This posting examines the strength of the Pound and that of the Euro
too.
The Pound as a currency will survive because it has no
alternative!!! Whether it is worth more than the Zimbabwean dollar
is more debatable. George Magnus seems sanguine in the subject!
The Euro on the other hand is being questioned as to whether the
currency can retain its present role as the EU’s official currency.
This seems much more doubtful and the Telegraph gives Ambrose Evans-
Pritchard’s judgment together with its own conclusions.
xxxxxxxxxxx cs
========================
FINANCIAL TIMES 30.1.09
Why this hysteria about sterling is misplaced
By George Magnus
Having already fallen sharply, sterling is believed by many financial
and political commentators to be due the kind of crisis that could
mean the UK would have to go cap in hand to the International
Monetary Fund. The fear is that the explosion of public debt and gilt
issuance, exacerbated by the UK government’s increasing financial
exposure to the banking system, will lead to a sovereign default
crisis in which sterling would collapse. It is a good scare story,
and it is also a hysterical one for four reasons.
First, the UK’s public debt prospects are serious but by no means
alarming yet. The government estimates that UK public debt in 2009-10
– including financial intervention measures, but excluding contingent
liabilities such as banking system credit and loan guarantees – will
amount to just under 55 per cent of gross domestic product. Official
estimates for growth in 2009-10 in the pre-Budget report were far too
optimistic – and therefore the subsequent figures for loss of tax
revenues in this recession are too high. Allowing for this – and for
sober estimates for the government’s share of losses in the banking
system over 2009-10, and a further round of bank recapitalisation –
UK public debt may have risen to about 70 per cent of GDP by 2010.
True, this is double what it was before the crisis erupted in 2007,
and the highest since 1969. As those with a fine sense of financial
history will know, however, the UK’s public debt ratio was as high or
substantially higher from 1916 until 1970, so the current surge is by
no means unprecedented.
Second, the UK is not the only country having to expand public debt
substantially as it battles to bolster and strengthen the banking
system and cushion a bad recession. Indeed, based on the 70 per cent
figure above, the UK’s ratio in 2010 will still lie below, if closer
to, the euro area average; below France’s and only slightly higher
than Germany’s; and significantly below the expected ratio for the
Organisation for Economic Co-operation and Development countries as a
whole, and for the US. This alone does not preclude a debt and
currency crisis, but the likelihood is very low.
Third, the UK state’s exposure to the banking system is expanding
rapidly, but it is likely that nationalisation would be less risky
than running up a mountain of contingent liabilities. Some paint a
morbid picture of the UK government having to absorb $4,500bn
(€3,400bn, £3,100bn) of UK bank foreign currency liabilities – three
times GDP – and ending up in a debt default and currency crisis
nightmare. No one should take this argument seriously. If these
liabilities, which include non-UK banks, were to become part of
public debt, so too would a matched £4,600bn of foreign currency
assets. The total balance sheet would rise sharply but, on a net
basis, nothing much changes. In this vital respect, the UK is unlike
Iceland, Russia and many other countries with foreign currency asset
and liability mismatches. Moreover, the UK’s much feared current
account deficit is now a benign 2 per cent of GDP and falling.
Some of the UK government’s acquired bank assets under
nationalisation would be bad, of course. However, transferring bad
assets into a “bad bank” under the public umbrella would be costless
or, in any event, a lot cheaper than the recently introduced
insurance scheme. The bad-bank-cum-nationalisation option might, in
fact, be a relatively fast and less expensive option for resolving
the banking crisis compared with the alternatives.
Fourth, the risk of a default and currency crisis in the UK surely
requires us to believe the implausible proposition that the state
will have a major failure of functions: loss of control over economic
management, exhaustion of the ability to raise taxes, inability to
get the Bank of England to use the printing press and desertion by
its financial allies. Believe what you will, but the likelihood that
these things will happen seems as low as is measurable.
The UK government has had to embark on a risky and potentially
dangerous financial path, which sterling already reflects. And it may
decline further, mercifully. But it is hysterical to imagine that a
debt default and currency crisis are likely. The country’s debt
metrics and economic management potential are nowhere near flashing
red, the government has plenty of opportunity to stabilise public
finances over the next few years, and sterling is by no means
finished against the euro in a long slowdown in which world trade has
stalled.
--------------------------------------------
The writer is senior economic adviser at UBS Investment Bank, and
author of The Age of Aging (October 2008)
===========================
TELEGRAPH 30.1.09
1. Trichet is bounced into defence of the euro
Europe's top officials have been forced into repeated assurances that
the eurozone is in no danger of falling apart, despite growing stress
in the Greek, Italian, Irish, Spanish and Austrian bond markets.
By Ambrose Evans-Pritchard in Davos
"There is no risk that the euro will break apart," said Jean-Claude
Trichet, the European Central Bank's president, speaking at the World
Economic Forum.
Yesterday was the second day Mr Trichet has had to parry questions
about the viability of monetary union. He seemed ill at ease when
asked whether Greece and Italy had become so uncompetitive they might
be forced out of the EMU.
EU officials are furious over comments this week by Dominique Strauss-
Kahn, head of the International Monetary Fund, who said the euro
could prove unworkable unless the member states give up some control
over fiscal policy. "Otherwise, differences between states will
become too big and the stability of the currency zone is in danger,"
he said.
The yield spreads on Greek 10-year bonds have reached post-EMU highs
of 265 basis points over German Bunds. The spreads have jumped to 236
for Ireland and 153 for Italy, levels unthinkable just months ago.
The spreads are watched by traders as the eurozone's stress
barometer. They also imply a large jump in funding costs for the
budget deficits of heavily indebted states such as Italy and Greece.
The Italian treasury needs to raise €200bn (£184bn) of debt in 2009.
José Manuel Barroso, the European Commission's president, insisted
that the single currency had more than proved its worth since the
crisis erupted. "The euro has acted as a very important shield," he
said. "Just compare Ireland with Iceland. I don't agree at all that
the euro is at risk."
However, the questions refuse to go away. Investor George Soros said
it was far from clear whether EMU's weaker states would be able to
uphold their bank guarantees, given the "structural weaknesses" of a
system where each country is in charge of fiscal policy and EU bail-
outs are prohibited.
"There has to be agreement at EU level on spreading risk. Germany has
been reluctant to reach into her deep pockets for countries like
Italy," said Mr Soros.
Mr Trichet denied the ECB was unable to take the sort of measures
being considered by the Bank of England and US Federal Reserve. "We
could engage in non-standard actions and, indeed, have already done
so. What we have done is extraordinary," he said.
The ECB has increased its balance sheet by more than the Fed,
accepting housing debt as collateral from banks. But it has not gone
to the next stage by purchasing bonds outright.
Such a radical move would open a political can of worms, raising
suspicions that German taxpayers were funding a covert bail-out of
Club Med.
Italy's finance minister, Giulio Tremonti, who was sitting on the
same Davos panel, nevertheless called for the issue of a "union
bond". Any such instrument would amount to a huge leap forward for an
EU debt union.
Mr Tremonti said Italy had been unfairly singled out. While its
public debt is high at 107pc of GDP, its private debt is very low.
Indeed, Italy has avoided the sort of housing bubbles that are
affecting other states.
"Our banking system is quite solid. They don't speak English," he said.
========================
2. The euro will struggle to survive the recession - Leading Article
The single currency is causing popular unrest in Europe.
Six months ago Nicolas Sarkozy crowed that when there is a strike in
France these days, no one notices. Well, we noticed yesterday's. A
million protesters were reported to be on the streets while transport
and public services were disrupted as a quarter of all workers in the
state sector joined the inaction. It may not have been the seismic
event that some union leaders had predicted, but it was enough to
demonstrate the depth of French anger over the government's handling
of the economic crisis. One poll showed 69 per cent public support
for the disruption.
Yet underlying the anger is a profound sense of frustration because
the French, like the other 15 members of the eurozone, are all too
aware that their national governments have only limited room for
manoeuvre. The one-size-fits-all inflexibility of the eurozone
deprives single currency members of the vital weapons of devaluation
and monetary policy with which they can at least try to ameliorate
the impact of the global downturn. This month the European Central
Bank cut interest rates from 2.5 per cent to
2 per cent and its president, Jean-Claude Trichet, indicated that the
bank is unlikely to make any further cuts. That leaves the cost of
money higher in the eurozone than in this country (where the Bank
Rate is 1.5 per cent) or the United States (where the Federal Reserve
has cut rates to 0.25 per cent). Such a straitjacket is exacting a
heavy price. The EU's powerhouse, Germany, is deep in recession with
unemployment forecast to exceed four million by the end of next year.
At the other end of the scale, the Club Med countries of Greece,
Spain and Portugal have all seen their international credit rating
downgraded by Standard and Poor's, which has also put Ireland on
"negative watch".
For critics of the single currency, the test of the euro was always
going to come during a bust, not a boom. Now the bust is with us, it
is evident that the strains on the currency are becoming
unsustainable. Europe's leaders are blaming the Left for the kind of
unrest we saw in France yesterday, and rather more bloodily in Greece
last month, but that is too simplistic. The inherent contradictions
of trying to run 16 national economies as one are becoming all too
apparent. Europe's political elite may be in denial but the people
are not. They realise that the governments they elect no longer have
control of the economic levers and the consequences are proving ruinous.
With the International Monetary Fund this week forecasting that it
will be two years before the world economy resumes growth, it becomes
increasingly difficult to envisage the euro surviving intact.
[Non-text portions of this message have been removed]
too.
The Pound as a currency will survive because it has no
alternative!!! Whether it is worth more than the Zimbabwean dollar
is more debatable. George Magnus seems sanguine in the subject!
The Euro on the other hand is being questioned as to whether the
currency can retain its present role as the EU’s official currency.
This seems much more doubtful and the Telegraph gives Ambrose Evans-
Pritchard’s judgment together with its own conclusions.
xxxxxxxxxxx cs
========================
FINANCIAL TIMES 30.1.09
Why this hysteria about sterling is misplaced
By George Magnus
Having already fallen sharply, sterling is believed by many financial
and political commentators to be due the kind of crisis that could
mean the UK would have to go cap in hand to the International
Monetary Fund. The fear is that the explosion of public debt and gilt
issuance, exacerbated by the UK government’s increasing financial
exposure to the banking system, will lead to a sovereign default
crisis in which sterling would collapse. It is a good scare story,
and it is also a hysterical one for four reasons.
First, the UK’s public debt prospects are serious but by no means
alarming yet. The government estimates that UK public debt in 2009-10
– including financial intervention measures, but excluding contingent
liabilities such as banking system credit and loan guarantees – will
amount to just under 55 per cent of gross domestic product. Official
estimates for growth in 2009-10 in the pre-Budget report were far too
optimistic – and therefore the subsequent figures for loss of tax
revenues in this recession are too high. Allowing for this – and for
sober estimates for the government’s share of losses in the banking
system over 2009-10, and a further round of bank recapitalisation –
UK public debt may have risen to about 70 per cent of GDP by 2010.
True, this is double what it was before the crisis erupted in 2007,
and the highest since 1969. As those with a fine sense of financial
history will know, however, the UK’s public debt ratio was as high or
substantially higher from 1916 until 1970, so the current surge is by
no means unprecedented.
Second, the UK is not the only country having to expand public debt
substantially as it battles to bolster and strengthen the banking
system and cushion a bad recession. Indeed, based on the 70 per cent
figure above, the UK’s ratio in 2010 will still lie below, if closer
to, the euro area average; below France’s and only slightly higher
than Germany’s; and significantly below the expected ratio for the
Organisation for Economic Co-operation and Development countries as a
whole, and for the US. This alone does not preclude a debt and
currency crisis, but the likelihood is very low.
Third, the UK state’s exposure to the banking system is expanding
rapidly, but it is likely that nationalisation would be less risky
than running up a mountain of contingent liabilities. Some paint a
morbid picture of the UK government having to absorb $4,500bn
(€3,400bn, £3,100bn) of UK bank foreign currency liabilities – three
times GDP – and ending up in a debt default and currency crisis
nightmare. No one should take this argument seriously. If these
liabilities, which include non-UK banks, were to become part of
public debt, so too would a matched £4,600bn of foreign currency
assets. The total balance sheet would rise sharply but, on a net
basis, nothing much changes. In this vital respect, the UK is unlike
Iceland, Russia and many other countries with foreign currency asset
and liability mismatches. Moreover, the UK’s much feared current
account deficit is now a benign 2 per cent of GDP and falling.
Some of the UK government’s acquired bank assets under
nationalisation would be bad, of course. However, transferring bad
assets into a “bad bank” under the public umbrella would be costless
or, in any event, a lot cheaper than the recently introduced
insurance scheme. The bad-bank-cum-nationalisation option might, in
fact, be a relatively fast and less expensive option for resolving
the banking crisis compared with the alternatives.
Fourth, the risk of a default and currency crisis in the UK surely
requires us to believe the implausible proposition that the state
will have a major failure of functions: loss of control over economic
management, exhaustion of the ability to raise taxes, inability to
get the Bank of England to use the printing press and desertion by
its financial allies. Believe what you will, but the likelihood that
these things will happen seems as low as is measurable.
The UK government has had to embark on a risky and potentially
dangerous financial path, which sterling already reflects. And it may
decline further, mercifully. But it is hysterical to imagine that a
debt default and currency crisis are likely. The country’s debt
metrics and economic management potential are nowhere near flashing
red, the government has plenty of opportunity to stabilise public
finances over the next few years, and sterling is by no means
finished against the euro in a long slowdown in which world trade has
stalled.
--------------------------------------------
The writer is senior economic adviser at UBS Investment Bank, and
author of The Age of Aging (October 2008)
===========================
TELEGRAPH 30.1.09
1. Trichet is bounced into defence of the euro
Europe's top officials have been forced into repeated assurances that
the eurozone is in no danger of falling apart, despite growing stress
in the Greek, Italian, Irish, Spanish and Austrian bond markets.
By Ambrose Evans-Pritchard in Davos
"There is no risk that the euro will break apart," said Jean-Claude
Trichet, the European Central Bank's president, speaking at the World
Economic Forum.
Yesterday was the second day Mr Trichet has had to parry questions
about the viability of monetary union. He seemed ill at ease when
asked whether Greece and Italy had become so uncompetitive they might
be forced out of the EMU.
EU officials are furious over comments this week by Dominique Strauss-
Kahn, head of the International Monetary Fund, who said the euro
could prove unworkable unless the member states give up some control
over fiscal policy. "Otherwise, differences between states will
become too big and the stability of the currency zone is in danger,"
he said.
The yield spreads on Greek 10-year bonds have reached post-EMU highs
of 265 basis points over German Bunds. The spreads have jumped to 236
for Ireland and 153 for Italy, levels unthinkable just months ago.
The spreads are watched by traders as the eurozone's stress
barometer. They also imply a large jump in funding costs for the
budget deficits of heavily indebted states such as Italy and Greece.
The Italian treasury needs to raise €200bn (£184bn) of debt in 2009.
José Manuel Barroso, the European Commission's president, insisted
that the single currency had more than proved its worth since the
crisis erupted. "The euro has acted as a very important shield," he
said. "Just compare Ireland with Iceland. I don't agree at all that
the euro is at risk."
However, the questions refuse to go away. Investor George Soros said
it was far from clear whether EMU's weaker states would be able to
uphold their bank guarantees, given the "structural weaknesses" of a
system where each country is in charge of fiscal policy and EU bail-
outs are prohibited.
"There has to be agreement at EU level on spreading risk. Germany has
been reluctant to reach into her deep pockets for countries like
Italy," said Mr Soros.
Mr Trichet denied the ECB was unable to take the sort of measures
being considered by the Bank of England and US Federal Reserve. "We
could engage in non-standard actions and, indeed, have already done
so. What we have done is extraordinary," he said.
The ECB has increased its balance sheet by more than the Fed,
accepting housing debt as collateral from banks. But it has not gone
to the next stage by purchasing bonds outright.
Such a radical move would open a political can of worms, raising
suspicions that German taxpayers were funding a covert bail-out of
Club Med.
Italy's finance minister, Giulio Tremonti, who was sitting on the
same Davos panel, nevertheless called for the issue of a "union
bond". Any such instrument would amount to a huge leap forward for an
EU debt union.
Mr Tremonti said Italy had been unfairly singled out. While its
public debt is high at 107pc of GDP, its private debt is very low.
Indeed, Italy has avoided the sort of housing bubbles that are
affecting other states.
"Our banking system is quite solid. They don't speak English," he said.
========================
2. The euro will struggle to survive the recession - Leading Article
The single currency is causing popular unrest in Europe.
Six months ago Nicolas Sarkozy crowed that when there is a strike in
France these days, no one notices. Well, we noticed yesterday's. A
million protesters were reported to be on the streets while transport
and public services were disrupted as a quarter of all workers in the
state sector joined the inaction. It may not have been the seismic
event that some union leaders had predicted, but it was enough to
demonstrate the depth of French anger over the government's handling
of the economic crisis. One poll showed 69 per cent public support
for the disruption.
Yet underlying the anger is a profound sense of frustration because
the French, like the other 15 members of the eurozone, are all too
aware that their national governments have only limited room for
manoeuvre. The one-size-fits-all inflexibility of the eurozone
deprives single currency members of the vital weapons of devaluation
and monetary policy with which they can at least try to ameliorate
the impact of the global downturn. This month the European Central
Bank cut interest rates from 2.5 per cent to
2 per cent and its president, Jean-Claude Trichet, indicated that the
bank is unlikely to make any further cuts. That leaves the cost of
money higher in the eurozone than in this country (where the Bank
Rate is 1.5 per cent) or the United States (where the Federal Reserve
has cut rates to 0.25 per cent). Such a straitjacket is exacting a
heavy price. The EU's powerhouse, Germany, is deep in recession with
unemployment forecast to exceed four million by the end of next year.
At the other end of the scale, the Club Med countries of Greece,
Spain and Portugal have all seen their international credit rating
downgraded by Standard and Poor's, which has also put Ireland on
"negative watch".
For critics of the single currency, the test of the euro was always
going to come during a bust, not a boom. Now the bust is with us, it
is evident that the strains on the currency are becoming
unsustainable. Europe's leaders are blaming the Left for the kind of
unrest we saw in France yesterday, and rather more bloodily in Greece
last month, but that is too simplistic. The inherent contradictions
of trying to run 16 national economies as one are becoming all too
apparent. Europe's political elite may be in denial but the people
are not. They realise that the governments they elect no longer have
control of the economic levers and the consequences are proving ruinous.
With the International Monetary Fund this week forecasting that it
will be two years before the world economy resumes growth, it becomes
increasingly difficult to envisage the euro surviving intact.
[Non-text portions of this message have been removed]
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