While the world is disracted by the Obamathon...
Okay, here in a very few, sketchy lines, is what is going on while the world (including Newsnight, just for one day!) is distracted by the Obamathon.
Problem One: There is substance behind the rumours that the UK sovereign debt is about to be downgraded. That is, there is both market logic and evidence that the markets are treating the UK debt as non AAA. Economist Graham Turner writes:
"Spain lost its triple A credit rating from Standard & Poor's yesterday. The country's long-term sovereign debt was downgraded because of the deteriorating public sector finances. But if Spain can get downgraded, then the risks for the UK are self-evident."
"The latest UK public sector net borrowing shows a shortfall of £62.4bn in the year to November, up from £35.6bn in FY2007/08. The full-year total looks set to reach £90.0bn, which would broadly equate to the deficit likely to be seen in Spain. But the UK has an added problem. Its liabilities outstanding are rising faster as a result of the banking bailouts."
Problem Two: Even with my fair, balanced, impartial and totally compliant with the post Russell Brand BBC rules hat on, I cannot find any other adjective to use about the position of RBS than "unsustainable". But that is not the real problem. Last night Vince Cable on Newsnight alleged that rumours are swirling about the City concerning the financial health of Barclays. There is no evidence that this is correct, but Barclays, since the 25% share price fall on Friday, are clearly on the Treasury/FSA/BoE radar. It is clear that Gordon Brown believes he was misled by RBS at some stage. Therefore, as a man who will only ever have to go to his own source of funding once (i.e. the electorate), he is once bitten twice shy.
Barclays meanwhile has provided loads of evidence that this is not the case. It is claiming a 9.5% Tier One capital ratio, which would allow it to write off £20bn while remaining compliant with its regulatory capital ratio. [UPDATE, this is a change from the first draft which was a bit over-optimistic on my part]. Of course Barclays cannot give us the one figure we all need: how much of its £420bn loan book is bad. Meanwhile, the influential website RGE Monitor is running the headline: "Is the UK's Financial System Technically Insolvent"
Problem Three: Ireland's finances now looking very perilous. What happened was that late last week in Tokyo, Irish PM seemed to say the country was on the brink of an IMF bailout:
"Prime Minister Brian Cowen, while at an investment conference in Tokyo on Wednesday, was reported to have endorsed the view of an Irish union leader that the parlous state of Ireland's public finances could lead to the IMF ordering mass dismissals of public sector workers. Dan Murphy, the general secretary of the Public Service Executive Union, had previously told his branch members that the Fund could intervene if public spending was not curtailed, according to the Irish Times."
This sent the interest rates on Irish government debt soaring. Now, at either end of the Eurozone you have countries whose creditworthiness is crumbling (Greece is in an even worse position). All across the continent there are op-ed pieces about whether one or other of these countries could actually bail out of the single currency.
All this is not directly a problem for the UK, but it shows that country debt is now the next big battleground for the forces of destruction unleashed by the credit crunch.
Problem Four: Yesterday's bailout package, though comprehensive in design, has not been readily "believed" by the markets. The plunge of RBS is one signal. The general weary response of the broadsheet press is another, together with seasoned City insiders like Howard Wheeldon, who writes this morning:
"The underlying fear though is also a reflection that the government is continually turning a blind eye to the relentless rise in national debt to hitherto inconceivable levels and the cost of this burden of this in the years to come could extend this period of recession over many years. Equally it is fear that gilts are already under pressure and that the whole system by which the government borrows to fund debt may be unable to cope meaning that at some point we might be building up to a repeat of 1976 when the IMF had to be called in. It is many other things too such as fear that even if the government is soon driven to call a general election with such an appalling inheritance what better chance does any new government have of clearing the self induced mess up."
Problem Five: Yesterday's bailout was clearly the work of some very smart cookies doing joined up policy: to get the FSA, Bank of England and Treasury ducks in a row is hard at the best of times. However, it demonstrates that huge amounts of government energy are going into firefighting rather than new system design or even pro-active policies to dig the real economy out of this mess. If you compare and contrast the current efforts to those of Obama they are striking. Obama has a firefighting team of the "old skool" Clinton Democrats and Wall Street survivors (Giether, Summers), but has also created an Economic Recovery Advisory Board where, apart from the emeritus sounding chairmanship of Paul Volker, he will put his radical Chicago-trained economists to work to engineer the $1bn job creation plan - which he seriously believes can create 3-4 million jobs by 2010. By contrast, Britain's fiscal stimulus knocks about 20 quid off a new laptop if you have money enough to buy it. And that's it, apart from the internship and apprenticeships.
The atmosphere around Whitehall and the press is febrile: we always seem to be on the brink of some major financial disaster, about which only a select few people seem to have any inside knowledge. I think, as well as all the tangible things like losing your job, getting your credit card declined etc, that is what's really going to wear thin with people if it doesn't end soon.