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Archives for April 2009

Hobbling hedgies and bashing buyout boys

Robert Peston | 09:03 UK time, Thursday, 30 April 2009


In much of continental Europe, there's a widespread belief that hedge funds and private equity firms caused the global economic crisis.

Which is presumably one reason why the European Commission wants much tighter regulation of both the hedgies and the buyout boys.

I've had personal experience of this, in a recent interview for French telly on how to prevent a repetition of the disaster: more-or-less all my interlocutor wanted to discuss was the alleged imperative of constraining the activities of hedge funds; there wasn't even a nod at the reality that far more of the real culprits were in the banks, including French banks.

To be clear, neither hedge funds nor the big private equity firms can be seen as innocent victims of the credit crunch.

They did make a contribution to the pumping up of the financial bubble that turned to bust.

As industries, they borrowed more than was healthy or sustainable (although within both industries, some firms resisted the urge to over-leverage).

Hedge funds helped to create a market for the toxic financial products - especially the collateralised debt obligations (CDOs) and credit default swaps - which destroyed the balance sheets of the world's biggest banks.

In their buyout rampage of 2006 and 2007, private equity firms were generating the ingredients (debt) for constructing one category of the poisonous CDOs.

Then there were the mind-boggling sums earned by the partners at hedge funds and private equity houses, which spurred the banks into providing equivalent remuneration schemes to their own bankers, for fear that the brightest and the best would desert - and, as we now know, at the banks these remuneration schemes gave incentives to take crazy risks.

Also banks saw the sky-rocketing returns of hedge funds and private equity houses and wanted some of that for themselves. So they took risks on to their own balance sheets which they didn't understand.

All that accepted, the banks didn't have to behave in a herd-like way - a herd of lemmings perhaps - to pump up the hedge-fund and private equity booms or to mimic the behaviour of the creatures they created (but without the finesse of the best hedge funds and private equity firms to identify and control risk).

Which means that the European Commission's proposed crackdown on hedge funds and private equity firms should probably be seen as an attempt to treat the symptoms of the disease, rather than the disease itself.

The disease (and I oversimplify here) was an excess of cheap money married to the greed and stupidity of banks and bankers.

In fact, from 2006 to 2007 the eye-watering profits being generated by the hedgies and private equity firms - the pay-packets that bust their pants - were an early warning that financial markets were not working in an efficient way, with potentially lethal consequences (which, as it happens, is what I argued at the time).

Regulators in the UK and the US chronically understated the damage that would be done from the market correction that was inevitable. And in that sense, I suppose, the visceral hostility of the French and German political classes to hedge funds and private equity firms, which they perceived as the savage beasts of Anglo-American capitalism, was perhaps a saner evaluation than was acknowledged in London and New York.

But that would not be to argue that there's merit in attempting to drive hedge funds or private equity into the sea.

Private equity can be a valuable source of alternative funding for companies, especially small and medium size companies.

The best hedge funds serve to make markets more efficient, by identifying when assets are chronically over-valued or under-valued.

That said, a bit more scrutiny and oversight of the hedgies and the buyout boys probably wouldn't be such a terrible thing. The question that's more moot is whether the proposed harmonised European regulations are too clumsy and crude (especially in the treatment of smaller buyout funds).

Which would be to argue over the detail of the new rules, rather than to say - after the horrors we've seen and experienced over the past 20 months - that we can simply leave it to these industries to ensure that they never again play a part (even if it's not the leading part) in destabilising financial systems and economies.

Measuring the global crunch

Robert Peston | 17:00 UK time, Wednesday, 29 April 2009


Official statistics tell us where we've been, rather than where we're going. But if the numbers are any good, they help to provide a bit of context and definition to our hunches and intuitions about what's going on in the world.

Bank for International Settlements<br />
So if there's anyone left on the planet who's still sceptical that we've been living through the mother of all credit crunches, I would direct you to quarterly banking statistics published today by the central bankers' bank, the BIS.

These show a plunge of almost $1.9 trillion or just over 5% between the third and fourth quarters of 2008 in banks' international assets, their overseas loans and investments.

In other words, there was a massive contraction of lending across national borders.

Banks called in their loans to overseas banks and other overseas borrowers on a colossal scale: it was the biggest shrinkage in banks' international assets since records began at the end of 1977.

In fact it's exceedingly rare for there to be any contraction at all in cross-border lending. So this represents an unusual reversal of financial globalisation.

Of course we already knew that banks were calling in credit last autumn in a panicky and manic way, after the collapse of Lehman.

Now we have a measure of that panic (though note that these figures are about the stuff that goes on to banks' balance sheets, not other forms of credit outside the banking system - so it's not the whole story of the crunch).

Now it won't surprise you that the shrinkage in international business was particularly pronounced for British banks

The overseas assets of British banks shrank $891bn during the whole of 2008 - which represents an astonishing 65% of the contraction of all overseas lending and investing by the world's leading banks in that year.

That repatriation by the Brits of lending is merely the corollary of an eye-watering withdrawal of credit from the UK by foreign banks: the liabilities to overseas lenders of our banks shrank $793bn in 2008.

Why were British banks so exposed to the global credit crunch?

Well it's because in the preceding few years they expanded their overseas lending at a breathtaking and unsustainable rate.

According to BIS figures, British banks' overseas liabilities increased from $3.4tn in December 2003 to $7.3tn in December 2007.

In that context, the recent fall to $6.1tn in British banks' cross-border liabilities does not look like the end of the story - especially if cross-border flows of credit in general continue to diminish.

To put it another way, there's a strong likelihood that overseas funding of British banks will continue to be squeezed significantly in the coming weeks and months.

Some of that will be absorbed by British banks calling in their overseas lending.

But it also means that there's no realistic prospect in the coming months of our banks being weaned off their new dependence on funding provided by taxpayers - unless, that is, we wish to risk a further serious contraction of lending by banks to UK households and businesses.

Making banks safe

Robert Peston | 12:05 UK time, Tuesday, 28 April 2009


Let's talk about banks' capital ratios, or the amount of capital banks are forced to hold as a proportion of their assets (or their loans and investments).

Stay awake. This stuff matters to you.

For those who don't know, banks' capital is a buffer against the losses they always face on lending and investing.

It's supposed to be the guarantee to depositors like you and me that we wouldn't be damaged when banks' loans go bad or when banks lose money on trading in securities: the hurt would instead be felt by shareholders and other providers of assorted forms of risk capital.

Now one of the main reasons the global economy is in such a mess is that big banks systematically lent far too much relative to their capital resources - which is mainly their fault but also that of numpty regulators, who allowed banks to drive a coach, horses and an entire wagon train through international rules that were supposed to ensure they kept adequate amounts of capital.

A few banks - such as Royal Bank of Scotland, Switzerland's UBS, Merrill Lynch and Citigroup of the US - took leave of their senses with their manic lending (by the way, the FT's Gillian Tett gives a particularly hair-raising account of their descent into madness in Fools' Gold, her new book).

The way most banks stretched their capital resources in their lending sprees both pumped up a dangerous bubble in asset prices and meant that when the bubble burst they didn't have enough capital to cover the losses.

So taxpayers, all over the world, had to step into the breach.

We taxpayers have pumped hundreds of billions of dollars of new capital into banks - we've nationalised or semi-nationalised loads of them - because the alternative of allowing the banks to fail was too scary for governments to contemplate (there was no desire to see the mobs of anxious depositors which formed outside Northern Rock's branches in September 2007 turn into a rampage outside most other banks).

But to state the bloomin' obvious, this global banking rescue is not something we'd want to repeat in a hurry.

It's quite important therefore that measures are taken to minimise the likelihood that banks will again systematically extend far too much credit relative to their capital resources.

However, closing this particular stable door is by no means simple, for two main reasons:

1) banks are global businesses, so new rules will have to be agreed by governments and regulators all over the world (never easy);
2) if we clumsily implement hastily and crudely devised requirements that all banks have to hold vast amounts of additional capital relative to their assets, there could be a permanent and significant reduction in the availability of credit - which could significantly reduce the potential for future global economic growth (we could all end up poorer from our natural desire to have a safer banking system).

For me, one of the big questions (about which there has been almost no public debate) is whether we should endeavour to make safe the global financial system that developed over the past few years - characterised by massive flows of capital across borders and the packaging of debt into securities for sale to investors - or whether we should give that up as a bad lot and regulate ourselves into a simpler but possibly poorer world, in which credit extended in any particular country is more closely matched by savings in that country.

The efforts of most governments, including our own, appear to be to sanitize the globalised status quo. It's obvious in our case why that's happening: as a nation, we don't save enough to meet households' or businesses' demands for credit (so we have to import credit from abroad).

But our government is doing its best to preserve the structures of financial globalisation, without explicitly making the case for doing so.

By contrast, it's possible to see in the words and deeds of the governor of the Bank of England that he believes some important elements of financial globalisation need to be rolled back (the Bank of England has, for example, been much more cautious about helping to rekindle securitisation - the conversion of debt into tradable securities - than Downing Street would like).

Here's the danger: we'll muddle through and devise yet another sub-optimal regulatory system.

Some of the second order issues were aired yesterday by Adair Turner, chairman of the Financial Services Authority (although he raised one very important question, which is whether financial innovation will always engender instability, and whether it's now clear that the costs of that instability outweigh the benefits of innovation).

Strikingly Turner said he was "open-minded to a [proposal]...that large systemically important 'too-big-to-fail' banks should have to maintain higher capital ratios than applied on average".

This is a nod to an idea that the chancellor is planning to float in a couple of weeks in a white paper on reforming regulation of the banking system (and the US authorities are moving in the same direction).

For what it's worth, there are two reasons why it might make sense to force our biggest and most complex banks to hold more capital than their smaller, simpler peers: if big super-banks have the privilege of knowing that we as taxpayers would always bail them out in a crisis, surely they've got to put in place treble protection against the risk that they'd call on us for such help; also the costs of holding the extra capital might encourage them to slim down and simplify their operations.

That said, such a regime could achieve the precise opposite of what would be intended.

The public imposition of a higher capital requirement on, for example, Barclays than on smaller, simpler banks would be a public declaration that Barclays would never in any circumstances be allowed to collapse.

And, paradoxically, that could give an unfair competitive advantage to Barclays - because safety-conscious depositors might well choose to give Barclays a disproportionate amount of wonga in the belief that there are no circumstances in which that wonga could be lost.

Which is partly why some, like the Liberal Democrats, are in favour of the forced break-up of the likes of Barclays and Royal Bank of Scotland into so-called narrow banks, so that these sorts of competitive distortions are minimised and so that banks don't abuse ordinary depositors' cash by gambling it in the supposed casinos of wholesale markets.

As I've recently noted, the Tories have also come out in favour of dismantling the big banking conglomerates - and Mervyn King, the governor, has said it's an idea he would like explored properly.

Even so, Lord Turner isn't in favour of the prohibition of Barclays-style universal banks, and nor are the chancellor and prime minister. They believe that delineating wholesale banking and retail banking in a clean way is easier said than done.

Certainly what's been striking over the past 20 months is that disaster has not been confined to one kind of bank: there have been egregious losses and humiliation for universal banks, such as Citi, UBS and RBS, as well as for narrower, more specialised banks, including Lehman, Bear Stearns, Washington Mutual and Northern Rock.

Oh, and lest we forget, the single biggest stimulator of the excesses of the banking system wasn't a bank at all: it was AIG, whose crazy insurance of financial products gave banks the lethal confidence to lend to those who could never repay.

Why tax the rich?

Robert Peston | 11:16 UK time, Friday, 24 April 2009


It is no exaggeration to say that this week's budget will define our politics, our prosperity and the nature of our society for at least five years and probably much longer than that.

As Stephanie Flanders, Nick Robinson, myself and others have elucidated, everything stems from the massive increase in public sector debt over the next few years to a level that will take more than a generation to pay down to levels that we consider normal.

The political debate will be over whether to attempt to pay the debt down faster, by cutting public spending more than the chancellor set in train and/or by increasing taxes more than he announced. That debate will frame the next general election.

How fast we reduce the debt and how we pay it down will also have an impact on the long-term growth of the economy and on the prosperity of the nation.

There is a trade-off between the scale of early pain - in the form of how fast and how much the size of the state is shrunk - versus the rate at which the economy will subsequently grow.

Economists are, of course, divided about whether our net long-term prosperity is maximised or minimised by being brutal early with public spending reductions.

But even if it were incontrovertibly true that we'd all be richer in the long term from fast and savage cuts in public services, those cuts would be felt most acutely by the poorest - which many would see as an argument for a more gentle approach.

Whether David Cameron likes it or not, the long shadow of the Thatcherite 1980s still conditions the consciousness of voters and politicians.

Which brings me to what I really want to talk about, which is the attempt to increase the tax burden on high earners.

According to the Treasury's figures, £7bn will be raised by 2012/13 from three raids on the rich: the new 50% tax rate for those earning £150,000 and above; the tapered reduction of tax relief on pension contributions to 20%, again for those whose incomes are £150,000 or more and the abolition of tax-free allowances for those earning £100,000-plus.

In respect of the hole in the public finances, the better-off are being asked to make a disproportionate contribution. But £7bn won't go anywhere near to closing a gap between the government's income and expenditure, which is currently running at £175bn.

2009 Budget Day

What's going on can perhaps be best seen in a bit of analysis by the Institute of Fiscal Studies.

It points out that if high earners made no attempt to avoid paying the new 50% rate, this new top rate would yield £7bn a year on its own, as opposed to the £7bn actually generated (in the Treasury's view) by all three tax changes.

But the Treasury believes that the yield from the 50% rate will be just £2.4bn because high earners will adjust their behaviour in ways that mean they avoid incurring all the increased liability.

Here's the thing. The IFS says that the Treasury's own figures imply that the new tax rate will in fact only generate about £1bn of extra tax, once the depressing effect on revenues from VAT, stamp duty and other indirect taxes is included (because the wealthy will spend less than they would otherwise do).

What's more, the IFS says that the Treasury is actually being too optimistic, on the basis of the best economic model of the impact on revenues of tax-rate increases. This model predicts that the Treasury will actually lose money on the new 50% rate, once the reduced harvest from indirect taxes is taken into account.

Now we're in the realms of behavioural uncertainty here. But there is a clear implication that if the Treasury simply wanted to raise a big sum of money fast and cleanly, it would have gone for other kinds of tax rises.

Which in turn implies that the 50% rate is less of an economic necessity and more a return to Labour's 1980s ideological view of fairness in taxation, that taxing the rich is a good in itself for the way it closes the gap between rich and poor.

The prime minister insists that New Labour - or Labour reconstructed as a party of financial aspiration which celebrates wealth creation - isn't dead. But many will say that the budget tells a different story.

ITV: Change of cast

Robert Peston | 09:30 UK time, Thursday, 23 April 2009


Michael Grade is stepping down as executive chairman of ITV about a year earlier than planned, but will remain as non-executive chairman.

The reason is that the commercial broadcaster faces three significant strategic decisions - and ITV's board sensibly concluded that it would be inappropriate for those decisions to be taken by Grade more-or-less alone and then bequeathed to a new chief executive.

Better to appoint a successor, before the end of this year, to set the direction of the business which he or she would then have to travel.

Michael Grade

The big decisions that loom, as result of regulatory reviews, are whether to remain a public-service broadcaster after 2012 - when all British TV goes 100% digital - and how to charge for advertising, as and when the existing contractual arrangements with advertisers are replaced.

Oh, and then there are one or two financial pressures, such as how to refinance £350m of debt due for repayment in 2011.

This morning, ITV said it "has no current plans for a rights issue", no immediate intention to tap shareholders for new equity finance.

Although advertising revenues are falling at an alarming rate - they're 20% down on the flagship channel - ITV feels it has enough cash and borrowing facilities to weather the recession. It is raising a further £58m of "covenant free" financing (or money without strings attached).

That said, ITV has discussed with leading investors the possibility of selling them new shares and may well have to raise new equity at some point.

When I spoke to Grade this morning, he said that market conditions were tougher than they've ever been since ITV was founded more than 50 years ago. Which is particularly galling for him, in view of progress in improving programmes, reaching more viewers and in removing shackles imposed by regulators.

So what is the future of one of the most distinguished brands in the history of British media?

A tantalising question is whether in the inferno of an advertising meltdown, the government and competition authorities would abandon their opposition to the creation of a super-broadcaster formed by the merger of ITV with channels Five and 4.

That would have seemed absurd a couple of years back. But right now, an ad on ITV 1 is cheaper per individual reached than an ad in a national newspaper.

Those are not the economics that can support the quality of programmes viewers expect from ITV over the long term.

Gilts shock

Robert Peston | 13:41 UK time, Wednesday, 22 April 2009


Gilt sales this year are forecast to be £220bn - way above all market forecasts.

There will be a big gulp from investors.

Why is the Treasury's borrowing need so much greater than was expected?

Well, the cost of bailing out the banking system appears to have been greater than expected.

I'm not surprised that sterling is now falling.

Questions will also be asked again about whether the UK will retain its AAA credit rating. If that were lost, the cost of selling all this debt would rise.

And then there will be the emotional reaction of bankers to the news that their take-home pay is being cut significantly by the new 50% top rate of tax and a reduction in relief on pension contributions for high earners.

There'll be gloom in the City tonight.

UPDATE, 14:10: Guess which single policy measure announced in the Budget represents the biggest single drain on resources and the largest individual stimulus measure in the current difficult year?

budget2009_commons226.jpgNot help for low earners.

Not support for pensioners.

Not support for the young unemployed.

Actually, it's the increase to 40% in tax relief to businesses on capital spending, for one year only - which is forecast to cost £1.64bn.

In fact, support for business in the current year looks pretty substantial. The total cost of deferring business rate payments, the car scrappage scheme, a fund for investing in young start-up companies, and various other smaller initiatives is over £3.3bn.

So although business leaders will hate the new top rate of tax, their chagrin may be tempered by the succour their companies are being offered.

UPDATE, 17:35: I haven't written much about one element of what I said early this morning I would be keeping an eye on, namely the credibility of the chancellor's growth forecasts.

That's because Stephanie Flanders has been highlighting all the reasons why the Treasury's expectations of a pretty sharp economic recovery may be far too optimistic.

If growth turns out over months and years to be even a bit lower than the Treasury expects - and many economists expect growth to be significantly lower - that would imply that the government will be borrowing even more, the public-sector debt will approach 100% of national income and it'll take even longer than seven years for debt as a proportion of GDP to start falling again.

Yuk and yikes.

How to borrow £200bn

Robert Peston | 11:16 UK time, Wednesday, 22 April 2009


What I expect the Debt Management Office to announce is that it will work more closely with investment banks in selling gilts.

What this offshoot of the Treasury will do is form syndicates of banks to sell around £20bn to £30bn of gilts, out of the record £200bn-odd it will have to flog to finance our financially stretched government.

This would involve firms like Goldman Sachs and Morgan Stanley finding buyers for UK government debt on behalf of the Treasury.

It's quite a substantial innovation for Britain, though other governments do this.

And it's how big companies borrow on bond markets: they hire banks as so-called lead managers or co-lead managers to find purchasers of debt.

Although the Debt Management Office will continue to use auctions and mini-tenders for the majority of gilt sales, syndicating a chunk is necessary because of the difficulty it has already experienced in selling long-dated gilts, or borrowing for 15 years or longer.

Plainly the Treasury wants to borrow as much as possible at a long maturity, so that it's not bequeathing a massive refinancing problem to the next government or the one after that.

As I implied in my earlier note, pension funds claim they want to buy long-dated bonds or index-linked bonds (which tend to be long dated). But they rarely turn up and buy the stuff in conventional auctions.

So the hope of the Treasury - and anyone who wants to minimise the risk that we might have to seek emergency funding from the IMF - is that silken tongued investment bankers can persuade them to buy the stuff.

And for those who believe investment bankers got us into the global economic crisis, perhaps this is public service as penance to help get us through it.

Except that the banks and bankers are bound to be handsomely remunerated for flogging this debt - much of which is only necessary because of the huge costs of bailing out our big battered banks.

Some might say that an ill wind they generated is rewarding them.

Funding record borrowing

Robert Peston | 08:12 UK time, Wednesday, 22 April 2009


What I'll be looking out for in today's Budget are three things.

First, what the Treasury and the Debt Management Office have to say about how they intend to borrow the record amounts that the government needs to raise from investors.

Second, how the government bond or gilts market responds to new hair-raising disclosures on debt that has to be financed - and the impact on the value of the pound.

Third, what the Treasury factors in for growth in the economy after we're through the recession - because the credibility of plans to pay back all this extra borrowing will hinge to a large extent on whether its projections for the recovery are perceived to be excessively optimistic.

Here are the basic numbers that, I think, will frame today's debate.

In the last Budget, a year ago, Alistair Darling projected public-sector net borrowing for 2009/10 of £38bn.

Come the autumn and his pre-Budget report, he projected that net borrowing for that period would be more than three times greater, at £118bn.

And today, just a few months on, he's expected to say he's understated yet again the scale of what the public sector needs to borrow - and that public sector net borrowing in the current fiscal year will be nearer to £180bn.

That would be an unprecedented amount for peacetime, both in absolute terms (natch) and as a percentage of GDP (more than 12%).

Now there are two ways it can raise this money.

The conventional way is to borrow it from investors, such as pension funds, insurance companies, hedge funds and other central banks.

It does this by selling gilts or government bonds to them - or rather the Debt Management Office, an offshoot of the Treasury, does this on behalf of the government.

As of now, the Debt Management Office expects to sell £148bn of new gilts into the market this year.

But that is bound to be revised up later today - to nearer £200bn.

And the closer that new aggregate amount for gilt sales is to £200bn, the more likely it is that investors will be spooked - since most analysts are expecting gilts sales closer to £180bn.

It would therefore help the government's cause if it could come up with a wheeze to sell this debt in forms that are more attractive to investors. For example, pension funds have for years been urging the government to issue debt in the form that more neatly matches their long term liabilities.

We've also, of course, all been recently reminded that there is a less conventional way of funding this deficit - which some would describe as dangerous and inflationary.

That is to turn public sector debt into money (to monetize it) through purchases of gilts by the Bank of England.

To ease putative deflationary pressures, the Bank of England is doing just that through its quantitative easing programme.

However Paul Fisher, the Bank of England's markets director, yesterday said the Bank's current budget for buying gilts and other forms of debt, which is £75bn, looked "about the right size" and was "calibrated reasonably well".

The price of gilts fell in response, because of investors' disappointment that demand for gilts from the Bank wouldn't be higher.

It would be odd if the gilt market weren't nervy today.

IMF vs Treasury and FSA

Robert Peston | 19:07 UK time, Tuesday, 21 April 2009


The International Monetary Fund has published some big and scary forecasts of losses banks and other financial institutions are likely to make in the coming couple of years.

And the emergency service for the global economy has also made some eye-watering estimates of additional capital that banks may need to raise.

Here are the headlines:

1) total losses for banks, insurers and other institutions from loans and investments in the US, Europe and Japan from 2007 to 2010 will be $4.1trillion or £2.8trillion - which is the equivalent of writing off the entire output or GDP of the United Kingdom for two years (a big number);

2) in the UK, the eurozone and what the IMF calls "other mature Europe", banks will need to raise a further $875bn of additional capital by the end of 2010 and perhaps as much as $1700bn - which implies that we'll see a good few more banks taken into public ownership.

Specifically on the UK, the IMF estimates that the costs to taxpayers (or us) of bailing out our big banks will be 13.4 per cent of GDP or around £200bn, rather more than the Treasury has been estimating or will factor in to tomorrow's budget.

On the IMF's figures, only Ireland will suffer greater taxpayer costs as a proportion of GDP. In the US, the so-called stabilisation costs would be 12.1 per cent of GDP.

However, the Treasury says the IMF ignores the fees it has received for some of the financial support to banks that's been provided and it thinks the IMF is being too pessimistic on potential losses.

The Tories of course argue that the IMF's assessment is just another manifestation of the costs to us all of the authorities' failure to rein in the lending bubble before it became almost lethally super-sized.

Meanwhile the Financial Services Authority is not overjoyed that the IMF says British banks will have to raise a minimum of $125bn of additional capital and perhaps as much as $250bn.

The City watchdog would make the following points:

a) it wouldn't disagree with the IMF's estimate that banks will incur further huge losses in the coming year or two;

b) it believes British banks have already raised sufficient capital to absorb those losses safely;

c) in measuring the capital ratios of banks (their capital resources relative to loans and other assets) the FSA is a bit bemused that the IMF doesn't seem to weight assets by their riskiness;

d) the FSA would not disagree that over the long term banks will have to hold more capital relative to assets than recent norms, but the FSA believes it would be bonkers to force banks to raise this additional capital until the recession is over - because to do so now would further deter banks from lending and would deepen and lengthen the recession.

Here's the bottom line.

Many may agree with the IMF's analysis and its desire that banks, including British ones, should raise more capital sooner rather than later.

But the power to force banks to raise additional capital rests with national regulators, such as the FSA, not the IMF.

And if the FSA doesn't believe that banks have an urgent need to raise capital, then banks won't raise massive amounts of additional capital (barring the disclosure of booboos that have somehow remained hidden).

UPDATE 00:05 The Treasury has shouted very loudly at the IMF. And the IMF has tonight withdrawn from the online version of its Global Financial Stability Report the table showing the costs to the British taxpayer of the bank bailout as being 13.4 per cent of GDP. That table is now, according to the IMF, "embargoed" - whatever that means.

Tesco: Not quite infallible

Robert Peston | 10:34 UK time, Tuesday, 21 April 2009


Tesco's pre-tax profits last year were either just under or just over £3bn, depending on whether you think the statutory or "underlying" measure is the better yardstick.

I tend to prefer the statutory number, for all its flaws, because it's less amenable to manipulation by businesses - not that Tesco would indulge in any sleight of numerical hand.

And in Tesco's case, that would mean its profits grew by 5.5% to £2.95bn - or 4.3% after adjusting for a rogue 53rd week in the 2009 figures.

For what it's worth, Tesco would argue that its profits grew 8.8% (on an adjusted 52-week basis) to £3.1bn.

Not that it's worth having a punch-up about.

On either measure, it's a solid performance in ghastly global economic conditions.

So the results are a reminder that even in a recession, the British and world economies are very substantial indeed.

The British economy may be contracting, perhaps by almost 4% this year, but that means the UK's output will diminish to the level of three or four years ago - when we weren't paupers.

So there are lots of profitable opportunities for entrepreneurs and businesses that know what they're doing.

Tesco bags in trolley

What's striking is that British consumers are still playing a disproportionately important role in fuelling the economy: they are spending a good deal of the cash put in many of their pockets by cuts in interest rates; there's a bit of extra saving going on, but not as much as you might expect given the uncertain economic outlook.

And lest we forget, the reason why Tesco's results are such a good barometer of what shoppers are doing is that it is so blinkin' enormous.

Tesco has around a third of all supermarket sales.

And even in non-food, it's a giant: at £8.7bn, its UK non-food turnover is well over twice the clothing and general merchandise sales of Marks & Spencer.

It's not exactly a minnow outside the UK either: total international sales were £17.9bn, up 13.6% at constant exchange rates (including the benefit of the sharp fall in the value of sterling, overseas sales rose 31%).

What the figures show is that British shoppers are not partying on the Titanic, but nor are they battening down the hatches, hoarding the cash in the mattress and only eating tinned baked beans.

There are two or three other notable features of Tesco's numbers.

Given my eccentric interests, you won't be surprised that the fat returns made by its financial services arm stood out for me.

This made a gross profit of £627m on loans and other assets of £6.2bn.

Even after a charge of £134m for expected losses on lending and £249m of running costs, the operating profit was £244m.

At a time when many of the world's biggest banks are struggling to make any profit at all, that's a pretty handsome rate of return.

At this relatively early stage in its development, Tesco Personal Finance is already a player in financial services.

The matter-of-fact confirmation today that it's planning to become a "full-service retail bank" should give the willies to every traditional bank and building society.

However, Tesco is not infallible. Its brave new US venture is making bigger losses than it hoped - and won't do any better this year.

Also, after years of performing miles better here in the UK than its smaller rivals, they are catching up a little bit.

Sales per unit of selling space are currently growing faster at Morrison, Sainsbury and Asda than at Tesco.

There are two reasons: they're better managed than they were; and the recession has hit non-food sales, where Tesco is bigger than most other supermarket groups, harder than food sales.

That said, this catch-up by Sainsbury et al is like saying Everton and Aston Villa are narrowing the gap with Manchester United and Barcelona.

Or to put it another way, on a good day for the opposition, Tesco can be beaten in the odd game; but its grip on the title doesn't look any less firm.

Treasury wants to cut pensions tax break

Robert Peston | 10:03 UK time, Monday, 20 April 2009


Plainly the big story of the Budget will be the deterioration of Britain's public finances, with the government's borrowing needs exploding to record levels for peacetime.

But tacked on to that hair-raising tale will be a subsidiary story, which will be the public-spending cuts and tax rises required to bring the government's expenditure and revenue nearer to equality over the coming years (though we're only going to get chapter one of this epic).

That's why in the pensions industry, which benefits from tax breaks and is habitually a target when money is tight, there is a great deal of nervousness.

For years, many in the Treasury have taken the view that providing full tax relief on pension contributions to top-rate taxpayers is not a sensible use of scarce resources - and in the past few weeks, ministers and officials have been sending out signals that the moment may be nigh for reform.

So some kind of change to the tax breaks available to high earners on their pension contributions is under active consideration.

That said, the chancellor is unlikely to decide till the eve of Wednesday's Budget whether to abolish the right of all top-rate taxpayers to offset their 40% tax liability against what they put into their pension pots.

The reason for prevarication is that limiting tax relief to the 20% basic rate of tax would represent a substantial rise in the tax burden on many hundreds of thousands of people who don't think of themselves as rich.

It would bite, for example, on those earning just a bit more than £40,000 a year, including deputy head teachers and senior policemen. The cost for many of them of limiting the relief to 20% could be more than £500 a year, equivalent to a 1% rise in their tax rate.

Which is why the Tories would be certain to oppose it - and it's already clear from newspaper coverage that the Tories would have a following wind from commentary and coverage in much of the press.

So what would be the argument for abolishing the relief, other than that the government needs more revenue (abolition would raise more than £5bn a year, a non-trivial sum)?

Well the Treasury would say it's slightly odd that the biggest tax breaks on pension contributions go to that part of the population who are saving adequately for retirement, whereas the smallest tax incentives go to the vast majority who are not saving enough.

As a nation we're not putting aside sufficient amounts for retirement - and the greatest deficiency in saving is at the bottom end of the income scale (as you'd expect).

So some would say it's a bit rum that for every £5,000 put into a pension pot by a top-rate taxpayer there's a refund of £2,000, whereas the refund on the same contribution would be just £1,000 for a basic-rate taxpayer.

Is that fair - especially when there are more than 23m basic-rate taxpayers and less than 4m paying the top rate of 40%?

You'd think, from much media coverage, that the vast majority pay 40% tax, and would therefore be hurt by abolition of 40% relief. But that's not so.

That said, would reducing financial support for those who are making decent contributions do anything positive to fill the horrible hole in final-salary pension schemes or boost the meagre payments into defined-contribution plans?

Silly question.

If one of the biggest structural problems faced by the British economy (and those of most other rich countries) is the under-funded pension burden of millions who are living longer, does it make economic sense to withdraw one form of support from pension contributions, without providing other incentives to save?

The chancellor could go for a more modest reform, limiting full 40% relief to earnings up to £100,000 or so.

Which wouldn't raise as much for the Treasury, but there probably wouldn't be opposition from David Cameron's Tory party, because he has made a strategic decision that he can't be seen to be defending the interests of those on highest incomes.

The argument here will also go wider than just the future of our pensions.

There's also a debate about the relative sizes of the public and private sectors.

It's moot whether right now the consensus would be that the hole in the public finances should be filled predominantly by shrinking the state or by finding ways to increase tax revenues.

Barclays' painful deal

Robert Peston | 17:50 UK time, Thursday, 9 April 2009


Barclays says that it has sold iShares - a provider of specialist stock-market funds - for £3bn.

But it's not a sale in the sense that most of us would recognise. Because it has lent the buyer, the private-equity house CVC, £2.1bn of the purchase price.

In fact Barclays' continued exposure to iShares seems even greater than just those loans, in that the deal adds £2.7bn to what the bank shows on its balance sheet as its so-called risk weighted assets.

That said, Barclays says that through the miracle of how banks do their accounting there will be a useful addition to its capital resources, its buffer against losses on lending.

Some would argue that extra bit of buffer has been acquired at the steep price of selling a growing business at a knockdown price into a buyer's market.

Which only goes to show quite how desperately Barclays - like most banks - needs capital, even if it has avoided the indignity suffered by Lloyds and Royal Bank of Scotland of getting that capital from us, from taxpayers.

What's even more delightful for the purchaser, Barclays will pay CVC £120m if it rats on the deal by securing better terms from another bidder (there's also provision for both Barclays and CVC to receive between £34m and £120m if either side walks away for other reasons).

And for some Barclays employees who have stakes in a subsidiary of the bank, BGI, there's a lovely windfall from the deal, in the form of a cash dividend and a more than doubling of their holding in BGI.

Barclays' president, Bob Diamond, will receive £4.7m in cash and a substantial increase in his interest in BGI.

So to summarise: Barclays is providing the buyer of iShares most of the finance to "buy" iShares; the purchaser will receive £120m, if Barclays secures a better offer; and the transaction has triggered handsome rewards for some Barclays' employees.

In normal times, that would be seen as a deal so bad for the bank that shareholders would be volunteering to throw themselves off Beachy Head.

But Barclays' share price rose more than 12 per cent today.

To state the obvious, these are not normal times, these are credit-crunch times: and, I guess, if a bank can raise capital in any way at all without tapping taxpayers, that's seen as good news.

PS. I'm planning to skive off for a few days. So forgive me if Picks goes quiet for a bit (and if you appreciate the silence, you don't need to inform me).

Tories to break up banks?

Robert Peston | 12:40 UK time, Wednesday, 8 April 2009


Royal Bank of Scotland and Lloyds Banking Group could be dismantled after the next election, if the Tories form the government.

George OsborneHere's why I say that, in the form of excerpts from a speech that's just been delivered by George Osborne, the Shadow chancellor.

"We cannot allow one part of our economy to behave in a way that puts the rest of the economy at risk when it fails. We need to think deeply about whether we can sustain banks that are not only too big to fail, but potentially too big to bail.

By dint of its substantial shareholdings the government has a powerful influence over the future structure of the UK banking industry, whether it likes it or not.

When the time comes to sell off those shareholdings we need to think very carefully before simply selling them to the highest bidder without thinking through the consequences for the wider economy.

We should look at whether Britain in fact needs smaller banks.

For it would be a bitter irony if we came out of this crisis with a banking system that was even more concentrated and even riskier than the one we had before it."

The background to these remarks is that Royal Bank's balance sheet is considerably bigger than the total output of the British economy and it liabilities are considerably great than the entire public-sector debt of the UK.

Hence Osborne's allusion to banks that are "too big to bail". Or to put it another way, in rescuing RBS, the government has mortgaged all our economic futures to the rehabilitation of this giant bank.

As for Lloyds, it became far and away the biggest retail bank in the UK when it was permitted to buy HBOS last autumn.

In fact, it only rescued battered HBOS because the deal offered a once-in-a-generation opportunity to become the unchallenged market leader in British retail banking.

So if the next government were to dismantle Lloyds, depriving it of its enormous share of the current-account, savings and mortgage markets, that would be a reputational disaster for Lloyds' management.

There are two further implications of Osborne's remarks: first, that he would privatise Northern Rock as an independent bank, rather than flogging it to another bank; second, that he would ask the City watchdog, the FSA, and the competition authorities to consider whether other big British banks should be broken up. Even those where taxpayers don't have a big stake.

In the City, where I am tapping out this blog, this is big stuff.

To do my normal thing of ramming home the bleedin' obvious, the opinion polls are currently saying Osborne will be the next chancellor. Which means that his ambitions for what our banks should look like after the spring of next year are at least as significant as the future plans of the current chancellor.

Should the banks back Britain?

Robert Peston | 09:15 UK time, Tuesday, 7 April 2009


A survey of one (me) would corroborate the recent Bank of England assessment of credit conditions, to the effect that banks are providing a few more loans to business than they were and - perhaps more importantly - are being a bit more sensitive to the needs of business.

For me, the change in banks' behaviour may have taken place a month or so ago.

Out of business signBefore that - through the autumn and winter - I would receive a steady number of complaints from small and medium size businesses that banks were pushing them under by capriciously depriving them of borrowing facilities or increasing the cost of such facilities to lethal levels.

It was impossible to investigate all the charges against the banks in detail. But I was persuaded that there was a serious problem.

Banks were not being wholly rational in their decisions about whether to provide vital credit to the supplicant businesses.

Some bank managers were exploiting technical breaches of borrowing agreements or covenants - breaches that really didn't imply that a business was in serious trouble - to demand their money back or screw a massive increase in fees or interest out of the vulnerable borrower.

It's impossible to know how many fundamentally sound businesses were killed off by banks' panicky attempts to cut their losses. But there was a fair amount of collateral damage to the innocent as banks brutally reduced the availability of loans to match the depletion in both their capital and in their ability to raise funds on wholesale markets.

Most at risk were the smaller companies.

Bigger ones - especially those owned by private-equity funds - were (and still are) being squeezed by the banks till the pips squeaked. That said, when it came to these larger businesses, banks' aim was typically to wipe out the equity in the business, push up fees and scoop 100% of whatever value could be realised, rather than kill off the business.

Then, in January or so, the penny dropped for banks with a resounding and deafening clank.

More-or-less all of them realised that they wouldn't still be standing if it weren't for the massive support of us, of taxpayers, in the form of loans, guarantees, insurance and investment (to the tune of about £1.3 trillion of succour from the authorities in this country alone, aggregating these different categories of support).

So if we were propping up the banks, and the banks were simultaneously destroying the economic fabric of the nation, well that wouldn't and didn't seem a fair exchange.

As a result, the message seems to have gone out from bank bosses to bank managers that they must behave properly: killing a viable business to recoup a loan isn't a banking strategy with a long-term future.

That said, if I'm receiving fewer cries for help from companies claiming they're being destroyed by banks, I am receiving an increasing number of complaints that banks are refusing to back sensible, legitimate expansion plans and investment opportunities.

Many companies see scope in the current recession to increase their market share or diversify. But they tell me that raising even modest amounts of additional working capital or longer-term loans from banks is hideously difficult.

If that is a generalised trend, it would be seriously bad news for all of us - because it would mean that banks' fears of taking any kind of new risk would be limiting the creation of jobs, tax-revenues and income, at a time when all three are in short supply.

Of course, the risks of lending rise in a recession, for the obvious reason that the incidence of bankruptcy rises (doh!).

But as an explicit aim of government policy, taxpayers have recapitalised two of our biggest banks - Royal Bank of Scotland and Lloyds - and provided other kinds of financial support to the others, so that they have the resources to lend now that credit is most needed.

All of which means that there is now something of an imperative for banks to demonstrate rather more than they have that they retain an appetite to back wealth creators.

For me, however, the really resonant question is whether we should expect British banks to bend over backwards to help British businesses, as opposed to overseas businesses.

What I don't mean is that they should engage in financial protectionism, that they should retrench back to the UK and withdraw credit from other countries.

In fact, there is quite a lot of that return-to-home banking going on. And, as I've been writing here for some time, this is disturbing - because it represents a beggar-my-neighbour retreat from financial globalisation which is exacerbating the worldwide recession.

Here's the trickier question. In a world of scarce resources, and where a bank faces a choice between competing investment decisions where the potential risks and rewards are similar, should that bank choose the investment that protects jobs and income in the UK?

This may seem somewhat academic.

But I suspect for international banks, it's frequently a genuine dilemma.

The issue was brought to my attention in a recent decision by a specially created company called SeaDragon Offshore, which is funded by Lloyds Banking Group, to switch the construction of two semi-submersible oil drilling rigs from the North East to Singapore.

The contracts would have been worth something over £200m to UK companies and would have supported 1200 or so high-skilled, high-paid construction jobs.

There wouldn't be any kind of an issue here if the construction was always going to be carried out in Singapore. But what's slightly alarming is that the work was originally going to be done on Teesside and was subsequently switched to Asia - and a last ditch attempt to win the business back by a newly created Tyne/Tees consortium has also flopped.

The question for Lloyds is why the risk of doing the work in the UK was perceived, in the end, to be excessive - given that the initial decision had been to place the order with North East construction firms.

And, I suppose, the bigger related question for the senior management of all the big British banks is whether there's any harm in sending out a message to their staff that - all other things being equal - they should look more kindly on requests for finance from businesses that support the British economy.

Or would even mild nationalism of that ilk undermine their managers' ability to make rational lending decisions?

A cuckoo in the stock market?

Robert Peston | 09:41 UK time, Monday, 6 April 2009


All the talk in markets is of a possible slowdown in the rate of decline.

The reason why share prices around the world have been rising in the past few days is not that there is evidence of economic recovery - but rather that the pace of deterioration may have been decelerating.

Think of it as what happens when you touch down in a plane and the pilot turns on the thrust reversers at full pelt - the plane stops before it overshoots the runway (barring mechanical failure).

The pilots of the global economy have been gradually increasing the force (and noise) of thrust-reversal in recent months: monetary and fiscal authorities have cut the cost of credit, pumped money into the system, rebuilt banks' balance sheets and stimulated the economy.

That amounts to many trillions of dollars of economic force. There may be more to do - but it's bound to have an effect.

Now, since it was a collapse in the availability of credit that pushed the world into the worst economic conditions since the 1930s, an improvement in the supply of credit would be (for most people) an encouraging sign.

In that context, the Bank of England's last credit conditions survey - which was published on Thursday but was drowned out by G20 mania - may turn out to be significant.

The survey claimed that in the first quarter of this year there had been a slight increase in the availability of loans to companies and a less-than-expected reduction in the supply of unsecured credit to households and small businesses - although the supply of mortgages shrank again.

Perhaps more relevantly, credit conditions were expected to improve in the coming three months: credit will remain tight, but not quite as tight as it has been.

It could be the first cuckoo (sorry for mixing my metaphors).

And there may be other cuckoo-ish noises; there's been contradictory data on what's happening in the housing market in the UK - whose underlying message may be that prices aren't dropping as quickly as they were - and a less-than-expected fall in US motorcar sales (though today's news on car sales in Britain is dismal).

I am being parochial, and economic stats from around the world remain pretty dire.

But here's the paradox. It's impossible to prove that we've heard the first cuckoo in spring. However that may not be the disaster it seems. What matters - to an extent - is what investors think they've heard.


The point - which I've been making for some time - is that there is an inextricable link between asset prices and the supply of credit (and between the supply of credit and economic prospects in general). Or to put it another way, a pre-condition of economic recovery is that asset prices have to stabilise and then rise in a sustained way.

For asset prices to rise, investors' appetite for risk has to increase - which would happen as and when they see portents of better times ahead. And if - for example - property prices then bounced even a little, banks would have a bit more confidence when lending, because collateral would not be seen as inexorably shrinking.

A similar virtuous process stems from a generalised rise in share prices. And that's a trend we have been seeing from Tokyo to Wall Street to London.

If share prices rise, including the share prices of banks (as has been happening), then it becomes much more of a realistic prospect for companies - including banks - to raise the equity capital they need.

That in turn both reduces the demand for emergency lines of credit and increases the willingness of banks to lend.

Against that background, the strong demand for HSBC's £12.5bn of new shares has to be seen as a very good thing.

None of which is to say that even if we've heard the cuckoo that it couldn't yet be wiped out by yet another malevolent storm.

And I've bored you rigid with my fears about the huge challenges we'll face, even after the recession has ended in a technical sense.

That said, it would be mean-spirited not to take pleasure from the thought that we might have heard a cuckoo.

That bloomin' pension again

Robert Peston | 13:32 UK time, Friday, 3 April 2009


The negotiations between Royal Bank of Scotland's new chairman, Sir Philip Hampton, and the bank's former chief executive, Sir Fred Goodwin, over Sir Fred's sensational pension deal have descended into near farce.

Sir Philip has been trying to persuade Sir Fred that it would be in his interest to voluntarily give up some of his £16.9m pension pot.

He's told Sir Fred on several occasions - the last time around a week ago - that it would be good for his reputation to make the sacrifice and good for the battered bank's.

On each occasion, Sir Fred has said he would ponder.

But the pondering has prompted nothing in the way of deeds - presumably because Sir Fred has made the reasonable calculation that whatever stain there may be on his reputation in the UK is unlikely to be washed away by any kind of self-denying gesture of this sort.

However, as I reported on 17 March, there was one exception to this immovability - which was in respect of a lump sum paid to Sir Fred.

I pointed out that Sir Fred had already received a £2.7m cash lump sum from his pension fund, thus reducing his annual pension payment (which he's already receiving, aged 50) from £703,000 to £555,000.

He was able to take this substantial sum tax free, under the terms of his pension arrangements with Royal Bank - the bank had agreed to pay the tax liability of considerably more than £1m on the payment.

Now, Sir Philip did persuade Sir Fred to repay the lump sum, but subject to an important condition - which is that Her Majesty's Revenue and Customs would have to agree not to levy tax on the initial payment.

This waiver from HMRC was necessary, for the obvious reason that neither Royal Bank or Sir Fred wanted to face a stonking tax bill on a lump sum he had given back.

Royal Bank was hopeful that HMRC would be happy to pretend that the original payment had never taken place.

It was wrong: HMRC has refused to play ball.

The tax authority has told RBS that even if Sir Fred gives the money back, it will still demand more than £1m in tax from him. Apparently, if it weren't to do this, an unfortunate precedent would be set.

So, after all that, it doesn't look as though Sir Fred will repay the tax-free lump sum.

He'll probably keep the £2.7m and will continue to receive £555,000 a year.

We're back to where we started on all this.

And for those of you bored witless by this saga (and I know there are lots of you who are in this category), I will endeavour to return to it only if something of genuine moment were to occur (and I honestly can't think what that would be).

RBS: Stop the flogging

Robert Peston | 09:09 UK time, Friday, 3 April 2009


In some ways, Sir Philip Hampton's statement to Royal Bank of Scotland's shareholders later today will be a catalogue of what the bank did wrong.

Sir Philip HamptonHe will say that its takeover in 2007 of a large part of ABN Amro, the Dutch bank, can be seen as "the wrong price, the wrong way to pay, at the wrong time and the wrong deal".

He'll say he understands why the £17m pension pot awarded to the former chief executive, Sir Fred Goodwin, is an issue of "significant political and public concern".

Sir Philip will add that it would be wrong for this beleaguered bank to retain its corporate jet. And he'll say that if he were making the decision today, Royal Bank would not choose to sponsor Formula One.

It represents a pretty comprehensive dumping on the previous directors of Royal Bank.

But in an interview for the Today Programme with me this morning - Sir Philip's first broadcast interview since becoming chairman of RBS - Sir Philip asked for an end to what he called the public flogging of the bank.

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What he said was: "We've got 180,000 people and 40m customers around the world, and what we want to do is get back to serving them, and restoring the morale of our people. And the more we have the public flogging, the longer that is delayed".

In the interview, Sir Philip - who was appointed with the blessing of the Treasury - also threw a small grenade in the direction of Lord Myners, the City minister.

Lord Myners recently told MPs that he felt Sir Tom Mckillop, the former chairman of Royal Bank, had used an elaborate ruse to secure Sir Fred Goodwin's substantial pension.

However, Sir Philip told me he believed his predecessor's decision on Sir Fred's pension was "taken in good faith," and he didn't believe anyone had "behaved badly," even if it now looks extraordinary that Sir Fred was allowed to receive £700,000 a year as a pension with immediate effect.

There's other stuff of moment in Sir Philip's statement to Royal Bank's annual shareholder meeting.

He'll say, for example that Royal Bank of Scotland would have made an operating profit last year were it not for the colossal losses made by the parts of ABN that it acquired.

This is what he extrapolates from that: "I don't think there can be any doubt that the key decision that led RBS to its difficulties was the acquisition of ABN AMRO. This is the painful reality that we can now do nothing to change".

But the positive implication is that it shows the "enduring quality, strength and potential within the core businesses of RBS".

Making banking boring

Robert Peston | 17:38 UK time, Thursday, 2 April 2009


There are no surprises in the deal announced today to reform the banking system, to prevent banks making the kind of risky loans and investments that precipitated the worst global economic crisis since the 1930s.

But it's nonetheless a historic event that the world's 20 most powerful economies have signed up for these reforms - because they represent the death knell for the Anglo-American doctrine that economies flourish when financial firms are left alone to do as they please.

Nicolas Sarkozy and Angela MerkelIf the French and German governments - long critical of the practices of the City of London and Wall Street - claim a victory, that's not wholly unfair.

What's been agreed is that hedge funds and other relatively unregulated financial institutions - known collectively as the shadow banking system - will have much less freedom to lend and trade.

There'll be a crackdown on tax havens, measures to prevent banks rewarding staff for doing dangerous deals, much stricter oversight of the agencies that determine whether investments and loans are safe, and a reform of the way that banks account for their profits and losses.

Most significantly, banks will have to hold much more capital relative to their loans and investments, so it will be much more expensive for them to lend.

That may seem crazy right now - when banks haven't been lending enough.

But if it changes the way that banks do business, so that they take fewer dangerous risks, in the long term most of us will probably be grateful.

G20: The big money decisions

Robert Peston | 11:32 UK time, Thursday, 2 April 2009


Okay, here's some news (well, sort of). The leaders are close to agreement on the big money questions.

There will be a significant increase in the resources of the IMF, the emergency rescue service for ailing economies. The increment in funding for the IMF could be nearer $500bn than the $250bn already pledged as a minimum.

For me, the fascinating question is how much of this increment comes from the soon-to-be superpower, China (I'm sad like that).

There could also be commitments of several hundred billion dollars of trade finance, to lessen the painful slump in world trade that's impoverishing so many countries.

And the question of the IMF providing financial support for developing countries through an arcane mechanism ("Special Drawing Rights" - don't ask) is apparently "open".

On protectionism and all that, there will be a commitment to name and shame countries that breach free-trade rules with protectionist measures.

LONDON, ENGLAND - APRIL 02: World Leaders including U.S. President Barack Obama, British Prime Minister Gordon Brown, Australian Prime Minister Kevin Rudd, French President Nicolas Sarkozy, Chinese President Hu Jintao, German Chancellor Angela Merkel, Italian Prime Minister Silvio Berlusconi and Brazilian President Luiz Inacio Lula Da Silva pose for a family photograph at the G20 summit on April 2, 2009 in London, United Kingdom.

But there will be no formal timetable to restart the Doha negotiations on further liberalisation, because President Obama has not yet got his domestic ducks in a row on what is a highly contentious issue in the US.

Finally, it's still slightly unclear whether the leaders will announce a policy of publicly humiliating tax havens that don't co-operate on disclosing the identities of potential tax dodgers.

Apparently the Chinese don't like the idea that Macau and Hong Kong could be named and shamed.

Update 12:37: The amount of trade credit being promised is $200bn (up from the $100bn minimum pledged in the finance ministers' summit last month).

And there will be an increase of $250bn in Special Drawing Rights from the IMF, the biggest increase ever - which is a mechanism for channelling funds to poorer countries.

The Special Drawing Rights increase is big stuff - and I haven't properly explained the significance.

The record $250bn increase in SDRs is shared between all IMF countries, broadly according to their size (on a quota basis).

Broadly the increase boosts every country's reserves and thus their liquidity.

It's particularly valuable for cash-strapped poorer countries or emerging economies.

But it's really the equivalent of creating money for all economies, including ours, or for the global economy.

Update 13:59: Stephanie Flanders tells me that the £250bn increase in the general allocation of Special Drawing Rights represents a ten-fold increase (or perhaps more) in the current stock.

As she says, that's particularly useful for poor, reserve-starved countries - because it allows them to borrow (in a world that won't lend to them) at the US official interest rate (which is as close to zero as makes no difference).

Update 15:21: A chap who knows a lot more about this Special Drawing Rights stuff tells me that it's not very useful for very poor countries in sub-Saharan Africa.

They won't be allocated more than a few billion dollars, and even the low interest rate on this de facto overdraft facility makes the money too expensive for them.

We in the rich West probably won't use the facility at all (we don't need a new overdraft facility - or at least not right now, touch wood).

So it will be most useful for middle-income, emerging market economies. Many of them are feeling very financially stretched, so the new borrowing facility should make a serious difference.

If it helps to prevent a domino-effect collapse of these emerging-market economies - well, we'd all benefit.

G20: Road to nowhere

Robert Peston | 07:43 UK time, Thursday, 2 April 2009


The journalist on the bus next to me is snoring like it's going out of fashion.

It's 7am and I have been cleared by the first security screening and am now sitting on a bus waiting to be shuttled to the next electronic frisk and probe.

The bus isn't moving, apparently because the road to the conference is blocked by... well, we're not sure.

But the journalists from all over the world crammed on to the bus are becoming restive.

Welcome to the G20, the conference that Gordon Brown tells us will set the world back on the road to economic recovery.

For most of us stuck on the bus, the road to anywhere would be nice.

I suppose the authorities figure that the only deadline that matters is 1530 this afternoon, when the prime minister will announce to 2,500 hacks like me that the planet has been saved.

There is, of course, a faint risk that if it takes that long to get us there, the polite Dutch, Italian and Spanish journalists dressed in their best smart-casual that surround me will have morphed into rabid, smash-capitalism protesters.

We long for escape from this detention camp in a wasteland on north east London.

If they let us out, we promise to suspend common sense and try to believe that there really is drama in the last closing hours of talks between the leaders of the 20 economies identified as the world's most pivotal.

Thank goodness for le president, M Sarkozy. His tantrum yesterday, his near-threat that he would stomp out if the excesses of Anglo-American financial capitalism aren't definitively tamed, created the almost convincing impression that the stuff which really matters in today's communique hasn't been stitched up and choreographed in the preceding days by diligent officials.

As a minister said to me yesterday, if money had changed hands between Downing Street and the Elysees, M Sarkozy couldn't have done a better job for G Brown of casting him as the peacemaking global statesman.

However, for the avoidance of doubt, I am not trying to downplay the significance of today's global concordat on boosting the resources of the IMF to rescue ailing economies, on the principles of reforming the banking system, and on standing ready to stimulate national economies should that be necessary (this latter a damper squib than Mr Obama and Mr Brown would have liked, but they'll never admit it).

That said, and as you by now may have gathered, I am feeling a little bit grumpy to be stranded on a bus seemingly on the road to nowhere.

Update 08:37: After a wrong turn, by the government-hired bus driver, we're in.

But in what?

We're nowhere near where the leaders will be passionately debating the precise words to employ when declaring that - in the light of evidence that secretive, tax-avoiding financial firms may not all have been a force for good - that they don't like tax havens.

Where we are is Planet Media.

I've been a hack for more than 25 years and I've never seen anything like it.

Picture to yourself the biggest indoor stadium you've ever seen.

And then think of it filled with desk after desk after desk of newspaper reporters in front of laptops and phone points.

Then visualise a couple of hundred yards of cameras directed at TV reporters and presenters.

Finally summon up the image of hundreds of little booths filled with TV editing kit and makeshift radio studios.

This is a heaving, gabbling mass of scribblers and pundits.

Are you feeling queasy? I wouldn't be at all surprised.

It's the London summit. I think we're still on Earth, but actually I can't be sure.

So far my only contribution to the future of the world's economy has been to tip my tea over a tray of free croissants in the refreshment area. Sorry, fellow hacks.

However the torrent of steaming hot brew missed my TV shirt. Disaster averted.

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Update 09:26: I've just interviewed Lord Mandelson for the News Channel.

The message of the business secretary is that the prime minister is being "greedy" - greedy for massive additional resources for the IMF for bailing out beleaguered economies; greedy for hundreds of billions of commitments to finance drooping world trade; greedy for a substantial injection of funds into poorer developing nations.

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In this instance, Gordon Brown would say that greed is good. Though if he doesn't get everything he wants, presumably we'll be told that lean and mean have their attractions too.

G20: Sticking plaster not cure

Robert Peston | 11:05 UK time, Wednesday, 1 April 2009


On the Ten O' Clock News last night, I said there's unlikely to be a return to business as usual in the global economy unless and until there's confidence that the banking system has been fixed and reformed.

Barack Obama and Gordon BrownWhich is the respectable reason for the shows of passion by some G20 members - especially France - for the London conference to signify that the riskier elements of the Anglo-American, financial-markets model are dead and buried.

But as Mervyn King, the Governor of the Bank of England, has pointed out, governments can afford to take their time over the detail of reconstructing the banking system and reining in the activities of less-regulated firms, such as hedge funds.


Well, with very few exceptions, most financial firms have been so battered and chastened by the collapse in the value of their loans and other assets over the past 20 months that there is not the faintest possibility that they're going to start taking stupid risks again for months, probably years.

In fact, the problem for the global economy right now is not that banks are taking too many financial risks, but that they're taking too few: what has precipitated the worst global economic downturn since the 1930s is that the flow of credit has become an inadequate trickle, because banks and other financial institutions lack both the resources and the confidence to lend.

Arguably the return of confidence to banks and in banks - and the return of the ability to invest for the long term by business in general - requires rather more fundamental reform of the global financial system and of the global economy than what's at the heart of the G20's agenda for the next couple of days.

The big point for me is that many of the business leaders and bankers to whom I talk have little ability to forecast business conditions beyond the end of their noses.

And the reason is that what they see from government heads is quick fixes to our economic woes rather structural reform.

Take, for example, national governments' attempts to sanitise their respective banking systems, their various initiatives to protect banks from future losses on the reckless investments and loans the banks made in the bubble years.

Whether these take the form of the insurance provided by the Treasury to Royal Bank of Scotland and Lloyds TSB or the state-funded purchase of bad assets that's been launched in the US, they all represent a transfer from the private sector to the public sector of the weakest portions of banks' inflated balance sheets.

That would be fine and dandy, if the public-sector balance sheets of the US and the UK - for example - were rock solid.

However that's not the case.

The collapse of the financial services industry, which triggered a general recession, has led to massive increases in public-sector borrowing in both countries.

And this huge public-sector deficit sits unprettily alongside the massive debts of banks, households and companies: the aggregate public and private indebtedness in the UK and the US, including the financial sector, is equivalent to an unsustainable and eye-watering 400% of GDP (give or take the odd few hundred billion pounds).

Which is another way of saying that each initiative for rescuing the banking sector - or for stimulating consumer spending, or for propping up an ailing motor manufacturer - is conspicuously solving one problem by creating another long-term problem: debt that needs to be repaid.

Because in the heavily indebted economies, we're robbing Peter to pay Paul, it's extremely difficult for any business to invest on the basis that there'll be a sustainable economic recovery any time soon.

Instead they feel obliged to keep costs as low as possible, protect as much employment as they can, but put any ambitions for expansion on ice.

Which means that they limp along - and, as a dire consequence, the economy as a whole could limp along for years, even after the recession has ended in a technical sense.

This is not to say that it's all hopeless, that there are no solutions.

But it's to argue that the permanent and lasting solutions aren't national ones; they require international co-operation.

Which is what the G20 conference was supposed to be all about - except that the really hard structural stuff will be a sort of Banquo's ghost at the meeting, scaring the living daylights out of the government heads, colouring their debate, but not at the heart of it.

As Martin Wolf points out this morning, the creation of an enduring economic settlement requires a formal recognition by the great exporting countries of China, Japan and Germany that their financial surpluses are our excessive debts - and that we will be a lousy market for the stuff they make until we've managed to reduce our deficits and have returned to full employment.

In other words they would benefit from reconstructing their economies so that they consume more of their income, because that would help us to reduce our indebtedness.

So even though they won't take lectures from us on how to manage their economies, because they blame our allegedly poor regulation of our banks for the woes of the world, it would be in their interest to help us mend our ways.

That said, there is an even more intractable problem, which is whether it's really possible to rehabilitate our banks while our banks' excessive liabilities are perceived as the liabilities of the over-extended US and UK public sectors.

There is, for example, a constant and destabilising battle between investors who want to sell the US dollar on the basis that America's banking system and entire economy is buckling under the weight of egregious debts and those investors who want to buy the dollar as the reserve currency and putative safe haven at a time of chronic uncertainty.

It is a tension that was elegantly deconstructed last month in a paper by the governor of the Chinese central bank, Zhou Xiaochuan.

He floated the idea that the world needs a new reserve currency, a supra-currency that floats above all national currencies, including the dollar, such that investors would have more confidence that it would retain its value even when a domestic economy as large as that of the US tries to inflate its way out of recession.

Just maybe, there'll be a nod from the G20 leaders that this is an idea worth considering.

And in the unlikely that there's any speedy progress towards the creation of a global supra-currency, many would argue that the truly optimal use of such a supra-currency would be as a unit of exchange for a new global fund, or mega bad bank, into which all banks' toxic assets would be transferred.

A return of near-normal credit conditions would probably be significantly speeded up - to the benefit of all trading nations - if the bad bits of banks were in effect transferred to the balance sheet of the world as a whole, rather than weighing down the balance sheets of individual nations.

However, that's certainly an idea too far for this G20 meeting. Most business people and bankers would, I think, settle for an acknowledgement from the government heads that this meeting is just one stopping point on a long and arduous journey.

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