This represents the best of the ‘heavy thinking’ around at the
moment. It’s not easy but important to try and follow it or one will
be entirely at the mercy of politicians “simplifying” [=distorting]
the situation.
The first of these probably inevitable given the banks inability to
meet borrowing demand . The Tories are unlikely to oppose this as
it meets many of the objectives of their own “State Loan Guarantee”
scheme. The same article looks at bank finances generally and in
particular at RBS (which in England is NatWest, in case anyone didn’t
know!) The effects of the vast inpouring of capital to this bank is
to unhinge the whole borrowing scenario set out by Brown-Darling and
to make total nonsense of Brown’s claim of prudent management of our
finances compared with other countries.
The second explores the alternative routes ahead for our whole
banking system
Finally the third looks at the current state of government finances
with up-to-date (dire) figures.
C
=========================
TELEGRAPH 18.12.08
1. Taxpayers' money will be lent directly by the Government to
struggling businesses
Taxpayers' money will be lent directly by the Government to
struggling businesses under a radical new plan to help them through
the recession, The Daily Telegraph can disclose.
By Andrew Porter Political Editor
Any struggling firm requesting a bank loan will able to apply for
"match funding" from the Government, under a deal which effectively
sees the Government acting as a bank itself.
In reality, the taxpayer will more than match the banks' money
because the Government is expecting that in most cases, the banks
will only provide 25 per cent of the overall loan.
The scheme, to be announced in the New Year, will enable struggling
businesses to borrow much more than the banks would ordinarily have
been prepared to lend them.
It is designed to get the banks lending again by placing much of the
risk for these loans firmly in the hands of the taxpayer. The
Government will take responsibility if the loan goes bad.
The plan had initially been intended for small and medium size
businesses but The Daily Telegraph understands that ministers are
looking to extend it to larger companies facing severe difficulties
with liquidity.
Ultimately, companies with turnover of up to £25 million a year could
be eligible to apply for help, although sources said that the plans
are still being finalised.
Senior ministers now accept that more needs to be done to get credit
flowing into businesses again as the British economy enters its most
severe recession for decades.
The £37 billion injected to recapitalise the banks in October has
saved them from collapse but has failed to get them lending to
businesses again.
That has pushed thousands of companies close to the brink of bankruptcy.
But Gordon Brown is reluctant to allow any more taxpayers' money to
be pumped directly into the banks themselves, as some senior Bank of
England figures have been calling for.
Instead, he hopes that the loan guarantee scheme will provide support
for the banks, while achieving the Government's primary aim of
restarting the flow of credit.
Earlier, Richard Lambert, the director general of the Confederation
of British Industry, wrote to the Prime Minister pleading with him to
"do whatever is needed" to get more credit flowing into the private
sector.
"Any other government measure seeking to mitigate the recession -
such as additional fiscal relaxation - would risk becoming an
expensive failure in absence of further action to tackle the core
problem of access to capital and credit," he warned.
"Where necessary, government itself should provide interim credit,
capital and liquidity directly to offset the shortage in the private
sector."
The loan scheme enables Mr Darling and Mr Brown to avoid having to
further "nationalise" the banks.
Charlie Bean, the deputy governor of the Bank of England, said the
banks may need larger reserves in order to get lending levels back to
healthy levels.
"It may well turn out that further capital injections are required,"
Mr Bean said. "I certainly wouldn't rule that out. It may well be
necessary if the banks feel they're going to feel comfortable about
continuing to lend."
He also warned that the Bank may have to emulate the US Federal
Reserve and cut interest rates "all the way to near zero".
The Conservatives have been advocating their own loan guarantee
scheme. They will seize on the Government's adoption of a version of
their plan to claim that they are offering solutions which ministers
then take on board.
There was a blow to Mr Brown when the Office of National Statistics
signalled that the RBS debt will count as part of the public sector
debt because of the Government's 57 per cent stake in the lender.
The ONS said that the investment and the Government's effective
control of the bank is "sufficient to move RBS into the public sector."
The £20 billion of public money injected into the bank and its huge
liabilities are now likely to appear on the Government's books from
this month, the ONS said.
RBS has as much as £1.8 trillion of liabilities, which will now count
when the stock of government debt is calculated.
That is likely to increase debt from around 44 per cent of gross
domestic product to more than 160 per cent.
The last time public sector debt was so high was in the 1950s as
Britain laboured under the burden of the borrowing that funded the
Second World War effort.
Shadow Chancellor of the Exchequer, George Osborne said: "It's
official - Britain now has the highest national debt in the developed
world "From now on, any claims that Britain's debt is low are
laughable."
Government officials said that the RBS liabilities will only be on
the Government's books until the bank is sold back into private
hands. They would only ever need to be repaid using public money if
the bank collapsed completely and was unable to sell any of its assets.
=============
moment. It’s not easy but important to try and follow it or one will
be entirely at the mercy of politicians “simplifying” [=distorting]
the situation.
The first of these probably inevitable given the banks inability to
meet borrowing demand . The Tories are unlikely to oppose this as
it meets many of the objectives of their own “State Loan Guarantee”
scheme. The same article looks at bank finances generally and in
particular at RBS (which in England is NatWest, in case anyone didn’t
know!) The effects of the vast inpouring of capital to this bank is
to unhinge the whole borrowing scenario set out by Brown-Darling and
to make total nonsense of Brown’s claim of prudent management of our
finances compared with other countries.
The second explores the alternative routes ahead for our whole
banking system
Finally the third looks at the current state of government finances
with up-to-date (dire) figures.
C
=========================
TELEGRAPH 18.12.08
1. Taxpayers' money will be lent directly by the Government to
struggling businesses
Taxpayers' money will be lent directly by the Government to
struggling businesses under a radical new plan to help them through
the recession, The Daily Telegraph can disclose.
By Andrew Porter Political Editor
Any struggling firm requesting a bank loan will able to apply for
"match funding" from the Government, under a deal which effectively
sees the Government acting as a bank itself.
In reality, the taxpayer will more than match the banks' money
because the Government is expecting that in most cases, the banks
will only provide 25 per cent of the overall loan.
The scheme, to be announced in the New Year, will enable struggling
businesses to borrow much more than the banks would ordinarily have
been prepared to lend them.
It is designed to get the banks lending again by placing much of the
risk for these loans firmly in the hands of the taxpayer. The
Government will take responsibility if the loan goes bad.
The plan had initially been intended for small and medium size
businesses but The Daily Telegraph understands that ministers are
looking to extend it to larger companies facing severe difficulties
with liquidity.
Ultimately, companies with turnover of up to £25 million a year could
be eligible to apply for help, although sources said that the plans
are still being finalised.
Senior ministers now accept that more needs to be done to get credit
flowing into businesses again as the British economy enters its most
severe recession for decades.
The £37 billion injected to recapitalise the banks in October has
saved them from collapse but has failed to get them lending to
businesses again.
That has pushed thousands of companies close to the brink of bankruptcy.
But Gordon Brown is reluctant to allow any more taxpayers' money to
be pumped directly into the banks themselves, as some senior Bank of
England figures have been calling for.
Instead, he hopes that the loan guarantee scheme will provide support
for the banks, while achieving the Government's primary aim of
restarting the flow of credit.
Earlier, Richard Lambert, the director general of the Confederation
of British Industry, wrote to the Prime Minister pleading with him to
"do whatever is needed" to get more credit flowing into the private
sector.
"Any other government measure seeking to mitigate the recession -
such as additional fiscal relaxation - would risk becoming an
expensive failure in absence of further action to tackle the core
problem of access to capital and credit," he warned.
"Where necessary, government itself should provide interim credit,
capital and liquidity directly to offset the shortage in the private
sector."
The loan scheme enables Mr Darling and Mr Brown to avoid having to
further "nationalise" the banks.
Charlie Bean, the deputy governor of the Bank of England, said the
banks may need larger reserves in order to get lending levels back to
healthy levels.
"It may well turn out that further capital injections are required,"
Mr Bean said. "I certainly wouldn't rule that out. It may well be
necessary if the banks feel they're going to feel comfortable about
continuing to lend."
He also warned that the Bank may have to emulate the US Federal
Reserve and cut interest rates "all the way to near zero".
The Conservatives have been advocating their own loan guarantee
scheme. They will seize on the Government's adoption of a version of
their plan to claim that they are offering solutions which ministers
then take on board.
There was a blow to Mr Brown when the Office of National Statistics
signalled that the RBS debt will count as part of the public sector
debt because of the Government's 57 per cent stake in the lender.
The ONS said that the investment and the Government's effective
control of the bank is "sufficient to move RBS into the public sector."
The £20 billion of public money injected into the bank and its huge
liabilities are now likely to appear on the Government's books from
this month, the ONS said.
RBS has as much as £1.8 trillion of liabilities, which will now count
when the stock of government debt is calculated.
That is likely to increase debt from around 44 per cent of gross
domestic product to more than 160 per cent.
The last time public sector debt was so high was in the 1950s as
Britain laboured under the burden of the borrowing that funded the
Second World War effort.
Shadow Chancellor of the Exchequer, George Osborne said: "It's
official - Britain now has the highest national debt in the developed
world "From now on, any claims that Britain's debt is low are
laughable."
Government officials said that the RBS liabilities will only be on
the Government's books until the bank is sold back into private
hands. They would only ever need to be repaid using public money if
the bank collapsed completely and was unable to sell any of its assets.
=============
2. Nationalisation looms for Britain's banks as they face 'Prisoner's
Dilemma'
"I am in no doubt that the single most pressing challenge to domestic
economic policy is to get the banking system lending in any normal
sense. That is more important than anything else at present."
By Philip Aldrick, Banking Editor
Tax cuts, interest rate stimulus, a public spending binge – none of
it, in the mind of Bank of England Governor Mervyn King, is as
important to hauling Britain back from the abyss as getting the banks
lending again.
Moreover, his opinion is rapidly becoming the consensus. Chancellor
Alistair Darling and his opposite number George Osborne agree, albeit
acrimoniously, on the issue. Peter Mandelson wants "bankers to start
being good, plain bankers again". Even the venerable UBS economist
George Magnus, who predicted the financial crisis, concurs.
"It is very important that those credit flows be kept open," he said.
"Restructuring of debt is a critical part of the healing process.
Debt forgiveness might even be necessary."
The thinking goes that by extending credit lines, banks can keep
viable but limping businesses and households alive through the
recession. Fewer jobs will be lost and the economy will recover more
quickly. Arguably, such behaviour is better for banks, too, as a
recovering economy will mean fewer defaults.
Higher levels of lending, though, risk more bad debts – reviving
concerns about capital despite the £50bn round of fundraisings, £37bn
from the state. In the context of fending off another great
recession, however, those fears are a side show.
Charlie Bean, the central bank's new Deputy Governor, said: "It may
well turn out that further capital injections are required." Tossing
such loaded comments around so freely demonstrates there is little
resistance to the idea among policymakers. The private sector could
be asked to chip in, but banks are more likely to come back to the
taxpayer a second time. Tellingly, Mr King has refused to rule out
full nationalisation.
The problem is, as Mr King told the Treasury Select Committee last
month, that a lending-led economic rescue plan only works if banks
act "collectively" – anathema to free market capitalism. As he
describes it, lenders are effectively trapped in a classic Prisoner's
Dilemma.
"Individually, it makes sense ... to behave defensively and reduce
the size of their balance sheet," Mr King said to MPs on the select
committee. "Collectively, it makes no sense at all because if all
banks behave in that way not only will the economy go into a steep
recession but the banks themselves will see even bigger losses on
their pre-existing loans.
"The challenge we have to confront in dealing with the banks is to
find a way in which their individual incentives do not lead to a
collective outcome that is clearly adverse."
From the banks' perspective, all this must be pretty confusing.
Pilloried for their reckless lending before, they are now being
actively encouraged to load faltering businesses with credit on a
scale far greater than that mapped into their business plans at the
time of the recapitalisation in October. [=Nobody had - or has - a
clue! -cs]
The request goes against all the basic principles of good banking.
Going into a downturn, banks need to conserve their capital because
they have no idea how long the recession will last. Every bad loan
made today piles on top of the shoddy lending in the books already,
eroding reserves and weakening the lenders.
Having just been recapitalised at punitive cost to both the taxpayer
and shareholders, it might seem forgivable that the banks want to
make the money last as long as possible. Particularly given the
unknown dangers still lurking in the shadow banking market, the murky
financial world where sub-prime monsters – disguised as
collateralised debt obligations – roamed.
Credit defaults swaps (CDSs) – insurance products against companies
going bust – are the shadow banking market's "bête noire", according
to Mr Magnus. The value of all derivatives, including CDSs, last year
was around $600,000bn (£387,000bn or £387 trillion) – 10 times the
size of the global economy. Although the default risk is a tiny
fraction of the total, it is impossible to calculate the black hole
of potential losses because no derivatives are exchange traded.
Economic historian Niall Ferguson, author of The Ascent of Money,
fears CDSs will cause a financial crisis next year the likes of which
will make 2008 look like a training session. [Ouch! -cs] He is an
increasingly lone voice but nobody is wholly comfortable with the
opaque derivatives market.
Even if CDSs don't blow up, the banks face a possible leveraged
finance crisis. In 2006, the volume of leveraged buy-outs around the
world peaked at $753bn. Much of the lending was done on a five-year
timescale, with vast quantities due to be refinanced in 2010 and
2011. By then, these over-indebted companies will look far less
enticing prospects. If banks want the debt off their books, they will
have to take much deeper writedowns than they have to date.
Britain's banks have less exposure than their US rivals, but the
numbers are still jaw-dropping. At the half year, the Royal Bank of
Scotland had £10.8bn and Barclays £7.3bn of leveraged loans
outstanding. In a variance of the "mark-to-market" accounting policy,
one banker described the two banks' current provisioning as "mark-to-
myth".
Running in tandem with these potential risks is the very real cost of
a recession. HBOS last week gave some warning of just how dire things
may get by revealing £3bn of bad debts in the past two months alone.
Given the potential pressure on balance sheets, it is no surprise the
banks want to hoard their capital. Small businesses and households
will not be utmost in their minds.
The problem is that banks have outgrown themselves. They are now so
vital to the economy, politicians believe, that they can not be
allowed to operate in their own myopic, commercial interests. It is
no surprise that RBS, now 58pc-owned by the state, has taken the lead
on lending to small businesses and homeowners, and is brandished by
the Treasury as an example to the industry.
Politicians are making little effort to disguise their belief that
banks are a tool of economic policy. John McFall, chairman of the
Treasury Select Committee, has urged the Prime Minister to get the
banks "into a room and collectively and simultaneously ensure that
they resume lending".
For Willem Buiter, a former member of the Bank of England's Monetary
Policy Committee, new regulation could reduce banks to little more
than a utility, like gas and electricity. If the dogma holds that
they must do "their bit" for the economy and the feared crises do
manifest themselves, he may be proved right sooner than expected.
===================
THE TIMES 19.12.08
Fears increase over the economy as borrowing reaches new high
Gary Duncan, Economics Editor
The Treasury suffered a record £16 billion plunge into the red last
month as the recession hit tax revenues.
The news came as the pound fell to a low against the euro, and the
rapidly worsening state of the Government's finances added to
anxieties about Britain's long-term prospects.
Sterling's latest losses left the pound worth as little as €1.0541 as
it fell closer to parity with the single currency.
The economic downturn undercut receipts of income tax, national
insurance, VAT, stamp duty and company and capital gains taxes while
driving up benefit costs as unemployment has risen. The number of
people claiming unemployment benefit rose by 75,700 this week to 1.07
million.
The widening gap between tax revenues and increased spending last
month led Alistair Darling to borrow £16 billion to plug the gap.
This was almost double the amount borrowed in the same month last
year, and the highest since monthly records began in their present
form in 1993.
It is only weeks since expectations of a deep recession next year
forced the Chancellor to raise his forecast for borrowing this
financial year to £77.6 billion, from the £42.5 billion projection in
his March Budget. Mr Darling also raised his borrowing expectations
for 2009-10 further, to £118 billion, or 8 per cent of national income.
Yesterday's worse-than-expected figures for November led economists
to suggest that the Chancellor may be forced to raise his borrowing
to a level not seen in modern times. “While alarmingly high, the
Government deficit projections in November's Pre-Budget Report are
already looking too low as the recession looks certain to be
significantly deeper and longer than the Government has forecast,”
Howard Archer, chief UK economist at IHS Global Insight, a
consultancy, said.
Mr Darling has conceded that the economy will shrink next year by up
to 1.25 per cent, but is pinning his hopes on a robust recovery in
2010, with predicted growth of between 1.5 per cent and 2 per cent.
Many analysts fear that the economy will contract by 2 per cent or
more next year, followed by a weak revival in 2010, with growth of
less than 1 per cent.
John Hawksworth, of PricewaterhouseCoopers, the accounting group,
predicted yesterday that the Chancellor would have to borrow £82
billion — 5.6 per cent of GDP — in 2009-10. This would climb to £130
billion in 20010-11, equivalent to 8.9 per cent of GDP, taking
borrowing above the 8.1 per cent reached in 1974-75, when Denis
Healey was Chancellor.
The scale of the mounting stresses on government finances was evident
in the detail of yesterday's dire figures.
Tax receipts from companies and individuals last month fell 5.2 per
cent compared with the same time last year. That compares with Mr
Darling's forecast for tax revenues to drop by only 0.6 per cent in
2008-09 as a whole, and by 3 per cent in the second half of the
financial year.
VAT payments fell 5.1 per cent compared with November last year. Even
after last month's cut in VAT to 15 per cent, Mr Darling is
predicting a fall of only 0.4 per cent in VAT revenues for the period
from last month to March.
While Mr Darling's tax revenues wilt, government spending continues
to grow, driven by rising welfare bills. Total spending, excluding
capital projects such as building roads, hospitals and schools, rose
6.2 per cent last month, while social security spending was up 7.1
per cent.“
The public finances look pretty awful,” said Vicky Redwood, of
Capital Economics. “It's just worrying that they are that bad this
early on in the recession.”
The Government's financial state is aggravating a sharp sell-off of
the pound as market concern grows over Britain's worsening economic
predicament. Yesterday the pound dropped by another 2 euro cents from
its closing value on Wednesday to hit €1.0541, leaving the euro worth
a record 94.86p at one point.
The pound also surrendered some of its gains registered against the
dollar this week, shedding 0.9 cents to close in London at $1.5339,
leaving the trade-weighted index of sterling's overall value close to
a record low at 76.7.
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