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Archives for January 2011

A moment of realism

Paul Mason | 15:08 UK time, Wednesday, 26 January 2011

There are moments when realism finally impinges on the world of self-congratulation that is politics and broadsheet journalism, and yesterday was one of them.

It may turn out that the Office for National Statistics is wrong. That the figures being clung to in Downing Street are a better guide - tax receipts and the claimant count.

It may also be a blip, that 0.5 per cent fall in the output of the UK economy that happened in the three months when, traditionally, the economy booms. I will add that nobody predicted it: not the doomiest doom-monger.

Personally, as an inveterate counter of shopping bags in hands, of empty seats at the bar in my local pub, it did not feel to me like a minus 0.5 per cent quarter (compared with Q1 2009, which definitely did).

However, if the 0.5 per cent fall is not a statistical glitch, or a blip, it is a very sobering moment. Because it reveals the fragility in the UK economy even before the substantive reduction of public spending, which is set to take £110bn out of the economy in tax rises and spending cuts, has begun.

Two interventions by senior members of the policy elite that runs Britain highlighted important complicating factors.

First, the outgoing boss of the CBI, Sir Richard Lambert claimed the government has no growth strategy to offset the impact of the deficit reduction plan.

Then, last night, Mervyn King outlined the sheer scale of the collapse of spending power that the combined impact of inflation and wage restraint has produced. A 12 per cent fall in wages over the three years since Lehman; a six year period of stagnation since 2005, unparalleled since Britain's re-entry to the Gold Standard, and the defeat of the General Strike, flattened wages in the 1920s.

You can tell it is a serious moment because suddenly everybody in politics is fractious. The Labour shadow chancellor is ousted; the spinmeister general in Downing Street is ousted; frantic negotiations are taking place to assuage an Australian businessman based in America, causing several important people to miss Davos.

Let's take the three big problems facing the UK economy and look at the potential outcomes.

First, deficit reduction. If Britain had to act fast and decisively on the deficit, it was because of the size of the deficit, the lack of credibility of the Labour government and the Eurozone induced global sovereign debt crisis.

For the best part of nine months the need for rapid deficit reduction has gone largely unchallenged by the opposition because the new Labour leader wanted to set his political priorities out first, and mould an economic strategy to meet them, should he gain office in four years' time.

Now it is not simply the accession of Ed Balls to the job of shadow chancellor, but reality that is calling that apparent consensus into question.

Politicians of all stripes are having to face the question: is a possible double dip a price worth paying for deficit reduction?

Some are having trouble answering this in public but, philosophically, the Conservative part of the coalition has already answered it. It has always insisted deficit reduction comes before any impact on growth - arguing, as the OECD's Angel Gurria argued this morning, that in the longer term growth will come back stronger as a result.

But macro-economic policy is a two-edged sword: fiscal and monetary. George Osborne has repeatedly said that, in the event of a double dip, or of a slide back to stagnation which is more likely, the Bank of England should stand ready to do more quantitative easing: to print more money and keep interest rates low.

Two things now militate against that. First, inflation. King's speech last night was designed to soften us up for 5 per cent (and I think in that you have to read 6 per cent inflation).

Increasing numbers of economists - including people on the right as well as the left - believe there is already, secretly, an abrogation of the Bank's formal inflation target and that it would be best to get it out into the open.

Andrew Lilico, formerly of Policy Exchange, argues that the new mandate should be 2 per cent with a 2 percentage point band on either side (as opposed to 1 percentage point now).

King himself raised an interesting question last night, when he said it was against the Bank's remit to keep inflation on target in this situation:

"Of course, it is possible to argue that the current recession should have been even deeper in order to keep inflation closer to the target. But that proposition is one few commentators seem willing to embrace, nor is it consistent with the remit given to the MPC which states that "the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output".

This bats the ball back into the court of those who set the remit, who are, of course, politicians.

The second issue is the growth strategy.

Here's why it is important: in the run up to the election many Tories embraced the arguments of Mr Lilico and Policy Exchange that deficit reduction would, on the basis of both experience and economic theory, clear the way for a return to private sector-led economic growth.

This is the rebalancing story, or strategy and in the case of PX, as I have written before, it is postulated not on any kind of "hit and hope" attitude, but a well-argued theory, grounded in the work of Harvard professor Alberto Alesina.

They argued that British deficit reduction would have to go alongside further quantitative easing, and that, with caveats, this could stimulate growth even in the short term - though it would also boost unemployment:

"Macroeconomic modelling is complex, and always depends on the specifics of the country concerned. Nonetheless, we believe that it is of relevance that even the economies in our sample (with their - in most cases - much smaller deficits than the UK at present) found fiscal consolidation boosted growth even in the short term (and certainly did not undermine growth). It should also be noted, however, that even though periods of fiscal consolidation based on spending cuts are rarely, in our case studies, associated with exacerbating recessions, they do often coincide with rising unemployment."

The problem lies not with the authors of the above. It lies with politicians who have interpreted it as saying there is some automatic process whereby shrinking the state boosts the private sector: this argument is more closely associated with the work of Milton Friedman and Robert Barro.

Now there is a crucial difference. If you believe philosophically that the state gets out of the way, the private sector grows, you are not going to busy yourself writing a "growth strategy" full of micro-economic lever-pulling measures to make the latter happen. In addition you will see inflation targeting, and therefore monetary policy, in a far more hawkish light than that shone by Mervyn King on the subject last night.

So where is the government's growth strategy. Two days ago Sir Richard Lambert said this:

"Rather than a big picture of the kind of economic eco-system that the government wants to champion, we are left with a few rather vague ideas about the scope for supporting a number of predictable sectors, and the promise that more ideas will be forthcoming at the time of the spring budget."

Here's what I think is happening, and it's from as close to the horse's mouth as you can get. George Osborne scrapped the autumn growth white paper because the ideas in it were unimpressive. Instead what he's done is turn over to various departments the job of outlining sectoral growth strategies to be pulled together into the 23 March 2011 budget - pharma is owned by the Department of Health, transport by Transport, etc.

But Osborne acknowledges that the growth strategy is also balanced by various political commitments the Coalition parties have made - both to the electorate and to each other.

No third runway at Heathrow; an immigration cap; carbon reduction targets. The Treasury believes that, after yesterday, the see-saw will now tip towards growth and away from social policy, but the growth strategy does remain a compromise.

It is also a compromise with fiscal reality: you could, in theory, do a lot for growth by slashing taxes and business regulation but the deficit won't allow you in the first case, and Europe will not in the second.

The Coalition growth strategy is, in other words, philosophically conservative and liberal : it relies on removing obstacles rather than picking winners; it expects the decentralised parts to contribute to a synthetic whole. It is the opposite of dirigiste.

It may work but two problems present themselves. The first is timing: the Treasury and the Office for Budget Responsibility projections for UK rebalancing see a very rapid switch to investment and export led growth, starting this year.

That may happen - and if by late 2011 we are in an investment boom our only problem will be inflation and wages (see below). But if it is not rapid you are left with a growth gap and therefore potentially a fiscal gap.

It will not be long before somebody points out that, if the 0.5 contraction is consolidated into the 2011-12 growth projections, then the Budget might have to be more austere than expected.

The second problem is scale: Karel Williams of the Manchester-based CRESC has pointed out the huge obstacles to a tech and innovation led transformation: they defeated even the dirigiste government of Harold Wilson - another prime minister who saw Britain's deficit and currency problems being solved by a one-off voluntaristic march into the "white heat of technological revolution".

Since dirigisme failed, can a version of modern laisser faire succeed? As I've said before - probably not without some modern form of selective protectionism to go alongside it: for everybody is now in the game of trade delegations to India and China, and some of those in the game are perennially protectionist when it comes to growth policy.

Finally we come to inflation and the fall in real disposable incomes. It is this, not the impact of public spending cuts, or the snow, that is worrying policymakers.

If we have undergone a 12 per cent cut in real wages, and stagnation since 2005, then we are living through a sharp reversal of the "deal" on which financialisation was founded in the UK.

While in the USA credit more or less replaced rising wages in the 2000s, in the UK it did not; it went alongside a moderate rise in real wages, and had the effect of damping down inflationary wage demands.

Now the cheap credit age is over and so is the age of wage growth. Leave aside the implications of this for social justice, its implications for the economy are scary: because where does growth come from if the consumer is being hammered? (Incidentally I would discount the possibility of a wage-led season of discontent; not simply because of the weakness of the unions, but because financialisation has placed having a job above having a wage rise - employees will bargain their own wages down rather than face the possibility of life with a P45 but without a credit card, mortgage or monthly mobile phone bill.)

On consumption government here is ahead of the population: the OBR's scenarios for the recovery include a consumer boom as an unexpected negative: the recovery path needs the consumer to retrench, to save more.

But we may have miscalculated as to the sensitivity of consumer demand to this twin switch-off of disposable income growth and credit availability.

What does it all mean?

First, that the government will now have to scramble to fill in the gaps in its growth strategy. Second that monetary policy remains set on the course Mervyn King outlined: there will be no knee-jerk rate rises and there may even be more QE.

Third that the issue of bank lending becomes crucial. George Osborne remains confident he can get a deal with the banks - a transparent and monitor-able deal - that significantly boosts lending. One glance at any graph of M4 or M4 lending shows why this is crucial: the lending figure has collapsed into negative territory; the M4 figure itself (ex OFCs) turned upwards in mid-2010, from near zero, but I would like to see what it is now.

An economy with broken banks is like a machine with a dodgy dynamo: it is prone to cutting out abruptly and without warning. That's what I think happened in Q4, and like with an old-banger, the snow didn't help.

If the so-called Project Merlin does not deliver an agreement with the banks, and if they do indeed threaten to sling their hooks offshore, and resist to the hilt the FAT tax that is now building momentum within Europe and the G20, the results will be political before they are economic.

For, behind the scenes, the Liberal Democratss claim to be fighting tooth and nail for punitive sanctions on the banks and even - as Lord Oakeshott said on Newsnight last night - some form of socialised control of RBS and Lloyds Group.

If they fight and lose, and lose AV in the process, and then we get to the Vickers Report in autumn and any radical bank reform gets back burnered; and if we have any more quarters of negative growth, things will get even more tooth-and-nail inside the cabinet.

I re-fight World War Two and lose

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Paul Mason | 09:30 UK time, Thursday, 20 January 2011

There is a theory among some historians of the Second World War that, if only the Allies had declared war on Germany to defend Czechoslovakia in 1938, Nazism could have been defeated in a short European war.

After all, the Czech army was fully mobilised in 1938; three out of the nine panzer divisions that invaded the low countries in 1940 were to be equipped at the Skoda works in Pilsen; and revisionist historians now explain Germany's successful blitzkrieg operation before Dunkirk as the result of French blunders and defiant anarchistic gestures by German tank commanders, not genius.

So, over Christmas, I decided to test this out on the geekiest computer game known to man, Hearts of Iron III, in which you can play any nation (including if you so desire Panama) right the way through from 1936 to the outbreak of the Cold War, modelling not just fighting, not just production and research, but also diplomacy, intelligence and internal politics.

I elected to play as France and my strategy was to re-arm as quickly as possible, intervene on the Republican side in the Spanish Civil War, sign a defence pact not just with Poland but also the Czechs - and attack Germany through the Netherlands at the slightest provocation, probably sometime around 1938.

But it wouldn't let me.

My population's "neutrality" was too high and the popularity of my ruling party, the Radicals, too low. So my tanks had to rev their engines in Toulouse, failing to speed to the aid of Barcelona; then they had to mass impotently while Germany re-occupied the Rhineland, then sit through the Anschluss, Munich and the annexation of the whole of Czechoslovakia, suffering a further indignity on the outbreak of hostilities in early 1939 because the Belgians refused my request for transit rights.

At first I thought this was a pretty unforgiveable glitch. But digging into the rules, hacks and kluges of HoI3, and real life history, the game is frighteningly accurate.

Firing up the "Politics" interface I was at first amused to find my president, Albert Lebrun, classified as "barking buffoon", prime minister Albert Sarraut as a "happy amateur" and my intel boss as a "dismal enigma" - but not amused to find that I could not change any of this before the scheduled election in 1940. My finger itched over the military coup button, and I immediately resorted to installing a far-right French police chief to quell dissent and abolish strikes.

But it was not ultimately the politics that defeated my cunning plan: it was the French people - and for that matter the Brits and Americans - and their "neutrality". My neutrality score remained stubbornly high - and in that the game is superbly realistic.

For it is a fact, easy to forget amid numerous onscreen portrayals of the 1930s set in aristocratic drawing rooms, that the majority of the people in democratic countries, for the majority of the time, were opposed to war in the 1930s. As Martin Gilbert wrote:

"At bottom, the old appeasement was a mood of hope, Victorian in its optimism, Burkean in its belief that societies evolved from bad to good and that progress could only be for the better. The new appeasement was a mood of fear, Hobbesian in its insistence upon swallowing the bad in order to preserve some remnant of the good, pessimistic in its belief that Nazism was there to stay and, however horrible it might be, should be accepted as a way of life with which Britain ought to deal."

According to this view, the "Guilty Men" so expertly excoriated in Michael Foot's 1940 pamphlet may indeed have been buffoons, and lied and blundered their way through numerous decision points, but at the end of the day there was no popular clamour for war - even in fact, as the French then found out to their cost, once it started.

And I'm finding out why: it goes badly.

After several false starts I have mastered the diplomacy system and got from 1936 to 1939 without bothering to save the Spanish Republic, Austria or Czechoslovakia. I have built an expanded Allies side including Sweden, Denmark, Finland and Norway, and pushed the Swiss from neutrality to mobilisation.

The Allies have become so fearsome that, despite massing its troops on the Polish border, Germany has hesitated to make the first move but then Finland - whose politics screen I have neglected to check up on but turn out to be dodgy - has attacked Germany in March 1939 and provoked the war. Meanwhile a lot of my tanks are still being built, apparently by guys taking a lot of Gauloises breaks.

Denmark has been rolled up in a few days, the Dutch and Belgian armies are refusing to make any moves that co-ordinate with mine and I am now pushed back to the French border with - as General Weygand put it to Churchill in real life - "aucune" strategic reserve.

The Brits have had the decency to send an expeditionary force commanded by Lord Baird of Stonehaven: it consists of his Corps HQ and refuses to move from the not very useful position of Cherbourg. The Americans are having none of lend-lease and will not sell me so much as a jeep and the Soviet Union is wedded, as in reality, to the Molotov-Ribbentrop Pact.

It is me, in other words, who is the buffoon. The game is trying to tell me that if the Allies had adopted re-armament earlier, with all the military rhetoric and sentimental songs and propaganda films that would have gone with it, Russia may have cemented its alliance with Germany much earlier than in real life, and American neutrality - never fragile when it came to wars in Europe - may have been strengthened.

I draw several lessons from HoI3. First, as with all god-games, how merciless strategy is towards tactics, human beings and trivial situations. I've been is several slightly chaotic situations as a journalist and the lesson of this top-down, realtime history game is clear: you never know what's going on when it's going on.

The second is quite topical: if you want to take a democracy to war, unless your country is actually being attacked, you have to relentlessly shape the narrative. This holds true in other times and theatres than 1930s Europe.

Finally, the 1930s were a complex reality. I've studied the period a lot on and off over the years and I'm dissatisfied at the simplistic picture that's being created around it in recent TV dramas and movies, in which everybody is either fascist or anti-fascist, the war is always inevitable, and in which the focus is always the beleaguered aristocracy (King's Speech, Upstairs Downstairs) or the fascist-friendly elite (Coco Before Chanel). The drama of the time - from Odets' "Awake and Sing" to Coward's soap-like "This Happy Breed" - was always a lot more focused on real people and the real situation. Even a serial like Granada's "Family at War" (1970-72), written as it was by people who actually remembered the time, captured the complexities in a way we now seem unable to. And so in a way, and despite its ludicrous title, does Hearts of Iron.

Sartre's trilogy Roads to Freedom (also if I remember rightly turned into a drama series in the 70s) begins with a scene of a French professor wracked with guilt over his failure and inability to go to Spain and participate in the war there. As I click and drag my hapless French divisions légère (all too légère mate, as it turns out), I think I suddenly understand that whole time and atmosphere a lot better.

So I think - if we are now tweaking the school curriculum slightly back in the direction of battles and leaders - it might be worth giving a group of sixth formers a go at doing this as a project. It would certainly add the their understanding of the historical origins of "kettling".

Oakeshott: Lib Dems 'still fighting' in Cabinet for bonus tax

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Paul Mason | 23:20 UK time, Tuesday, 11 January 2011

Lord Oakeshott, the Lib Dem Treasury spokesman claimed tonight that in contrast to David Cameron and George Osborne, Vince Cable had personally demanded Barclays boss Bob Diamond take a reduced bonus.

Asked if the business secretary Vince Cable was still fighting to impose limits on bank bonuses, Lord Oakeshott (who does not hold a ministerial position) told Newsnight:

"It's not just Vince it's the Liberal Democrats as a whole: it's an important issue for us. We're not going to go back on it."

Asked whether this was an argument still going on within cabinet Lord Oakeshott said:

"This is going on. This is very topical. We are still very much fighting."

Lord Oakeshott, who arrived on the Newsnight set bearing a copy of the Coalition Agreement later told me that it is still on the table that the government will impose a one-off bonus tax.

Which makes the front pages of every paper this morning - as briefed by Downing Street spin doctors - a little confusing. Because the message coming out of Downing Street could not have been clearer: no bonus tax but an attempt at a voluntary restraint on bonuses.

Labour are already on the blower depicting Oakeshott's move as a tactic to mask capitulation - but if the battle is as intense as it is being portrayed, these could be make or break days for the influence of the Business Secretary, Vince Cable.

In a shock development - Select Committee lands punch on banker

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Paul Mason | 12:31 UK time, Tuesday, 11 January 2011

I've sat through a lot of Treasury Select Committees and usually they are dire, because the MPs - in the old parliament at least - always broke the first rule of interrogation: know more than your victim. They always seemed to know less and were outfoxed by the suave men in cufflinks.

But today the new TSC, chaired by Conservative MP Andrew Tyrie, broke this pattern. Questioning Barclays plc's new boss, Bob Diamond, they raised four points which deserve further investigation.

1) Does the Barclays boss feel grateful to the British taxpayer for the bailout of the whole system which has, according to the Bank of England, boosted profits in the sector, thus indirectly contributing to the success that Barclays will celebrate next month with its bonus pool? Mr Diamond could not bring himself to say that he was grateful to the taxpayer - only to "central banks around the world". This, translated, means he was not prepared to recognise the role of the taxpayer bailout in indirectly benefiting the bank, only the liquidity support provided by the Fed and the BoE.

2) How much tax does Barclays pay, and how many subsidiaries has it set up in offshore tax havens? Mr Diamond did not know at all the answer to the latter half of the question and had to be told by rising-star Labour MP Chuka Umunna, who resisted great flourish while delivering the accusation that Barclays was engaged in "tax avoidance on a grand scale". The answer is, as Mr Umunna then read out: 38 subsidiaries in Jersey, 30 in the Isle of Man, 181 in the Cayman Islands.

As to the first bit, Mr Diamond answered that Barclays had paid £2bn in tax last year, but could not tell the committee how much of that was "payroll tax" - ie paid on behalf and in relation to its workforce, and how much was paid by Barclays as a corporate entity. Given Vodafone and Topshop have been besieged by protesters who have surmised these firms pay too little tax, you can bet BARC will go on the hit list unless he now comes up, as promised, with a written breakdown.

3) How many times had David Cameron or George Osborne looked Diamond in the eye and asked him to moderate his bonus? Never was the clear answer. Now you only have to meet a senior banker for them to drop into the conversation that they have met the Chancellor or that other bloke (Vince Cable) only the other day, so it's not like there's been a diary issue.

4) Will Barclays' bonus pool be bigger than the amount it pays out to shareholders? Though he could not answer there was a feeling in the room of "Is the Pope a Catholic".

I left before the end but while Mr Diamond's performance was assured, if a little startled at times, he may have left Barclays more in the glare of public scrutiny on the tax and bonus pool issues - and slightly dropped the Conservative leadership in the mire. Of course the same question could be asked of Messrs Clegg and Cable: have they ever asked Bob Diamond to moderate his own bonus? If the answer turns out to be also no, the mire gets deeper.

For one thing can be said about Labour, despite the deathbed nature of its conversion to effective bank regulation: Gordon Brown knew how to put pressure on people in banking in a highly personalised way.

Anyway - though the lobby hacks queuing as if for a Dickensian execution looked a little bored by the end - what we have certainly seen is a revival of effective scrutiny on the TSC - some of the MPs even wore cufflinks themselves!

There's more to come - and more on Newsnight tonight. Tune in and hit the comments meanwhile.

Giffords assassination attempt: some background reading...

Paul Mason | 11:05 UK time, Monday, 10 January 2011

In March last year I blogged here on the subject of "angry America". I make no comment on the motives of the man accused of the murders and attempted assassination of Gabrielle Giffords in Arizona - but the US media is now full of recrimination over the "violent" language and "confrontational politics" much of its media stokes up, so it's relevant again. Here's the link.

Last September I toured the American midwest speaking to people - on both sides of the political divide - who are indeed angry but also see the dangers ahead if politics in America becomes even sporadically violent. Again, here's the link - also to a video report.

Since then one phrase keeps coming back to me - thrown at me during a discussion meeting with playwright David Hare, by a despairing American in the audience: "America is the Weimar Republic with 250 million guns". It's stuck with me not because it is true - it is manifestly an extreme judgement - but because it vividly reminds us why you would not want any kind of descent into political violence in the USA.

There's more from my colleague on the ground, Mark Mardell, here.

Timetable of the euro-showdown

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Paul Mason | 11:11 UK time, Friday, 7 January 2011

Barely has the non-drop Nordic Pine been dragged, threadbare, to the door, but the euro sovereign debt crisis revs up again - this time with Portugal and Spain in the firing line.

This is how I expect it to pan out.

First a primer: governments have to borrow to a) finance their overspend (aka deficit) and b) to roll-over old loans from years past, known as redemption. They borrow by issuing bonds. Those who buy the bonds are banks and investment funds, sometimes also other governments who are flush with cash - most notably in the Middle East and China. Usually these bonds last for 5, 10 or 20 years until maturity - but there are also short-term loans called Treasury Bills, which are repayable after one year.

Right. Overall Euro area governments are expected to issue €750bn this year. Of this, the markets expect Spain and Portugal alone to be borrowing €225bn.

The only Geiger Counter we have to judge whether it's going to be hard or easy for them to borrow is the effective cost. This is called the bond yield: it's the official interest rate on the bond divided by its current price as traded on the bond market. Here is what's been happening to Portugal's bond yield over the past 12 months (from

Portugese Bond Yield rises to 7% early in 2011

Portugal gets caught in the general panic around the Greek crisis and then hit again as confidence wanes over Ireland in November/December.

This year Portugal is on course to reduce its budget deficit from 9.3% of GDP to 7.3% - according to its finance minister. But its cost of borrowing is rising and is not far off the trigger point where investors will start refusing to buy. There are already reports today that the Swiss National Bank is refusing to take Portuguese bonds as collateral in short term financing deals.

Portugal got downgraded by the ratings agency Fitch before Christmas, and Moody's issued a downgrade warning. They were worried about a) the size of the overall debt and b) the possibility that Portugal will fall back into recession this year. The effect of the downgrade is to make some investment managers less likely to hold onto these bonds - because their investors, which could be your pension fund, demand they only hold ultra-safe debt.

In this crisis timing is important. Portugal needs to borrow €20bn this year, but €10bn falls in Q2. This rising cost of borrowing plus the short timescale is what made JP Morgan analysts last night warn their clients:

"In Portugal, €10bn of redemptions in Q2 do not leave the country much room for manoeuvre: we expect external aid to be requested."

So this is the market - not speculators but your pension fund guys - beginning to back off Portuguese debt and predict what no Euro politician is prepared to talk about: a final massive bailout process for the stricken periphery of the Eurozone.

The good news is Portugal can be sorted: there is plenty left in the pot of the two Euro bailout funds created in May 2010 to cover the €20bn, plus what it might need next year. But now look at Spain.

There are two Spanish bond auctions coming up, on 13 and 20 January. Spain needs to borrow about €38bn in new money this year, plus another €47bn to roll over. If you add in the Treasury Bills coming up for repayment (the short term loans) this rises to €225bn over 12 months (not three months as I mistakenly said in my report last night).

Now the T-bills should be less challenging, although there is an anecdote circulating of a big US investor deciding it will not roll-over Spanish T-bills. Likewise, market people estimate it should be able to renew €15bn plus €10bn in new borrowing this quarter.

The problem is the banks. The banks hover over this crisis as a constant wildcard.

The Spanish and Portuguese banks were largely given a clean bill of health by the very same tests that said the now busted Irish banks were OK. That's the problem. If the Spanish and Portuguese regulators decide to make their banks as safe as the Irish banks have been made, raising their requirement to hold capital to about 12%, then - because the government has guaranteed certain banks - that would add another €80bn to the borrowing requirement for both countries, bringing it to 300bn. (See Spain's current borrowing cost here, again, on Bloomberg).

The problem is the main Euro bailout fund, the EFSF, stands at 440bn. But in order to gain its own AAA credit rating, that fund has used the 440bn to guarantee only about - says BarCap analysts - 255bn of actual rescue funds. So the answer to those who've emailed me to ask: is there enough money to bail out Spain - the answer is, just about.

So the difference in this phase of the crisis is that what is driving the problem is not economic collapse and abject political mis-accounting (as per Greece) nor the collapse of a kleptocratic banking and property elite (as per Ireland), but collapsing confidence in the Eurozone's authorities.

I will blog - and report - separately on the deeper roots of this but basically they could - but will not - combine their sovereign debt issuance into a "Eurobond". Or they could double the size of the bailout fund - but have so far refused.

Or they could bite the bullet and impose losses on investors - ie when a country cannot borrow, it partially defaults, making the bondholders take a "haircut" - ie they get less money back, or get the same money back over a much longer timescale. But they will not countenance this. In fact, as our interview with Christine Lagarde last night showed, they will not countenance anything. Nor will they admit the possibility of the Euro breaking apart.

There is some support for the Euro authorities' view in the market. David Bloom - the forex wizard at HSBC's investment bank - has pinned his colours to the mast of Euro survival, and even to the pressure moving onto the dollar by the end of the year.

But in the end all these upward-moving graphs demonstrate a divergence between the relative safety of lending to Germany and the relative riskiness of lending to Spain and Portugal, despite the fact that they are part of a single currency. Meanwhile the whole crisis takes its toll on Euro credibility in the wider world.

Right now the Chinese deputy PM is touring the stricken countries offering to lend 5bn here, 6bn there. That's fine - but if it came to much more we would be well and truly in the realms of "political economy": 5bn is a lot of money for Portugal - a quarter of its borrowing. It would give China a massive economic lever over Portuguese policy - on for example acquisition of transport and infrastructure assets and, as is the way of the world, all kinds of personal lines of communication might then open up, some of which might lead to what the French are currently calling, with disarming frankness, "economic war".

Before Christmas, Lord James told the British parliament that a mysterious group called Foundation X was prepared to lend Britain £22bn to get it out of its difficulties. The Treasury "decided not to pursue the matter further". For the same reasons it is unlikely that Europe is going to accept being bailed out by China.

So it's the good ol' capitalist bond market, the big gorilla whose strings are pulled by self-effacing men and women who manage the pension funds of coupon-clippers in the coastal retirement resorts of Europe and America who will have to lend the money.

And it's the unelected eurocracy around the Commission, the ECB and the EFSF that is going to have to get its act together and come up with a credible plan: to meet the eventuality of a Spanish crisis and the near-certainty of a Portuguese one - and then work out what to do about Greece, which is not improving.

Behind Facebook's megavaluation: the generational divide lurks

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Paul Mason | 10:45 UK time, Tuesday, 4 January 2011

The teenagers among our friends and family at New Year were fascinated and flabbergasted that I am on Facebook. "Paul is on Facebook!" one nudged the other, also displaying slight consternation that I had played Assassin's Creed and Call of Duty: Modern Warfare 2. Because their parents do not know what any of this means, they assume that nobody above the age of 25 does.

Also, having taken professional-standard shots of them surfing in the freezing ocean on New Year's Day, I now find they do not want these posted on Facebook, even on a friends/family basis, because they consider the waves to have been too lame.

It's a kind of reverse generational digital divide: young teenagers live almost exclusively on Facebook but only have teenage friends. They are almost totally unaware of the networks of the adult members of their family and do their best to stay out of contact with them. They do not need email apps or chat apps - they do it all on FB. They would rather crop a JPEG on FB than use Photoshop. Yes they will have your surplus Word and Powerpoint registration keys but no thanks they do not want Outlook and frown at the idea of what it is for.

Meanwhile the grown-up internet trend of 2011 will continue to be Twitter. I was named #22 in the top 100 "twittering bloggers" recently and it's interesting how much of the conversation has migrated to Twitter. The problem with blog comment lines is that they get overwhelmed by a small number of people who want to go on about their own obsessions, sometimes called "trolls". Whereas with Twitter there is a more democratic outcome: if what you say is worthy of being repeated it will be re-tweeted and discussed by many others; if not, it won't be.

If I do a quick New Year's "audit" of my networks they are as follows: Facebook: 964 people, about 1/3 of whom I actually know; Twitter: 7,784 followers and I follow 100 people. I am strictly limiting my follows to 100, and editing them regularly - and I would say this is the "network" I most value because it is mainly other journos, politicos and the occasional complete stranger whose tweets tend to reflect the zeitgeist. As for my blog, the BBC finds it hard to tell me how many hits it gets, but as it is buried here among the Newsnight pages I am assuming it's a minority sport.

Now the good news for Mark Zuckerberg is that the only clamour coming from the 8, 9 and 10 year old younger brothers and sisters of the Facebook teens is: Facebook, Facebook, Facebook! The bad news is that if I, as an adult professional who has been a bleeding-edger with social media since it started, had to lose one thing in my online life it would be Facebook. Blogging is not going to die, though it will morph: it is too vital a feeder stream to the new publishing, to the "revolution in reading" as one senior media executive put it recently. Twitter is, as I have said before, an ideal news medium. The missing thing in my networked life is a iPad/Galaxy-only newspaper - but Rupert Murdoch is about to put this right.

So kids, do not worry: despite shelling out a large amount of money for my 400mm lens and still more for a camera that can take surfing shots at an ISO speed of 6400, capturing the individual droplets of surf as they fall, I will not be posting any shots of you surfing - and soon I may get out of your Facebook life altogether.

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