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Eurozone: Stressful 'haircuts'

Robert Peston | 15:50 UK time, Wednesday, 14 July 2010

In the assessment of whether European banks are strong enough, a really important issue is what kind of discount or "haircut" should be applied to their holdings of government debt.

The final details are still being agreed. But bankers have disclosed to me that they have been told to assess the strength of their balance sheets on the basis of the following haircuts.

Greek government bonds would be written down by around 17%, Spanish sovereign debt by around 10/11%, UK government by a marginally smaller discount than on Spanish debt, French by 6%, and German by 4 or 5%.

Now two numbers stand out for me.

First, that the discount on Greek debt is only 17% - when many analysts believe it needs to be written down by nearer 50%.

And then there is the almost identical haircuts applied to Spanish and British government debt.

Now the rationale for applying similar haircuts is that both Spain and the UK had very large public sector deficits in 2009: 11.2% for Spain and 11.5% for the UK.

But, as I've pointed out before, the UK has two advantages lacked by Spain when it comes to the affordability of its debt.

First, the maturity of its existing debt is much longer than for Spain: so on top of needing to borrow to finance the gap between spending and revenues, Spain also has to refinance maturing debt equivalent to 8.7% of GDP next year, compared with 3.8% for the UK.

So from that point of view, Spain is more exposed to the whims of lenders than the UK.

Also, most economists would argue that the UK's ability to service its debts is helped by having an independent currency, which adjusts to perceptions of its economic strength, rather than being locked into the euro - as is Spain - whose value is only partly determined by the performance of the Spanish economy.

That said, according to Eurostat - the EU's statistical arm - the UK's national debt at the end of last year was 68% of GDP, compared with just 53% for Spain.

In other words, and in the round, it is difficult for the UK to argue that a significantly smaller discount should be applied to its sovereign debt in the stress tests than would apply to Spain.

Even so, it's arguably quite embarrassing for the new coalition government that European regulators believe the UK's sovereign debts are of equivalent quality to what Spain has borrowed - and significantly worse quality than French and German government bonds.

Update 1556: By the way, I have a bit of additional ammunition for those who fear that the stress tests won't be robust enough.

What I've learned is that to pass the tests, a bank has to prove that its tier 1 ratio won't fall below 6% through the stressed cycle.

Now the important point about this 6% tier 1 figure is that it's calculated according to the widely discredited Basel ll formula: in other words, banks can include in their calculations of their capital resources various forms of capital that the recent banking crisis showed were more-or-less useless for absorbing losses.

By contrast, when the UK's Financial Services Authority conducted its stress tests, it insisted that British banks' core equity (or core tier 1 capital) shouldn't fall below 4% of risk-weighted assets (loans and investments).

Most investors and lenders would regard a 4% core equity target as more demanding than a 6% Basel ll tier 1 target.

The use of the Basel ll definition is widely seen as a victory for France and for French banks, which are relatively short of pure equity in relation to their assets.

Comments

  • Comment number 1.

    Haircuts on sovereign debt? surely the regulators are barking mad! Does this mean all those years we have been wrongly taught to assume governments are risk-free as they can raise taxes indefinitely or print money to repay their debts.

    If death by a thousand cuts hold true, this is surely one of them. A lot of the free-market propagators argue that the economy/system will always bounce back, but I think they all suffer from disaster myopia, and if we stetched our time periods over a few hundred years we would see that a financial meltdown that eclipses 2007 and the great depression is not a too distant reality.

    Run on banks - check
    Run on countries - check
    What else is left?

  • Comment number 2.

    Robert Peston Wrote...

    "In the assessment of whether European banks are strong enough, a really important issue is what kind of discount or "haircut" should be applied to their holdings of government debt."

    Er, strong enough for what, exactly?

    "The final details are still being agreed. But bankers have disclosed to me that they have been told to assess the strength of their balance sheets on the basis of the following haircuts."

    Er, Er, "told", by whom?

    "Even so, it's arguably quite embarrassing for the new coalition government that European regulators believe the UK's sovereign debts are of equivalent quality to what Spain has borrowed - and significantly worse quality than French and German government bonds."

    Er, Er, Er, did the new coalition government borrow these, or do they predate the last election? If so, why would that be embarrasing for anyone except the previous government(s)?

    Er, Er, Er, Er, Robert, are there any "Business Stories" out there, or is sovereign debt the only game in the casino these days?

    This mushroom suspects that the pressure to pay back Britain's sovereign debt may be because the banks fear that the GBP in which the debt was issued will devalue faster than they can raise the interest rates. The sooner they get their hands on our tax-money, the quicker they can convert it into nice safe currencies perhaps?

    Of course, the Banks would be happy if we devalued, and then borrowed lots more "to keep the economy afloat", but if we cut borrowing AND devalue, they lose on both counts. (So I can't see that being allowed to happen...Shylock has to get his pound of flesh somehow.)

  • Comment number 3.

    Common sense has gone amiss from this RP’s entry. I was taught that for a sovereign such as UK it would impossible to default on its own debt which is denominated in its own currency. Unlike Banks of other EU countries, Bank of England can print as much sterling as it pleases.
    PS. For further reference: when comparing two countries, if one has an advantage it is clear that the other lacks it.

  • Comment number 4.

    First of all why would anyone believe anything told by a bank. You might remember their last scheme and they had all the numbers to convince the investors that their house of cards was actually on a sound foundation. Even had their rating agencies pumping everything up. These are no small time thieves they have a very complicated system. Please banks, tell us all another lie that will make us feel good. Governments deal with misrepresenting the truth all the time so the banks are in good company and as they were partners in the last fleecing of the taxpayers it is worrying to see that they have joined once again. There is a loyalty amoung the criminal class not understood by the public. The taxpayer pays this all off and the banks make a lot of money....same as before. Paint a skunk red and it is still a skunk. We will have to cut back on our needs as the wealthy have islands to buy and sailing vessels to maintain. Of course you don't understand...if you did you would be one of them.

  • Comment number 5.

    If a bank is doing its accounting in Euros, the fact that the UK can depreciate its currency makes the risk of holding sterling denominated bonds greater, not less.

  • Comment number 6.

    The haircuts were always going to be be something very political and to I am sure no one's surprise they appear to have been fiddled in the favour of French and German banks who hold large amounts of their own countries and in some cases huge amounts of Greek debt.

    For obvious reasons German debt is seen as the best and politically the French must be seen as next best, not quite as good as the Germans but better than everyone elses.

    Robert, I agree with you re the Greek haircut it is far too low but this low haircut will help make the French banks in particular and the German's to a lesser extent seem safer than they really are. Allied to the low discounts on French and German debt expect all the large French and German banks to be declared "safe".

    I would view British debt as safe as if not safer than French debt with the French being hindered by both the Euro and common Euro interest rates plus an inflexible domestic Labour market.

    In Britain we remain masters of our own interest rates and can allow Sterling to depreciate, if need be.

    Having said all of this did we expect anything else from the continent?

  • Comment number 7.

    Unless and until there is a genuine strategy to actually handle the extra trillions (of Euros an or Pounds) of PRIVATE secured debt - none of these tests actually matter because the problem is still there.

    The global economy cannot recover (assuming that means get back to the normal times in the 1990s) unless the over-leveraged debtors problems are resolved.

    So long as a rational (3-3.5 times) multiple of income that is required to buy a home to live near where one works is in-excess of the multiple of the salary paid for the area the economy is b*******d and will remain so.

    Lord Turner started to edge towards this today (on Today) - now both he a Mervyn King were warned of this problem in writing regularly over the last decade - it is a terrible catastrophe for us all that they did not possess the gumption to either understand or insist one way or other that the problem was fixed.

    The absurd multiples of secured loans lent by the banks over the last decade effectively means that the test of house prices falling 50% is 'the' critical test for unless this actually happens (either directly or via inflation) the economy cannot recover. Indeed it would be good if it happened now for as soon as the overvalued properties are back on the market at half price the sooner the economy can being to recover.

    The only way we will know the economy is on the mend is when interest rates go up by a factor of ten (to 5%) and stay there!

    All assets/liabilities on the books of the banks must be fully 'marked to market' and the banks MUST produce proper accounts - every month. Carved up stress test are actually rather pointless as they exists today.

    By the way, the EU stats. figure of National Debt is just junk as it does not include all national debts - blame the civil servants of Europe for this huge error. (And fire some while we are about it - their conniving deceit has led to the complacency that ignored bubbles and led to the crash!)

  • Comment number 8.

    Why do they call it sovereign debt?

    These countries are not sovereign as most don't have their own currency and they all deep in debt and told by the IMF how to run their countries.

  • Comment number 9.

    "Won't be robust enough" ?

    I should say not. The BIS guidelines - issued as recently as 2009, state that stress tests:

    "should feature a range of severities, including events capable of generating the most damage ... a stress testing programme should also determine what scenarios could challenge the viability of the bank" (Principle 9) - see http://cityunslicker.blogspot.com/2010/07/stress-testing-banks-not-very-stressful.html

    Haircuts are not enough: outright default should be modeled. What's being done may be a step in the right direction but let's not call it a real stress test.

  • Comment number 10.

    So is the UK 'AAA' rated or not? Why not scrap these ratings and the agencies if they are not of any real use when it comes to deciding risk.

  • Comment number 11.

    Robert

    They call these Stress Tests? Stress tests are supposed to be based on worse case scenario and math.

    Too many Lorries carrying Gold over the Dartford Bridge will collapse that bridge. It will fail under that stress and there is a mathematical equation to explain to everyone at what point the failure point will be.

    These tests are more akin to Balloon Tests where a hypothetical amount of gas is kept in the cylinder to ensure the Balloon stays INFLATED and therefore afloat.

    Think of the financial sector as a group of hot air balloons floating over the “Market Alps” and as the estimated gas (kept on board as a fail safe) runs out and still inflated, the Banking Balloons can still stay afloat until they hit that range of Market Mountains and collapse in on themselves.

    Moral of the story is the only stress test on a Bank is amount of gas it needs to keep borrowing or investing to expand – if it cant keep expanding it sinks.

  • Comment number 12.

    Item 4, wrote:
    These are no small time thieves they have a very complicated system.

    Yes quite right, very, very big time thieves. The main problem is that they are so big they can afford to buy the government, regulators, electorate through well-funded advertising campaigns and it appears most newspaper editors too. Unfortunately, only repeated bouts of reality vs the misinformation they peddle through the above will be their undoing; for by then their organs of misinformation will be too discreditedd to influence the electorate.

  • Comment number 13.

    To state the bleedin' obvious - it's bankers who should be having a flippin' haircut - to get them ready for their prison cells!

  • Comment number 14.

    Surely if this charade is obvious to Mr Peston and the rest of the contributors to this blog then it must be even more obvious to the finacial markets? If so the so called "stress tests" will fool no-one save the readers of dubious tabloids and the odd politician. If that is the case what is the point of trying to create such pretence?

  • Comment number 15.

    John from Hendon "So long as a rational (3-3.5 times) multiple of income that is required to buy a home to live near where one works is in-excess of the multiple of the salary paid for the area the economy is b*******d and will remain so."

    ========================================================

    There is nothing rational about 3-3.5x income multiple being the mortgage limit. A limit should be based on what the borrower can sensibly afford, it is slavish adherence to rules rather than following common sense that got us into problems in the first place.

    Also when do you think that idea that 3-3.5x income was invented? As I recall it was in the late 1980s when (a) inflation was much higher around the world (b) UK interest rates were much higher and much more volatile than now and (c) tax rates were higher.

    In other words the 3-3.5x rule related to a completely different circumstances.

  • Comment number 16.

    I’m getting a little tired of this topic. Why not just wait for the European stress tests and then have a go?
    In the assessment of whether European banks are strong enough, a really important issue is what kind of "haircut" should be applied to their holdings of government debt.
    Haircut is the the margin or difference between the actual market value of a security and the value assessed by the lending side of a transaction. Who really knows what the lending side will pay?
    As for the Haircuts, Greek sovereign debt at around 17% seems suitable to me, if that’s what the market will bear. Analysts can believe that Greek debt needs to be cut by nearer 50%, but from the way I see it, and what is currently happening, I really do believe the Greek 17% haircut is trim; in fact, it may be too short at 17%.
    In any case, why don’t we talk (for at least a little while) about American Banks and what they used as capital in their stress tests. I keep thinking that attention is being diverted to the Euro and European Banks because someone does not want us talking about the American economic situation, its proximity to bankruptcy and its extreme lack of regulation.
    My prognosis for the Euro and Europe, they will both be fine; they are well on their way nurtured along by the security of Basel 3.

  • Comment number 17.

    So basically like everything EU driven its a botch up job, and not a stress test at all....

    Lets just think up some numbers that show us in the best light......

  • Comment number 18.

    Robert,
    Please could you justify further why longer maturity debt makes the government less vulnarable. Surely it is the amount of debt which needs to be added (ie the deficit) which is the important factor.
    After all, if a creditor has a policy of holding short term debt, surely she would buy more as it became too short or expired?
    It is the yield at which further money must be raised which is the problem, since this is the only way in which the government interest bill can rise. If the government cut their deficit to zero today, a bond strike could not touch them as the yield on all outstanding debt is already fixed. (It would have other consequences of course...)
    Personally I don't see that gilts will have much of a problem anyway, since the debt deflation which is happening will 'money interest on safe loans[ie Gilts] falls but money interest on unsafe loans[ie Mortgages] rises'.

    Also, isn't the makeup of UK gilts outstanding artificial as the BoE have been purchasing so many?

  • Comment number 19.

    Does that really mean there is a 10% probability that the UK government will default on its debt, all its debt? Perhaps it means 20% probability that it will welch on half its debt, or some other permutation?

    Some of us hold gilts, directly or through pension funds etc - in fact more than half of us. Worrying.

  • Comment number 20.

    I think it is unfair for the public (taxpayers) to bail out the banks every time they are in trouble. Banks need to take responsibility for the risks they are taking and assume losses according to those risks. Every time they approve loans for, let's say, outrageous mortgages for modest homes or people with dubious credit or overdebted countries, they need to take into account the fact that they may go insolvent (because obviously this fact has not been calculated that well so far). Sovereign debt is bank debt in most cases and taxpayers should not be bailing out banks' mistakes.

  • Comment number 21.

    The stress tests remind me of Douglas Adam's improbability drive.

    It passed every test it's manufacturer knew it was capable of withstanding.

  • Comment number 22.

    #14 ObserverinMonmouth

    "what is the point of trying to create such pretence?"

    The UK in common with other developed economies has moved on from being able to do anything useful.
    We keep this pretence up in order for the City to make a very nice living and keep the rest of the economy going.

    The financial shenanigans are used to get other nations or nationals to do our work for us.

    We need to keep the pretence up or we might actually have to do something.
    That would mean competing with other nations.
    We don't do that.
    Not since we bought into the City.
    It has served us very well so far..

  • Comment number 23.

    #15. Justin150 wrote:

    "In other words the 3-3.5x rule related to a completely different circumstances."

    ahh the AFFODABILITY argument that caused the bubble and the crash....

    Sorry, if the aim of policy is a recover and a return to normal times that as 3 - 3.5 times was the multiplier that worked for for most of economic history then if we are ever to return to growth and a real recover it is ESSENTIAL that this multiplier forms part of the mix.

    The "completely different circumstance" that you should consider is the conditions that CAUSED the bubble which is the CAUSE of the economic atrophy we are now desperately trying to recover from. So I totally disagree with you analysis.

    We have to get back to 3 to 3.5 times salary, with proven salaries - nothing else will cure the economy.

  • Comment number 24.

    Ian post 18, longer maturity debt is better for the simple reason that the money is tied up for longer and your creditors cannot either renegotiate the interest rates you pay or demand repayment of the debt in full for a longer period of time.

    Imagine government debt was like an outstanding balance on a credit card. Governments generally don't pay off all their debt they mostly roll it over and issue new debt to pay off old debt. If a government is running a surplus it can either repay or buy in the open market its outstanding debt or some of it and thus reduce its outstanding debts.

    The Tony Blair government did some of this in the early part of its reign in power. Paying off the debt reduced the governments interest repayments and hence allowed for increased government spending.

    Sorry for the digression but imagine our government debt is a credit card equivalent of a reduced rate balance transfer the shorter the interest free or reduced rate period (in our analogy the shorter the date to maturity of the governent debt) the more often you have to find a new deal or pay punitive interest rates. This is what so called credit card "tarts" do as they don't repay their debt merely roll it over via another card at an introductory low rate. This only works if you can find another card issuer to offer you a new deal or one of your other card companies offers you a new deal.

    Because the UK debt is relatively long term in its maturity we can be certain of exactly what interest rates we will be paying on our debts for the foreseeable future. With this in mind we know how much money we have to spend on other things.

    Spain and Greece, in particular, have a lot of short term debt and that means that they have to renegotiate much more of their debt in the near future. At every rollover point the interest rate of the debt is fixed for the term of the debt. If there is a shortage of short term debt then generally the interest rates go up or the less financially sound get excluded from the market. Greece has found that it cannot get the equivalent of a new credit card at a reduced rate so has to either pay higher interest rates on its debt or look to renegotiate its debt.

    This is currently what is happening to both Greece and a large number of Southern European banks at the moment. With much more debt up for renegotiation you are more exposed to the vaguaries of the international markets either to their being a lack of available credit, as happened to Lehman Brothers, RBS and Northern Rock or that credit which is available is only available at punitive terms.

    The nightmare scenario for any debtor is that there is a complete or virtually complete freezing of the debt market as happened over AIG and the CDS crisis. It is happening now as many Euro zone banks are having to borrow from the ECB to roll over debts because they either cannot get credit or the rates offered are punitive.

  • Comment number 25.

    It's a Eurozone stress test. Sorry to sound facetious but they wouldn't be stupid enough to test if they were likely to fail? But even if they did manage to foul it up, being Europe, they will just test again until the test is passed, (and then the Bureaucrats can announce once more why the Eurozone experiment is so marvellous.)

    With all of this, "pulling the wool over," going on I could almost laugh and scream at the same time. But that would make ME seem like the looney, (then of course I could be, I suppose?)

    Apparently there's a rationale in all of this? Basel 11 makes an appearance (discredited,) Spanish Sovereign debt roughly on a par with UK Sovereign debt, solely on the basis of GDP ratio's? Which on that basis is only marginally superior to German, no sorry Greek debt?? (Hang on that can't be right.)And all of this to keep the French happy, because their banks don't have "much in the way of equity in relation to their assets." So the French have lent against thin air?

    If I didn't know better I'd comment that this looked like some sort of botched Tommy Cooper stunt. If they pass, will it be "just like that," as well? I'm sorry they're all bonkers!

  • Comment number 26.

    The UK seems to have an LTV ratio of 66%?

    Most mortgage companies would kill to get their hands on such business.

    I've no doubt I've simplified things overly :-)

    Couple of points

    1 ) I think VAT on refurbishment should be removed and VAT should be added to new build - that should square off a few circles

    2 ) We need as a nation to get back to basics. We are all still looking for that proverbial free lunch.

    3 ) We've stiffled enterprise and shot common sense. We've hung drawn and quartered those who dare to run against the heard and banished those who would dare to think for themselves. No wonder we're broke.

    4 ) Bankers are not the answer we need in the UK. They are leaches. Make them all move 300 tonnes of concrete a day. We have allowed these modern day alchemists to fool us into believing we can all have a free lunch. The only people who get rich are the bankers. They do so at our expense as they "rape" the stock market and erode our pension provisions.

    5 ) We need a government that will fire all the bankers and bring back miners and steel workers and ship builders.

    This governement will not confront the real issues. It will skirt around them and convince us that it's really getting to the heart of the problems we face. They may as well stick an elastoplast on a broken arm.

    It's a mess and always will be whilst so ever we let the bankers and banks rule over us. When Margaret Thatcher took on the coal miners, I don't suppose for one minute she wanted them to be replaced by bankers. Although I suppose bankers smell nicer. Maggie had no exit strategy for her battle with the miners - and the bankers have been allowed to construe that for her.

    The banks will ruin this country - they haven't finished with us - it's merely half time.

  • Comment number 27.

    Peston gurgled: "But bankers have disclosed to me (snip delusions)"

    Now, lad, why in blazes would they do that?

    Didn't you realise they know you're a hack?

    Could it be they wanted you to broadcast it?

    Which you have now done?

    As they wanted?

    I have a large bridge to sell to you. Did you know that the word "gullible" is not to be found in Proper Dikshunhairies?

    Well done, Peston. You are progressing, in subtlety, by leaps and bounds.

    ;-)

  • Comment number 28.

    You say: "So from that point of view, Spain is more exposed to the whims of lenders than the UK". That may be true, but you forget that Spain has got the weight of the EU bail out fund behind them, either real or imagined, which the UK does not. This gives them a distinct advantage over the UK

  • Comment number 29.

    Preston,

    Did your banker friends also disclose to you how the FSA's stress test assumptions differed from bank to bank, to show that all UK banks passed the test?

  • Comment number 30.

    Btw, the haircut for Greek debt is 23% not 17%.

  • Comment number 31.

    It is a Eurozone stress test and that is good part, it is
    not influenced by London's destructive finance lobby.

    I live in England for many years and doubt that the sell out of Britain
    (refering to Prestons own book "Who owns Britain" - last chapter)
    and the overreliance on London has had a major negative effect on
    the debt strucutre.

    A large hair cut for the UK debt is justified!

    1. You can just "print" sterling. It will mean you can't
    repay the debt denominated in foreign currencies because your
    own currency is worthless

    2. Britain lives from imports (from food to all other goods),
    depreciateing the Sterling will be catastrophic.

    Conclusion: The BoE is far less independent then you think.



    I hope investigateive and critical journalism like Peson is doing it does
    not die out in Britain because it does not confirm with
    feelings of the masses (like we have it in the USA, CNN).

    PS: I hate the word "surely". Don't use it just imply that the other
    people must be silly if they do not agree with you.

  • Comment number 32.

    So default it is then - you don't prepare your plane passengers for a crash unless you're fairly certain it's going to happen.

    News hasn't gone down so well though - the cost of insuring Greek debt has been falling recently and yesterday it started rising again.

    Never mind optimists - maybe the wind today will blow it all over eh?

    We're next on the default train - Cameron can't even control facebook - how's he going to control the people when the cuts come?
    Even this morning I heard total nonsense from the state - apparently they're going to pull off 25% cuts in a service (the police) in which 85% of the budget goes on employees - and yet they're not going to affect numbers

    Maths not a strong point for the coalition then - let's hope they all get maths degrees soon.

  • Comment number 33.

    #3 read post 5.

    Most UK debt is held by Uk banks/pensions but not all of it.

    As far as eurozone banks are concerned, printing Sterling is defaulting.

  • Comment number 34.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 35.

    Robert,

    'The use of the Basel ll definition is widely seen as a victory for France and for French banks, which are relatively short of pure equity in relation to their assets.'

    So French banks can by happy they will pass a test designed for them to pass?

    Is it just me?

  • Comment number 36.

    > The use of the Basel ll definition is widely seen as a victory for
    > France and for French banks, which are relatively short of pure
    > equity in relation to their assets.

    How come? This is a defeat for France and for French banks, because the tests have been branded ineffective.

    Look, we all know that a successful stress test is one that banks fail. If I go into a bank and "stress test" it by drawing out 50p, then I have proved nothing. But if I go into a bank and "stress test it" by drawing out £50 billion, and the bank is unable to stump up the money, then I have tested it successfully. A well designed test is one that reveals failures.

    Only bankers could be so stupid that they would test anything like this. Why do we hire such low-calibre chumps for responsible positions?

  • Comment number 37.

    Medieval merchants weren't seen for dust when the king wanted to borrow money - they knew that one way or another they wouldn't get their loan back. A bank with government bonds has got problems (things haven't changed much in the last 5 centuries) and the stress test is right to recognise it.

    And on a related issue - it suits the US and UK governments just fine to have the world distracted by Greece and Spain when they are no better risk (than Spain at least)

  • Comment number 38.

    36. At 10:38am on 15 Jul 2010, Jacques Cartier wrote:
    A well designed test is one that reveals failures.

    Only bankers could be so stupid that they would test anything like this. Why do we hire such low-calibre chumps for responsible positions?
    -------------------
    Just goes to show that economics is a branch of philosophy rather than a science.

  • Comment number 39.

    @ 38. At 11:28am on 15 Jul 2010, Kit Green wrote:

    > Just goes to show that economics is a branch of
    > philosophy rather than a science.

    Philosophers, in particular, should know that tests must be design to catch failures, not to assure positives. Anyone (even bankers?) can construct a test which fails to find faults! What on earth are those block-heads trying to say?


  • Comment number 40.

    I see the moderators are out in force again today.

    I am confused.

    Which part of house rules says you cannot call someone young - in the context of they assume that the rules that applied for say the last 10-15 years must also be the rules applied 20 or 30 years ago before they were born?

    Or is it part of the house rules that you cannot say someone is deluded in their views? The dictionary definition of deluded in this context means someone is holding a belief which is wrong or false.

    Come on moderators keep up the work

  • Comment number 41.

    John-from-Hendon wrote "the AFFODABILITY argument that caused the bubble and the crash....

    Sorry, if the aim of policy is a recover and a return to normal times that as 3 - 3.5 times was the multiplier that worked for for most of economic history "

    ==========================================================

    The idea that there is a rule that 3-3.5x multiple of income applied to mortgages for most of economic history is wrong.

    It applied for a time in from the late 1980s to mid-late 1990s before then the rules were often more complicated and in the 1970s the multiples was a lot less. For a long time banks would only lend to couples based on the man's income, then it became 2x the man's income + 1x women's income. Ideas which now would looks very strange.

    It was not the affordability concept which caused the bubble but the fact that neither borrower nor lender seemed to do any analysis of affordability for a very large percentage of loans (see FSA latest press releases on liar loans).

    I do a lot of work in insolvency. It is not the amount of debt that causes companies and people to go bust but the fact that the amount they have to pay out each month grossly exceeds the amount they earn. People often have a wholly unrealistic expectation of how much it costs to live on a month before the mortgage and then couple it with a wholly unrealistic expectation of any likely pay rise.

    If I were a lender looking at a borrower now I would want to take into account that over the next 2-3 years (a) interest rates will probably go up (b) the borrower is unlikely to get any pay rise, and certainly not a rise above rate of inflation (c) tax is unlikely to go down (d) inflation is running at 3% per year. Combination of all of that means borrowers are going to suffer a big cash squeeze over the next 2-3 years. In those circumstances I would want to know that even after paying for the mortgage and any holidays my borrower was still saving at least £200 per month for every £50,000 of mortgage.

  • Comment number 42.

    #11. PetersKitchen wrote: ".........
    – if it cant keep expanding it sinks."

    ++++++++++++++++++++++++++++++

    That may be sir, but we cannot keep expanding. We are at the limit on food and water and room. Fuel is dwindling yet still the politicians talk about 'Growth'. The show is over. We had better start implementing population.

    As these banks get bigger are they then too big to fail? control.

  • Comment number 43.

    #24 Ian_the_chopper -

    Thanks for the reply!

    I see what you are saying. In that case we should probably add debt which is maturing in the next year to the expected deficit to get a better idea of the coming years problems.
    They both fall into the same category - debt which needs to be financed, although the re-financed part is not adding to the total.

  • Comment number 44.

    @ John-from-Hendon and Justin150

    Regardless of whether an income multiple or a multi-part questionnaire is used - someone ( the lender ) should satisfy themselves regarding the borrower's ability to repay a loan with interest.

    This has not been done properly for a long time.

    I made my monthly payments when mortgage interest rates were 12% (1976 or thereabouts) and eventually repaid the lot.

    Now I get virtually no interest on my Bank deposits. When I had no money the bank charged me interest for a loan; now, when I have money the same bank pay me less than 1%. And I bet I'm not alone I can hear thousands of baby-boomers shouting "me too".

    Pay me 5%. Charge the borrowers 7 or 8%. If they can't afford it (by any sensible test) then they are borrowing too much and should look for a cheaper place to live. - and to hell with the BofE Base Rate!

    But no - The bank pay me as little as possible; charge the borrowers as much as possible because they have to rebuild their balance sheet - well not at my expense.

  • Comment number 45.

    Post 43, you are exactly right.

    The issue Greece and Spain has is that in addition the money they need to borrow this year there is a lot of previous years debts that are coming up for renegotiation within the next 12 months.

    The UK having less short term "old" debt won't be in such a bad situation as Greece and Spain.

    My personal view is that the markets will see the coalition government's attempts to reduce the debts as a good sign. Also apart from a few public sector workers who will strike we won't see mass unrests and national strikes like they have had in Greece. I don't quite expect the sang froid shown in Ireland but equally I am not stocking up on essentials.

    I would liken the European economy to the human body. We have all over indulged and put on a few pounds of weight and drunk a bit too much, some of us are still smoking 20 a day.

    The doctor says you have to cut down your drinking, cut out the smoking and lose a few pounds. The German had just come in for his latest check up and the doctor is very pleased at their improvement, the Irish have gone on a bit of crash diet and show signs of improvement as well. The Greek and Spaniard are outside having a last sneeky cigarette before they come in.

    Only time will tell how we take our medecine.

  • Comment number 46.

    Peston:
    "The final details are still being agreed. But bankers have disclosed to me that they have been told to assess the strength of their balance sheets on the basis of the following haircuts."

    European democracy in action.

  • Comment number 47.

    Darrell1:
    "The banks will ruin this country - they haven't finished with us - it's merely half time."

    Well given that bankers built the country, that seems fair enough.

    But in all seriousness, how did we somehow absolve the political class from the responsibility for their actions?

    Are you seriously suggesting that bankers somehow contrived to force the socialists in Europe to borrow more than the economies could repay?

    Was it bankers who force party members to recklessly plunge their societies into unsustainable debt, or was that rather the choice of party members who understood that getting elected was more important than understanding fundamental economics?

    Blaming the bankers for the sins of the political class is as old as the persecution of the jews. And about as distasteful.

    It is not the fault of bankers if the political economy of a state allows them to control it. If the political economy of a state allowed the generals to control it, we would blame the political structure, not the generals. We would reform the constitution, not purge the generals. I hope.

    Bankers are just trying to do what bankers do. Protect their investments, in other words. Of course they get involved in the political process when the political process looks likely to allow half baked socialists to steal everything they have, and promote class warfare and massive centralized schemes that impoverish the majority.

    The problem here is political, not economic. At the current time, the western political model is one where a small ideological group can largely control the fate of the entire society. If not the bankers, then the commies.

    Now that may be a poor choice, but it is what we get with systems of representation where an elite preselect the representatives on offer before the people get a chance to choose their heros. Either that elite is bankers, or it is the communist party.

    If the only "solution" to having bankers control this system of representation is to have commies do it, and thus we all endure the charming fruits of class warfare, then give me the bankers every time.

    I would much prefer we changed the structure of the political economy such that real democracy prevailed and both the grand schemes of the bankers and the communist party were subject to a veto by the people.

    That cannot happen under representation, neither in the UK nor north Korea. It can only happen under direct democracy.

    Hopefully Europe and the UK will evolve towards that advanced system of political affairs, and quickly.

 

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