at least 15 of its 127 branches will be axed in the North-East and North-West.

Branches in Bradford and Dewsbury in West Yorkshire, and Lancaster and Wigan in Lancashire are among those that will be shut. In Cheshire, High Street sites in Cheadle, Knutsford and Poynton will be closed and consolidated into one branch in Wilmslow. Further evidence of the fragile state of the housing market was provided on Friday when HBoS announced the sale of its 13% stake in property website Rightmove for £59m.

HBoS was one of the four founding shareholders when Rightmove was launched eight years ago and its decision to offload its stake suggests the bank is gloomy about prospects. Also on Friday, shares in upmarket estate agents Humberts were suspended amid uncertainty over its finances. The Royal Institution of Chartered Surveyors will tomorrow paint a dire picture of the housing market for the remainder of the year when it will say property transactions could fall by 40%.

None of Reeds Rains' executives was available for comment on Friday, but a spokeswoman confirmed that the company is currently consulting all employees affected by the changes. The closures will bring the number of branches shut this year by LSL past 45. Most so far have been concentrated on the Your Move network. Other big estate agency networks to have closed branches recently include Countrywide and Spicerhaart

East European Growth to Slow on Inflation, EBRD Says
Economic growth will slow this year across eastern Europe because of accelerating inflation and the credit crunch, the European Bank for Reconstruction and Development said. The London-based EBRD is forecasting overall growth for the region of about 6 percent this year, compared with 7.3 percent in 2007, the bank said today at its annual meeting in Kiev.

"Inflation, now in double digits in many countries, is the region's most pressing current problem," the EBRD said. "Protracted stress in western financial markets could lead to a sharper-than-expected downturn in capital flows to the region, which could expose the substantial external financing requirements of some countries."

Inflation is accelerating in eastern Europe, driven by an increase in global food prices and strong domestic demand. Surging inflation, which reached 17.5 percent in April in Latvia, 11.4 percent in Estonia and 30.2 percent in Ukraine, has crimped consumers' buying power and cut retail-sales growth.

"The current rate of inflation is unsustainable" in Ukraine, EBRD's chief economist Erik Berglof told reporters in Kiev today. "There's a possibility of a hard landing" unless the government and the central bank respond with a more flexible currency policy, he said. The effect of the global credit squeeze on the EBRD region has been "limited" so far with the exception of Kazakhstan, where it had "a real effect on growth," Berglof said.

The Central Asian country's economic expansion will probably slow to 5.1 percent this year, according to EBRD. "Kazakhstan has been hit by the crisis because it's been very dependent on foreign lending," Berglof said. He also said that the situation for the people of Tajikistan, a landlocked central Asian nation that's among the poorest former Soviet states, "will be very difficult," partly because of unusual weather conditions.

Extreme cold has caused $1 billion of damage, destroyed winter crops and killed almost 70 percent of livestock in Tajikistan, President Emomali Rakhmon said while visiting Russia in February.

The Baltic countries, which have been among the fastest- growing nations in the European Union, are facing a rapid slowdown in growth. Estonia's economy expanded by an annual 0.4 percent in the first quarter, down from 4.8 percent in the previous quarter. Fast-paced economic growth, fuelled by energy sales, will continue in Azerbaijan, where the economy is set to expand 20 percent this year, according to Berglof.

Russian economic growth of an estimated 7 percent in 2008 "should be supportive of the entire" former Soviet region, according to EBRD. The EBRD, created in 1991 to invest in former communist countries from the Balkans to Asia, has shifted its resources east and into Mongolia as some of its member states have joined the European Union and attracted billions of dollars in investment.

India seeks ties in Africa
African leaders have identified high oil prices, food security and climate change as top concerns in a joint declaration at the firstever Afro-Indo summit on trade and investment. Attended by 14 African countries, the two-day summit sought to deepen ties with the resource-rich continent and ensure India is not eclipsed by China. China held a similar summit with African leaders in November 2006.

“The partnership will be based on the fundamental principles of equality, mutual respect and understanding ... for our mutual benefit,” read a declaration issued at the summit’s close in New Delhi on Wednesday. Jakaya Mrisho Kikwete, the Tanzanian president, noted that “food security and high oil prices clearly impact on our economies”.

“We agreed there was need for intervention ... that we should bring these two matters to the attention of the United Nations, the World Bank and the International Monetary Fund in particular,” he said. On climate change, Kikwete said that since nations contributed differently to global warming, it was necessary to “uphold the principal of common but differential responsibility”.

He thanked Manmohan Singh, the Indian prime minister, for offering increased project aid and preferential market access for African exports. Alpha Oumar Konare, the head of the African Union, said the meeting had “truly understood” the continent’s needs and aspirations.

“Today, Africa does not need a guiding hand ... we are equal partners in this race like everyone else,” he said, adding that Africa could benefit from the advances made by India in health, information technology and agriculture. Moses Wetangula, Kenya’s foreign minister, stressed the need to implement decisions taken at the summit. “We must be able to ‘walk the talk’ for the sake of the peoples of our countries,” he said.

Singh said the meeting was “held in an atmosphere of great warmth and sense of partnership”. It “laid the firm foundations on which to build the new framework of co-operation”, he said. On food security, Singh said that the economies of India and Africa “must acquire the momentum to meet food needs ... through domestic production”.

With India’s economy growing at nearly nine per cent a year, New Delhi is looking at Africa’s vast mineral and hydrocarbon resources to help fuel its growth.

Biodiversity loss costs six percent of world income: report
The destruction of flora and fauna is costing the world two trillion euros (3.1 trillion dollars) a year, or six percent of its overall gross national product, according to a report trailed by German news weekly Der Spiegel. The European Union and German environment ministry-led research, entitled "The Economics of Ecosystems and Biodiversity," will be presented on Monday at the ninth conference of the UN Convention on Biological Diversity in Bonn.

In its edition out Monday, Der Spiegel will present extracts from the paper, with the study's lead author, Pavan Sukhdev, a senior figure with Deutsche Bank in India, writing that "the world's poor bear the brunt of the cost." Der Spiegel also says that German Chancellor Angela Merkel will announce a sharp increase in German funding to combat deforestation in line with Norway, which ploughs 500 million dollars annually into forest retention.

Deforestation -- a huge factor in species loss and global carbon emissions contributing to climate change -- is a central theme of this year's conference in Bonn, formerly the capital of West German. One in four mammal species, one in eight among birds, a third of amphibian creatures and 70 percent of all plant life made the most recent endangered list issued by another UN agency, the World Conservation Union (WCU).


Anonymous said...


Excuse me for sounding like a broken record, but would you say the oil exporting countries are suffering from inflation or deflation?

In the money-supply sense.

It seems to me that countries which are running a big trade surplus - Saudi Arabia, China etc - are experiencing a growth in their money supply.

My point is that in all the talk of deflation (undoubtably happening in the USA) it is possible to overlook the fact that other countries might be experiencing inflation at the same time.

I'm not trying to push my position. I'd like to see some arguments as to why deflation is happening everywhere and no countries are experiencing inflation, in order to point out any errors in my thinking.

Because to me it looks like "deflation in the USA, inflation in China". Can you see any flaws with that view?

Stoneleigh said...

Credit destruction, and hence the collapse of the effective money supply, will be a global phenomena, but is not happening evenly. In some places it is well underway and in others has not yet begun. In such areas, the expansion continues and price of goods and services in short supply rises. The effects of credit-deflation are not likely to be uniform either as exposure varies.

In China, the market has been hit hard in recent months and the bubble is bursting. That bubble was based on an enormous amount of bad debt used to construct a staggering amount of productive capacity that will have no market. There will be no exporting their way out of the difficulties they face. That excess capacity will be a millstone round the neck of the Chinese economy for years to come as they become mired in depression. Recent price rises - a lagging indicator of the ending expansion - should be reversed quite quickly.

However, credit deflation should be a much less serious threat to China than to far more credit-dependent economies. They should still be a position to buy up land (Lebensraum) and resources as they begin a colonial expansion phase. They are the empire in the ascendancy and they will do what we did when we were in that position, with the added impetus of a huge population problem and a ruined environment (for instance, the coming Chinese version of the 'dust bowl' will be considerably worse than the original).

As for the oil sheikdoms, the expansion continues for now and prices rise as shortages loom and the price-supressing mechanisms of globalization are breaking down. However, their economies are largely a desert mirage. The grotesque over-build of pleasure palaces being constructed there will never be productive investments. All of that is credit-based, and credit deflation will be a very serious threat to an over-populated region living so far beyond its carry capacity in what amounts to a political tinderbox. Oil wealth is likely to end up in Swiss bank accounts owned by erstwhile leaders living abroad once the conflict just below the surface erupts.

Already, the standard of living for ordinary citizens of places such as Saudi Arabia is slipping badly. There is a huge, restless and increasingly radicalized population of young people with no real prospects. Easy money from oil exports has given Saudi Arabia a bad case of 'Dutch disease', so that there is relatively little in the way of a real domestic economy to absorb the very rapidly increasing population. Even supplying adequate water and electricity will probably become difficult in the not too distant future.

Areas with supplies of scarce strategic resources are rarely peaceful as too many competing interests encourage conflict. Weapons have already been poured in the region in huge quantities by outside powers seeking to protect their interests through alliances. Tremendously destructive resource wars will be centered in the Middle East and in central Asia in coming years.