Two from Ambrose Evans-Pritchard.
Firstly the question of the eurozone’s hidden toxic debts was forecast in my postings to surface at about the turn of the year. Hitherto their existence had been denied, Now that their existence is surfacing and being admitted they are presaging trouble
This mainly seems to be relevant to Germany and - some say - France. Spain has its own looming near disasters brought on by the inflexible single currency.
Then this posting turns to the dangers in the next six months for Britain, this is written by an earlier head of the FSA. He makes some surprising judgements about yje readiness of the British people to face facts.
Christina
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16.10.09
1. German 'Wise Men' fear credit crunch in 2010
Germany's leading institutes have warned that the pace of economic recovery is "unsustainable" and that the country's banks may face a fresh crisis over the next year as bad debts surface in earnest.
By Ambrose Evans-Pritchard, International Business Editor
'There is still a significant risk of further shocks to the international financial system,' said a joint report by the five 'Wise Men', a panel that advises the government.
Emergency action by the European Central Bank and authorities worldwide "averted a looming collapse" of Germany's banks over the Winter but lenders are still too frail to renew normal lending.
"Credit to non-financial firms has clearly been declining. Financial conditions are likely to worsen further. Banks are facing large write-offs on toxic debt and a rising toll of company insolvencies," it said.
The report said it was a serious error to pressure banks to raise capital ratios in the middle of a downturn, causing them to tighten lending standards. "There is a major danger that already tight financing conditions could lead to a credit crunch next year," it said.
The first round of the financial crisis hit the big banks and state Landesbanken, which had portfolios on US sub-prime debt and other traded assets,. The next wave of victims may be the country's savings banks faced with the 'slow-burn' losses of loan defaults.
Large companies can raise money on the bond markets but smaller Mittelstand family firms are facing serious problems rolling over debt. Germany's industrial lobby VDMA this week called for a change in policy to prevent savings banks from choking off credit to its members, the backbone of the export machine.
The Wise Men said Germany's economy would contract by 5pc this year. They have upgraded their growth forecast for 2010 from minus 0.5pc to plus 1.2pc, but cautioned that unemployment will rise by another 300,000 as firms pull back from costly work-support schemes, known as Kurzarbeit. [tr:’short-time working’ -cs] The pace of the current rebound - driven by restocking and short-term stimulus - is "not likely to be sustainable".
The report said Berlin had botched its bank rescue programme by allowing lenders to choose whether to take part. Banks opted to cut lending rather than dilute their share base or accept onerous conditions from the state. They were reluctant to send a "negative signal" to the markets by admitting to distress.
Separately, the rating agency Moody's said this week that Spanish banks face "severe asset quality deterioration" and have yet to make provisions for over half of the €108bn (£99bn) of likely losses over the next five years. The figure could prove much higher if pessimists are right about the gravity of the Spanish slump. Under Moody's "stress scenario" losses could reach €225bn.
"Spanish banks have so far demonstrated remarkable resilience, but Moody's remains concerned that many entities appear to be avoiding recognition of the true scale of asset quality deterioration on their books," said analyst Maria Cabanyes.
The Bank of Spain has been praised for trying to restrain credit by tightening lending standards as the boom gathered pace over the last year. This has bought the country some protection. However, the effects of ultra-low interest rates in the eurozone washed over their best efforts. [Yet another example of damage caised by membership of the euro, where ‘one size does NOT fit all -cs]
The Bank has since admitted that monetary policy set in Frankfurt was too loose for Spain's needs over an extended period.
2. Ex-FSA chief Sir Howard Davies sees 'dramatic’ risks for Britain
The British people are living in a fool's paradise and have yet to understand the gravity of the economic crisis, according a former head of the Financial Services Authority.
By Ambrose Evans-Pritchard, International Business Editor
Sir Howard Davies, now Director of the London School of Economics, said Britain faces a dangerous rise in the levels of public debt – even taking into account tax increases planned for coming years.
"The next six months are going to be extremely delicate in the UK", he told a gathering of HSBC clients in London. "It is very clear that something dramatic has to happen to control spending: but is the economy robust enough to survive fiscal tightening?"
The Government is already running out of weapons to fight the crisis. While the fall in the pound has helped boost exports and proved benign so far, Sir Howard said that past experience handling sterling crises had taught him that the matters can turn ugly fast once confidence is lost. "The pound never stops where you want it to," he said.
What is disturbing is that the British people seem unwilling to face minimal belt-tightening. [AEP appears to have used different Opinon polls from those I’ve read which show great willingness to accept most suggested cuts. The only one - probably the most necessary one - which thet appear to reject is the rise in pension age ! -cs] Even professors in higher education are balloting to strike, demanding a continuation of boom-time pay raises. "You have the best minds in the country planning to go on strike for 8pc. People are miles away from understanding what is needed."
Polling data shows that 48pc of the public are against any spending cuts and only 20pc see the need for retrenchment. Britons appear to assume that the "fantastic growth in public spending" over the last decade has become an entitlement.
Sir Howard said the reality is that the Government has so far come clean on just half of the fiscal consolidation necessary over the next five years merely in order to stabilize debt. By 2014 we will be among the Big Four of global profligates. "It is not a great club to be in," he said
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