Posts Tagged ‘northern rock’

There have been times in the past when the markets got it into their collective head that it was time for buying, even though there were good reasons to think it was really a time for panicking. Take 2007: in that year, the Dow Jones passed a new all-time high, and the FTSE 100 came close to passing its all-time high.

These promising stock market peaks occurred after the run on Northern Rock; after the phrase ‘credit crunch’ crept into popular parlance. Back then the markets were in the mood for interpreting all news – good or bad – as if it was a reason to buy. Their logic went like this: if the news was bad that meant interest rates might fall, so buy; if the news was good, they bought because, well… because the news was good.

There have been times since when it felt a bit like that all over again, but this year, it has been rather odd.

The Dow Jones began 2013 with a score of 13,104, peaked at 15,409 on May 28 (the previous all-time high was 14,164 set in 2007). The index then fell back, falling to under 15,000 and at the time of writing stands at 15,135.

For the FTSE 100 things were a lot more volatile. The index began 2013 with a reading of 5,897, peaked on May 22 with a reading of 6,804 (against an all-time high of 6,930 set on December 30 1999), before falling back to 6,029 on June 24, and at the time of writing is at 15,135.

In Japan things have been more even extreme. With the Nikkei 225 rising from 10,401 on January 1, to 15,627 on May 22 and then 12,834 a week or so ago.

It is not hard to find an explanation but it is harder to find one that makes sense.

Because the news out of the US has been so good, the Fed is now talking about reining-in QE, and upping interest rates in 2015.

The markets do not like it.

The jury is out on how much QE has had to do with equities surging so high. QE has driven asset prices upwards, but then valuations to earnings, especially in the UK, do not look excessive.

One of the worries is that while the US economy may boom, the more indebted regions of the world simply cannot afford higher interest rates.

The Bank of England and the ECB recently went out of their way to emphasise that they have no plans to tighten monetary policy and that what they do is not dictated by the Fed.

But, supposing interest rates rise in the US, and money therefore flows into the US from the rest of the world. In response and to stop currencies falling too sharply against the dollar, we may see other central banks up rates. To make matters worse, the Central Bank in China seems to be tightening monetary policy. This may be a good thing for China, and indeed for the global economy in the long term, but for much of the world the timing is not good.

Some have had a nasty attack of déjà vu. When the Fed upped rates in 2004, one eventual consequence was money flooding out of South East Asia into the US, which led to the Asian crisis of 1997.

But then again there are differences this time. In Asia, especially among the so-called ASEAN countries of Malaysia, Indonesia, the Philippines and Thailand, internal savings are much higher and the countries are less reliant on overseas credit.

Across the world some countries are more vulnerable than others. Brazil may be the most vulnerable of the BRICS; Turkey seems to have high exposure, and worryingly – given the political situation – so does Egypt.

Many countries in emerging Europe seem exposed, as do the PIIGs – of course, and so do Sweden and the Netherlands. Household debt and house prices are high in Canada and Australia, and then there is the UK. See: Is that a sword of Damocles hanging over the UK housing market? 

Interest rates seem set to rise in the US, and for other reasons they may rise worldwide. See: The Great Reset 

This is down to good news, and is largely positive, but for some countries, companies and people, the news is not so good – not at all.

© Investment & Business News 2013

Cyprus’s first problem is that its banks are in debt.  Its second problem is that its banks are rather large relative to the Cypriot economy – at the end of 2011, money in Cypriot bank accounts was worth roughly 835 per cent of the country’s GDP.

It’s not all Cyprus’s fault – bad luck has played a role. Cypriot banks lent a lot of money to the Greek government, or – to put it another way – these banks bought bonds drawn on the Greek government worth around 160 per cent of Cypriot GDP. When Greece’s creditors were forced to accept write-downs, Cypriot banks suffered massive losses.

Cyprus is small, and the powers that be, and which control the Eurozone’s money, can afford to bail-out the country with ease. There is, however, something else at stake. Cypriot banks were also the place that many Russian Oligarchs chose as a home for their money. Lean in close, and a little secret will be whispered to you. Are you ready? There is talk of money laundering.

So why should wealthy bankers from the richer part of the euro area put their hands in their pocket and bail-out banks that do not apply the same, oh so very high standards that they do?

Some might cry hypocrisy, which may or may not be true, but maybe hypocrisy only applies if you are the one needing funding. After all, the ones with the funds are always right.

On Friday, when Cyprus’s Prime Minister President Nicos Anastasiades began discussions with finance ministers from the Eurozone and the IMF, he knew negotiations would be tough. He knew his options were limited. If the terms put to him were hard to stomach, he had little choice.

So Cyprus’s would be backers agreed to provide 10 billion euros worth of loans, but on the condition that Cyprus chipped in by contributing money from deposits held in its banks. Those with 100,000 euros or less will lose 6.67 per cent of their deposits; those with more than that will also lose 9.9 per cent on all monies over 100,000 euros.

Mr Anastasiades, or so say some reports, wanted to do it differently. He wanted those with 100,000 or less euros to contribute zero, but wanted those who had more to pay as much as 60 per cent of their bank deposits. “No!” came the response to his idea from the money men.

What about bank deposit insurance, you may ask? If you have less than 100,000 euros in a Eurozone bank, then your money is supposed to be safe, guaranteed.  How can those with less than 100,000 euros be expected to contribute to Cyprus’s bail-out? If you make them take a haircut on some of their money, the bank deposit insurance scheme counts for nothing.

Never fear, the clever old Eurozone financiers thought of that. Instead of forcing deposit holders to lose some of the money, they have been taxed instead.

Haircuts can be dangerous. Markets don’t like them. Samson didn’t like his much either, when it was administered by Delilah. But this was no haircut, it was a tax. It’s a bit like the difference between a haircut you have at the hairdresser and having your hair yanked out by pliers in the torture chamber.

You could say the people of Cyprus are a bit peeved by the whole thing. They knew something nasty was in store, but this nasty?

The Eurozone’s finance ministers are taking a risk. It is not the fault of the Cypriot people that its country’s banks made bad decisions. But they are paying the price. They might feel let down in much the same way that someone doing a bungee jump may feel let down if someone cuts their harness.

Cyprus is a small island, beautiful for sure, and its people seem to genuinely like the British too – or maybe they are welcoming to all tourists.

But they have been punished in a most cruel way. In Greece we are seeing the rise of the Far Right. Policies such as these can only have the effect of forcing massive resentment in certain pockets of the euro region. Cyprus is hardly going to invade Germany, but the discontent that is being created will surely cause resentment for years to come.

Cyprus has an alternative way forward. Take another island, at pretty much the opposite corner of Europe. After an horrendous 2009, Iceland has done okay, with its freely trading currency giving exporters a big lift. The chances that Cyprus will leave the euro must surely have risen, and frankly this may ultimately prove to be a blessing in disguise for the country.

If Cyprus does an Iceland, and – armed with an independent currency – starts attracting more tourists and more money from abroad, and then enjoys recovery, the rest of the troubled regions of the euro will look on and may eventually begin to feel envious.

What we can say without doubt is that from today onwards the chances of a Northern Rock style bank run in Europe has risen. So too, have the chances of a break-up in the euro.

p.s. Critics of the bank bail-outs of 2008/09 take note. The hardship being enforced on Cyprus is not that much different from what the UK would have experienced if its banks had not been rescued, except  that a UK banking crisis of that type would have caused a banking meltdown across the world, and repercussions would have been even more severe than what we are seeing in Cyprus.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

The FTSE 100 finished Monday 11 March at 6503. That was a five year high, just 217 points off a decade high (set 31 October 2007), and 426 points off an all-time high (set 30 December 1999).

As an aside, it is quite interesting to note that the FTSE 100 decade high occurred after the run on Northern Rock. I find it hard to imagine  what madness possessed the markets to show such exuberance when the signs of problems ahead had been writ large on the wall.

The question is: are the markets mad this time, too?

The news from the UK is not very good. But then there is this thing called the global economy, and perhaps what really counts is how the rest of the world is doing. Besides the FTSE 100 is not really a bellwether of the UK at all; after all, many of the companies listed on this index do most of their trading abroad.

The news from our two biggest trading partners is okay. In the US, annualised GDP was a tiny 0.1 per cent in the final quarter of last year, but there are reasons for believing this was a one off, and the poor performance was mainly explained by falling inventories and cuts in defence spending. Other data is far more promising.

The latest US Consumer Confidence Index from the Conference Board was 69.6. Okay that was down from the heady heights of 73.1 seen in October when the index hit a near five year high, but not a lot down. More to the point, the index rose sharply on the month before.

US Consumer Confidence

The latest Purchasing Managers’ Indices (PMIs) are promising too. The index tracking non-manufacturing hit a 12 month high, and the index for non-manufacturing rose to a two year high.

Finally, the news on US jobs is promising, with February seeing an increase of 236,000 non-farm jobs. In fact, the US unemployment rate fell to 7.7 per cent, which is the lowest level since George Dubya and Dick ruled the roost at Capitol Hill.

All in all then the data coming out of the US, is not bad. Sure you can be cynical, and say it won’t last or the US is built on a bubble, but the US does at least provide a rationale for surging stock markets.

The news out of our second largest trading partner is not quite so good, but it is still all right. The Germany economy contracted in the final quarter of last year, but the various surveys including PMIs (the Germany composite was 53.3 in February), Zew index and German IFO all point to a much better performance in Q1.

Next on the list of main exports markets is the Netherlands. The Dutch economy contracted by 0.2 per cent in Q4 last year after contracting 1 per cent in the quarter before.

But it is when we look a little further down that things are looking worrying. Our fourth largest export market is France. The French economy contracted by 0.3 per cent in Q4, a smaller contraction than Germany. But, unlike Germany, the latest Purchasing Managers’ Index was bad; at 43.1 it pointed to the contraction continuing, and the latest data on French industrial production showed a 1.2 per cent contraction.

More worrying still, our seventh largest export market is China, and things have turned for the worse. UK exports to the economy on the other side of the Great Wall have risen eight times since 2000. Earlier this year it appeared as though China was over the worst and on the mend. Not so says the latest data: growth in both industrial production and retail sales in the year to January  and February was down on the year to December. Investment into bubble areas, such as property and infrastructure is still surging, but investment into other areas, which can create sustainable growth, is not.

Markets may be riding a tide of euphoria.

But the tide may yet go into reverse.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

Never forget that before 2008 the Spanish government was held up as a beacon of fiscal responsibility. Of the world’s richest developed economies, its public debt as a percentage of GDP was the lowest. Its banks were held in pretty high esteem too, and when Northern Rock and then RBS and HBOS hit the buffers, the media said we could learn from Spain, and how its banks managed to maintain prudent management of their balance sheet, while at the same time providing mortgages with a very high loan to asset values.

It just goes to show that in hindsight it is easy for people to say: “Of course the problems were obvious all along,” but it is also possible that their backwards vision is a touch rose tinted.

And when others say: “You can’t fix a crisis caused by too much debt by borrowing more,” they miss the point where Spain is concerned.

The real problem for Spain is that during the boom years, the one size fits all approach to monetary policy in the euro area meant that its interest rates were too low, and unencumbered capital flows meant money from Germany and other richer nations flooded into the country.

Actually, if you are experiencing déjà vu, there is a good reason for it. The names were different, and so were some of the circumstances, but the Asian crisis of 1997 was largely caused by similar factors. It was not Malaysia and other so called tiger Asian economies who messed up during the 1990s; it was those who flooded the countries with money. Yet when the bubble burst and the IMF was called in to help, and Alan Greenspan waded into the fray, the priority was to ensure creditors got their money back. They imposed sharp austerity on the countries to which they provided backing. The result was that an economic nightmare was foisted on Malaysia and other countries in the region. A year later, the IMF dealt with the Russian crisis in a similar way. The long term implications of that has been mistrust of the Western economic policies, leading to deterioration in relations between Russia and the West, and the emergence of China’s policy of protecting the yuan.

When the priority is to protect creditors over debtors when the problem was as much down to the errors of the lenders, you end up with a distorted world.

The management at Barcelona might say: “Why don’t you run your football team like we do, and pick all the world’s best footballers, then you too would be unbeatable. “Alas they would be wrong. Some teams must be beatable. And when creditors dictate terms and say: “Be more like us,” we risk creating a world that can only ever know permanent depression.

Before we get to the fix, let’s take a look at Catalonia, and the snag with single currencies.

Also see the following related articles:

Is there hope for the euro? Catalonia’s rift with Spain
Spain’s woes are not down to debt
Catalonia’s strife; currency’s knife
Political shenanigans in Europe
The fix to the euro crisis

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here