FedUpUSA

Archive for the ‘United Kingdom’ Category

It’s for the children….errr…or something.  You guys don’t mind, right?  And you Americans thinking that this can’t happen here – think again.  Consider yourself warned.

* Govt targets pension funds for spending boost

* OECD sees UK economy slipping into recession in 2012

* Series of measures aimed to bolster growth

LONDON, Nov 28 (Reuters) – Britain unveiled plans on Monday to tap pension funds for the lion’s share of an investment of up to 30 billion pounds ($46.5 billion) in big building projects to help to revitalise a stagnant economy forecast to slip back into recession next year.

The measures are the latest in a drip feed of government announcements ahead of Finance Minister George Osborne’s autumn statement on Tuesday when growth forecasts will be cut as the euro zone crisis bites.

The OECD forecast on Monday that Britain would suffer a modest recession next year, urging the Bank of England to expand its asset purchase programme designed at shoring up a faltering economy.

Adding to the gloom, British retail sales fell at their fastest pace in 2-1/2 years in November, a survey by business lobby the CBI showed.

Britain’s Conservative-led coalition has made it its priority to erase a budget deficit that peaked at 11 percent of national output.

It is cutting spending by around a fifth across most government departments, but the domestic squeeze has coincided with plunging demand from continental European markets hit by the eurozone crisis.

The unemployment level has hit a 15-year high and the government is likely to fail to hit a target of wiping out the structural deficit by 2015, when the next election must be held.

Responding to industry calls to help companies to access cash, Osborne announced measures on Sunday to underwrite 20 billion pounds of loans to smaller companies which are struggling to get credit.

Analysts backed the plans but said that they would take time to feed through into the economy.

“Measures to reprioritise capital spending and start the credit easing programme are welcome, but they are coming too late to do much about the impending recession in the UK,” BNP Paribas economist David Tinsley said in a note.

“With the domestic demand in the UK already very weak heading into the crisis, it is hard to see where any growth next year will come from.”

 

NO NEW BORROWING

Treasury Minister Danny Alexander said that the government would reallocate 5 billion pounds of spending to capital projects by 2015 but crucially added that a deficit-cutting coalition would not borrow any more.

“Through working with British pension funds, we’re identifying ways to unlock around 20 billion pounds of pension fund investment to go into privately funded infrastructure,” Alexander told BBC Radio 4.

Osborne said the government could invest up to 30 billion pounds in schools, roads and rail projects, a much needed boost for the country’s creaking infrastructure.

He got a boost on Monday when the head of China’s sovereign wealth fund said the country was keen to invest in the ailing infrastructure of Western countries, especially Britain.

“Britain has got to get away from the quick-fix, debt solutions that got us into this mess,” Osborne said.

“We’ve got to weather the current economic storm but we’ve got to lay the foundation for a stronger economic future.”

Pension funds are looking to ensure better returns after yields on British government bonds or gilts fell following buying by the Bank of England and by investors seeking a haven from eurozone turmoil.

Pension funds saw great potential in the scheme but again its effects would take time to work through.

“This could be a real win-win. The UK desperately needs to update its infrastructure, and pension funds are looking for inflation-linked, long-term investments,” said Joanne Segars, chief executive of the National Association of Pension Funds.

“Pension funds hold over a trillion pounds in assets, but only around 2 percent of that is invested in infrastructure. There’s the potential for that to be much higher.”

Analysts at Panmure Gordon said the additional investment would provide a boost to British construction and engineering firms including Balfour Beatty, WS Atkins, Kier and Costain.

I’m sure this will end well.

A week after the BBC exploded Alessio Rastani to the stage, it has just done it all over again. In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone’s mind: “If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008…. What we don’t know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems.”

But no, Morgan Stanley does, or so they swear an unlimited number of times each day. And they say not to worry about anything because, you see, it is not like they have any upside in telling anyone the truth. Which is why for everyone hung up on the latest rumor of a plan about a plan about a plan spread by a newspaper whose very viability is tied in with that of the banks that pay for its advertising revenue, we have one thing to ask: “show us the actual plan please.” Because it is easy to say “recapitalize” this, and “bad bank” that. In practice, it is next to impossible. So yes, ladies and gentlemen, enjoy this brief relief rally driven by the fact that China is offline for the week and that the persistent source of overnight selling on Chinese “hard/crash landing” concerns has been gone simply due to an extended national holiday.  Well, that holiday is coming to an end.

By the way, Reuters, Shapiro is not a Yes Man – we’ll spare you the ruminations.

h/t Scrataliano

ZeroHedge

Hats off to Iceland for a second time for telling the IMF, the UK, and Netherlands to “Go to Hell” over the most recent Icesave proposal, better thought of as Ice Torture.

Please consider Iceland’s President Vetoes Icesave Deal

For the second time, Iceland’s president vetoed a bid by the island nation’s Parliament to repay the U.K. and the Netherlands more than $5 billion lost by depositors in Iceland’s epic 2008 banking collapse—sending the matter to a referendum by a deeply skeptical public and complicating the country’s application to join the European Union.

The dispute over Icesave—the online arm of a failed Iceland bank that took deposits from British and Dutch savers—has percolated for more than two years, reflecting the Icelandic people’s dissatisfaction with paying the price for what is almost universally regarded as the hubris of a few bankers.

A first attempt at a repayment deal in 2009 faced stiff opposition in the Icelandic parliament. A modified bill passed later that year, but President Ólafur Ragnar Grímsson vetoed it in early 2010, triggering a referendum, which failed.

The new deal carries substantially better terms—Iceland has until 2046 to repay, at an interest rate of about 3%—but Mr. Grímsson said in a statement issued Sunday that the Icesave issue is so weighty and so contested that it wasn’t up to Parliament to decide.

“There is support for the view that the people should once again, as before, act together with the Althingi as the legislator in this matter,” Mr. Grímsson said, using the local name for Iceland’s thousand-year-old Parliament.

The presidential veto is rare. It has now been used just three times since Iceland’s independence from Denmark in 1944. The Icelandic president approves nearly all bills passed by Parliament; under the constitution, he may only approve or call a referendum.

If history is a guide, the deal once again faces nearly certain defeat. In the first plebiscite, 93.2% of voters, or 134,392, rejected the bill. Just 2,599 picked “yes,” badly trailing even the 6,744 who left their ballots blank.
The British and the Dutch governments stepped in in 2008 to compensate depositors in their countries who had placed money with Icesave, since Iceland’s tiny deposit-insurance program was woefully short of cash. The two nations soon demanded their money back—about £2.35 billion ($3.8 billion) for the U.K. and €1.32 billion ($1.8 billion) for the Netherlands.

The total amounts to about half a year’s economic output.

Iceland repayment talks collapse

The BBC Reports Iceland repayment talks collapse

Talks on how Iceland will repay more than 3.8bn euros (£3.3bn) of debt it owes to the UK and the Netherlands have broken down without agreement.

The collapse of the Iceland-based Icesave online bank in October 2008 hit savers in both countries.

The UK and Dutch governments are seeking repayments from Iceland after they compensated savers themselves.

However, the three governments have been unable to agree on revised payment terms after a week of negotiations.

“We had hoped to be able to reach a consensual resolution of this issue on improved terms, but this has not yet been possible,” said Iceland’s finance minister Steingrimur Sigfusson.

In a statement, the UK and Dutch governments said they were “very disappointed that despite all the efforts over the past year and a half, Iceland is still unable to accept our best offer on the Icesave loan”.

Iceland plans to hold a referendum on the Icesave repayment on 6 March, but the government is hopeful it can reach a different deal ahead of that.

Opinion polls suggest that a majority of Icelandic voters would reject the repayment plan.

The dispute has delayed International Monetary Fund help for Iceland, which Reykjavik needs to shore up its stricken economy.

The country’s parliament voted for a referendum on the Icesave bill after President Olaf Ragnar Grimsson vetoed the repayment to the UK and the Netherlands.

Opponents say the repayment plan forces Icelandic taxpayers to pay for bankers’ mistakes.

The dispute has also overshadowed Iceland’s application to join the EU, which was submitted in July.

Iceland’s economic crisis persuaded many of its politicians that it would be better off inside the 27-nation bloc.

Arrogance of UK, Netherlands

Note the arrogance of the UK and Netherlands issuing a statement “Iceland is still unable to accept our best offer on the Icesave loan”. It is up to Iceland to make its best offer not for the UK and Ducth governments to make demands of 100% repayment.

Why should Iceland crucify its taxpayers with a “loan” when the correct procedure is a massive haircut.

Iceland should immediately counter with its “best offer” of one cent on the dollar. That will set the tone for reasonable expectations.

Somehow the Icelandic Parliament does not get it. Fortunately the president does.

Commending Iceland’s President

I commend the decision of the president to send this to the people to vote. Moreover I encourage Icelandic voters to vote the same way they did last time.

Here’s the deal. When you make stupid investments, don’t expect to be bailed out. There is no reason the people of Iceland should have to pay for the stupidity of others.

If the UK and Dutch governments were dumb enough to guarantee those deposits, then the UK and Dutch governments should pay the price, not Icelandic citizens.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Now London Is Getting Into It: Goldman

Posted by Karl Denninger

Europe’s Banks Brace for UK Debt Crisis

UniCredit has alerted investors in a client note that Britain is at serious risk of a bond market and sterling debacle and faces even more intractable budget woes than Greece.

By Ambrose Evans-Pritchard, International Business Editor

No turning back: Sterling is going to fall further over coming months, warns Unicredit

The Italian-German group, Europe’s second largest bank, said Britain’s tax structure will make it hard to raise fresh revenue quickly enough to restore confidence in UK public finances.

“I am becoming convinced that Great Britain is the next country that is going to be pummelled by investors,” said Kornelius Purps, Unicredit ‘s fixed income director and a leading analyst in Germany.

Mr Purps said the UK had been cushioned at first by low debt levels but the pace of deterioration has been so extreme that the country can no longer count on market tolerance.

“Britain’s AAA-rating is highly at risk. The budget deficit is huge at 13pc of GDP and investors are not happy. The outgoing government is inactive due to the election. There will have to be absolute cuts in public salaries or pay, but nobody is talking about that,” he told The Daily Telegraph.

“Sterling is going to fall further over coming months. I am not expecting a crash of the gilts market but we may see a further rise in spreads of 30 to 50 basis points.”

Yields on 10-year gilts have already crept up to 4.14pc, compared to 3.94pc for Italian bonds, 3.48pc for French bonds, and 3.19pc for German Bunds, though part of this reflects worries about higher inflation in Britain.

Ian Stannard, currency strategist at BNP Paribas, said markets are fretting over how the UK will cover its deficit following the pause in quantitative easing by the Bank of England. The Bank has absorbed £200bn of debt, more than total Treasury issuance over the last year.

“The UK may have difficulty in attracting extra investors to fill the gap. We think they will have to do more QE as recovery falters,” he said.

BNP Paribas expects sterling to drop to $1.31 against the dollar this year and reach parity against the euro despite troubles in Club Med. “We’re very bearish on the UK,” he said.

Big global banks are divided over Britain’s economic prospects . Goldman Sachs is betting on a turbo-charged recovery as the delayed effects of sterling devaluation kick in. Britain’s trump card is an average debt maturity of 14.1 years, nearly three times US maturities and double those of France. This greatly reduces the risk of a “roll-over” crisis.

UniCredit said Greece is better placed than the UK in coming months even if deficits look comparable. “The polls point to a minority government in the UK, while Greece’s government can count on a majority to push austerity measures through parliament. Secondly, the British tax system offers less leverage for a rise in revenue,” he said.

Paradoxically, Greek tax evasion creates scope for a surge in revenues from tougher enforcement. “It is not out of the question that we will see a positive surprise in Greece: is there any such hope for Britain?” said Mr Purps.

Still, while it is arguable whether a hung Parliament in Britain will lead to policy drift, analysts said Greece was in trouble already. The country was brought to a standstill on Thursday by the second general strike in weeks. Police clashed with rioters , again reducing Athens to a fog of tear gas. Observers said that did not augur well for a nation that has hardly begun its three-year ordeal of draconian cuts.

Albert Edwards: At 500% Net Liabilities To GDP, It Is Too Late To Prevent The Collapse Of The G-7; Greece Is Irrelevant, We Are All Now Insolvent

Submitted by Tyler Durden

For Greece, with on and off balance sheet liabilities at over 800%, it’s game over. For the Eurozone, with the same ratio at about 500%, it is also game over. For the US, at 500%+, it is, you guessed it (sorry Joseph Stiglitz), game over, but since we have the printers, it will simply take a little longer. Following up on yesterday’s popular post on prevailing delusions as captured by Albert Edwards’ colleague Dylan Grice, we present Albert’s latest outlook. Please don’t read this if you want to keep believing there is any hope left for the (developed) world.

But first some aeral photography from Dylan Grice, indicating just how far the US government is willing to go to get the population stoked about owning fixed (shouldn’t it be called broken really?) income. With British QE over, and the country still to implement the same criminal annuitizing of 401(k)s that Uncle Sam is contempltating in order to make “Buy Bonds” a “voluntary” option one can’t really decline, maybe letters on modern architecture building blocks is all that would works. As Edwards says: “I’m not sure leaving man-sized building blocks around the City of London is really going to make an awful lot of difference, but I suppose when your public sector deficit is around 13% of GDP, every little bit helps!”

So back to Greece, the Eurozone, and policy response in general, Edwards places the causes (and “solutions”) of the escalating problem precisely where it belongs: at the core of the Keynesian systemic outlook flaw.

A major divergence of views in the market at the moment concerns what governments should be doing with their outsized fiscal deficits. Economists seem to be polarised between those who think governments should be rapidly cutting fiscal deficits to avoid impending insolvency and/or a surge in bond yields, and those who believe this will be totally counterproductive and that deficits should stay very large. Behind this controversy probably lies the key to the economic outlook.

To Edwards, and to ever more hedge fund investors judging by the jump back in Greece Bund spreads which just broke the most recent technical resistance level of 300 bps, Greece is nothing more than Russia and LTCM (or Bear Stearns as the case may be).

The situation in Greece following hard on the heels of similar solvency issues in Dubai feels to me very much like the Russian default and LTCM blow-up in 1998. For the blow-ups that year were a direct follow-on from the Asian crisis a year earlier a different chapter in the same book. There will be more crises to follow Greece, both inside and outside of the eurozone.

The outcome of broken Keynesian policy (by definition) will be ugly, and will destroy the eurozone. We said it some time ago, and SocGen has now also confirmed this bearish perspective.

My own view of developments, for what it is worth, is that any “help” given to Greece merely delays the inevitable break-up of the eurozone. But, for me, the problem is not the size of the government deficit and the solvency or otherwise of the governments in the PIGS (Portugal, Ireland, Greece and Spain – we deliberately exclude Italy).
The problem for the PIGS is that years of inappropriately low interest rates resulted in overheating and rapid inflation, even though interest rates might well have been appropriate for the eurozone as a whole. Rapid inflation has led to overvalued bilateral real exchange rates (they do still notionally exist) for the PIGS and in most cases yawning double-digit current account deficits. With most trade done with other eurozone countries, the root problem for the PIGS is lack of competitiveness within the eurozone – an inevitable consequence of the one size fits all interest rate policy. Even if the PIGS governments could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Hence the PIGS public sector deficit will inevitably remain large as a direct consequence of this weak growth outlook.

As noted earlier on Zero Hedge, in Europe the population is a little less brainwashed by the moronic happenings on prime time TV, so while in America the destruction of the economic system, as trillions are transferred to the kleptocracy which knows fully well the end game is nigh, results in some sighs of desperation at best, in Europe the outcome will be somewhat more violent.

In my opinion this will not be tolerated by the electorates in these countries. Unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain. Consigning the PIGS to a prolonged period of deflation is most likely to impose too severe a test on these nations. And the political “consensus” within the PIGS to remain in the eurozone could falter in the face of another of Europe’s unfortunate tendencies -the emergence of small extreme parties to take advantage of any unrest. My own view is that there is little “help” that can be offered by the other eurozone nations other than temporary confidence-giving “sticking plasters” before the ultimate denouement: the break-up of the eurozone.

And in case you were wondering why all European leaders are powerless to provide a bailout proposal that actually has a snowball’s chance in hell of doing something/anything to help Greece, read on. Alternatively, if you want to find out why any plan suggested on Monday will be thoroughly useless and once digested by the market will cause another major crash, read on as well.

The pressure to tighten fiscal policy from current nose-bleed levels of deficits is not just an issue for crisis hit Greece. It is an issue for virtually all economies. It is a particular issue for the US and UK with structural (cyclically adjusted) general government deficits of almost 10% of GDP (according to the OECD)! There is a ferocious debate ongoing between those who believe there needs to be a rapid reduction in these deficits to avoid some combination of insolvency/default/rapid inflation and those who believe that there should be even more fiscal stimulus. The debate is loud and opinions are tending to be polarised.
My own view on this is that obviously we should never have got into this wholly avoidable mess in the first place. But having got here, there really is no way out that does not trigger a major market-moving upheaval. Ultimately economic prosperity over the past decade has been a sham: a totally unsustainable Ponzi scheme built on a mountain of private sector debt.GDP has simply been brought forward from the future and now it’s payback time. The trouble is that, as the private sector debt unwinds, there is no political appetite to allow GDP to decline to its “correct” level as this would involve a depression. So burgeoning public sector deficits and Quantitative Easing are required to maintain the fig-leaf of continued prosperity.

And here is the topic that will dominate over all pundit round table discussions in the next weeks: the entire world is insolvent, although some are more insolvent than others. Greek total net liabilities (on and off balance sheet) to GDP are 800%! EU: at 470%, the US, at over 500%. There is no way out but default.

Edwards’ poignant summation.

I am persuaded by my colleague Dylan Grice’s analysis that, including unfunded liabilities, most governments are already insolvent with debt to GDP ratios closer to 500% of GDP instead of around 100% for most G7 countries . It is too late.
Nor were Dylan and I persuaded by recent comments from Nobel Prize Winner Joseph Stiglitz that it is absurd to suggest that the US and UK governments might default on their debts as they could just print money. Indeed. But a client pointed out to us that Weimar Germany did not default on its debts during its hyper-inflation. How reassuring!
I am persuaded though by Richard Koo’s book about the lessons from Japan’s balance sheet recession. The crux of his analysis is that governments have no option but to stimulate aggressively all the while the private sector is de-leveraging. ANY attempt at fiscal cuts simply results in renewed recession and a further loss of confidence, thus making it even harder and more costly to sustain any subsequent recovery – and hence the budget deficit ends up bigger than before (e.g. see chart below). This is exactly the outcome I expect.

The take home is very, very simple: we can delude ourselves that the game can be won (it can’t), or we can prepare for the imminent collapse when delusion finally fails.