Some key facts and warnings about the ongoing crisis. (nb excuse more comment - power-cuts keep occurtring!)
Christina
TELEGRAPH
15.9.09
1. Sterling is a silver lining as the dark clouds of austerity gather
The single biggest issue facing the UK economy is the chronic state of the country's public finances. There was some cheery economic news yesterday but I stick to my prediction of earlier this year that I won't be writing about recovery in 2009 – bottoming out yes, but not a real recovery.
By Damian Reece
The austerity measures needed to deal with a public sector deficit heading towards £200bn (enough to pay for all the energy infrastructure we need to go green and keep the lights on) will act as a major dampener on UK economic activity.
We face an economic restructuring every bit as profound and painful as that of the early 1980s as we move, once again, away from an economy characterised by an unaffordable and unmanageable public sector to a more sustainable private sector led existence.
In reaching that point there's obviously no money left in Government coffers to spend our way out of recession. Taxes are going up, not down. Interest rates are as low as they'll go. We're fast approaching the limits of Mervyn King's ability to pump money into the economy via the banks (who don't seem to be passing much on) which leaves the currency as the final instrument we have to keep the economy off the rocks.
The pound has been tumbling against the euro and dollar which, frankly, has been the one bit of good economic news in recent months. Our private sector is encouraged to export because its goods and services are cheaper in overseas markets while output for domestic consumption is more competitively priced than imports from more expensive currency zones.
This advantage won't anaesthetise us completely against the austerity years to come, but it will help, as King mentioned in a recent interview.
Economists at Goldman Sachs have even raised the prospect of Britain returning to a trade surplus as a result. There is a danger sterling could fall too far and this year's correction will certainly turn into a rout if international capital markets don't believe our politicians are serious about tackling the deficit.
But right now sterling is fairly valued against both the dollar and the euro, any measure of purchasing power parity will show that. Take The Economist magazine's popular Big Mac Index. In the US the globally ubiquitous burger costs $3.57. Here it's £2.29 implying a pound/dollar exchange rate of 1.56. The actual exchange rate yesterday was 1.59 so we are within a gherkin sliver of fair value.
Go to Paris and you'd pay 3.31 euros for a Big Mac implying a euro/dollar exchange rate of 1.08 compared to the actual rate of 1.48 which shows the euro is overvalued against the dollar by 37pc – a Whopper of a premium some might say.
That's a big part of the euro/sterling story too: overvaluation of the euro rather than an undervaluation of the pound.
At 1.07 euros to the pound we're undershooting, by 7.5pc, the 1.15 level previously thought of as a fair value entry point if the pound were ever to join the single currency. Cast your mind back to those fairly recent days of the two-dollar pound and you can see just how overvalued the pound was in 2007, itself a big contributor to our trade deficit as we bought all things American.
A 10-year gilt yield of 3.49pc against a French yield of 3.57pc tells us investors have as much faith in the UK as euroland. We've maintained our credit rating as a nation so an inflation inducing death spiral for the pound is not expected, as long as we start to restore the public finances to order sharpish. If anything, deflation remains a more likely scenario as the spare capacity (unemployment, vacant offices, closed factories) created by recession leaves an awful lot of slack in the system before inflation can take off. We can't afford to be complacent but our free floating currency is a blessing not a curse.
2. EU directive on the City will leave pension funds £1bn worse off
Pension funds will be more than £1bn a year worse off under European Union plans to clamp down on hedge funds and private equity according to a new report by the City regulator.
By Helia Ebrahaimi
The EU Directive will also hit hedge funds and private equity firms with one-off compliance costs of up to 3.2bn euros and ongoing annual costs of 311m euros, the study commissioned by the Financial Services Authority shows.
Its publication provides powerful ammunition to opponents of the Alternative Investment Fund Management Directive as it shows the proposals have far reaching cost implications across a range of industries and will even hit pensioners in the pocket.
The report, from independent consultants Charles River Associates, said EU pension funds had assets under management of about five trillion euros and more than half used alternative investment funds, meaning annual returns could be hit by about 1.4bn euros.
“This is a conservative estimate of total loss of return since pension funds are only a portion of the relevant investor universe,” the report said. The two month study, which interviewed leading industry firms and organisations across Europe, highlights the financial impact of the Directive which will put severe restrictions on how and where funds can invest.
There are fears that given the concentration of hedge funds and private equity firms based in London that the UK would bear a disproportionate impact from the financial burden of the Directive, but the report shows the threat is widespread.
Dan Waters, director of retail policy and conduct risk for the FSA, said: “We commissioned this report to understand better what the impact would be on an evidenced basis - which is how we devise FSA policy.”
One major proposal that has attracted the anger of critics is that funds not domiciled in Europe would not be available to European investors – which would curtail the ability of pension funds to choose the best funds.
The one size fits all regulation model of the Directive, which lumps hedge funds, private equity and property funds in together, would also have big compliance costs implications borne out by the report.
“We wanted to understand what the effects would be on the market as a whole,” said Mr Waters who stressed the importance of the report's contribution to the FSA’s efforts to try and make sure the Directive was more proportionate in its approach to regulation.
“We are not opposed to regulation - we would welcome sensible and proportionate regulation and if we can get this thing right it will be very good news for the hedge fund and private equity industries,” he said.
The publication of the report comes as Lord Myners, the Treasury minister, flies to Spain to lobby Spanish finance minister Elena Salgado as the Government steps up the fight to reform the Directive.
“We are not Johnny-come- lately’s to this issue we have been working on it for the last six months,” the City minister told the British Venture Capital Association’s annual summit in London this week.
“The case needs to made that it is not just about London, but that it would be a lost opportunity for Europe as a whole if the private equity and hedgefund industries were damaged,” he said.
Spain takes over the European presidency in the New Year and Lord Myners wants its backing for reform having already secured the support of Sweden, which currently holds the presidency. Spain’s support is vital as the battle to water down the proposals is likely to continue into next year
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