US toxic asset plan

Will Geithner’s latest plan to re-move toxic assets from the financial system really work? The fundamentals are there, they need to be removed to avoid sustained stagnant economic problems like Japan but will the US tax payer have to take the losses on the extremely hard to value assets no-one wants?

Base rate to 0%

Is a world where money is free a real possibility? In theory yes, at which point economic activity should increase dramatically. However, banks are not going to lend when they cannot make a return, plain and simple, simply causing the opposite effect intended. No lending and banks making no money at all! Square one…

Sir Fred

What reward do you deserve for a £24bn loss using £37bn of tax payer’s money with a further £325bn at risk and putting 20,000 innocent employees’ jobs at risk? £16+ million is a round about figure, only £693,000 a year. Is it fair that Sir Fred was offered this? Should he give it back along with his recent knighthood?

G7 commits to open market

During the two day discussions finance ministers met to talk about maintaining financial stability, the US package capping bankers' bonuses to one third of pay and, most importantly, their commitment to retain global market openness to avoid exacerbating the fragile world economy after the US and Chinas' protectionist strategies…

World recession to follow…

Last week saw a massive knock for the world economy as the IMF almost estimated a world wide recession. It revised down global growth for 2009 by 1.7% to 0.5%, the slowest rate since pre-war periods.
The news for the UK was even gloomier with 2009 growth estimated to be -2.8% and 2010 barely registering growth at 0.2%. The UK will decline more than any other economically developed country with the likes of the US, Germany and Japan suffering 1.6%, 2.5% and 2.6% falls respectively. This does beg the question why the UK is suffering more than its economic counterparts?
Many theories get put out to answer this but in-between all the political and media spins you can come up with a simple but yet logical solution. When you look at the GDP growth data closely for 2008-2010, economies like Japan and Italy are expected to suffer a bigger slowdown than the UK, suggesting that Britain will purely suffer a sharper recession than other economic powers. This would also make sense when you look at the fundamentals behind the reason for the economic slowdown. UK has been hit hard by being the financial centre of the world with its market structure heavily skewed towards services, in particular the financial sector, meaning any downturn in the main industry would impact heavily. The matter of fact is that this is one of the biggest financial crises of all time and it is causing spill over effects in to other industries, making the bigger issue to the world economy the macro consequences of the past 18 months where financials have purely been a catalyst to what has been simmering for a long time. This is not an excuse as to why the UK is likely be the biggest suffer in the recent epidemic, but the combination of a housing market correction, plunge in lending and borrowing, a record government deficit and a business cycle long over due for its revolution, it can not come as a big surprise the sheer severity of the situation.

World Economies

The true effect of the current financial crisis’ impact on world economies has been revealing itself in the later half of 2008. Economies around the world have been forced to quickly implement extensive strategies to tackle the deterioration in both the global and domestic economy. The United States’ strategies may have been implemented to avert world economic meltdown, having pumped almost $2 trillion into the global market place, but conversely the highly internal policies implemented by emerging economies seem to have had a greater impact on world markets. The fear of falling demand for commodities in China has fuelled an 80% drop in oil prices over the four months to November, while the two US bailout plans stabilised the equity market at a lower threshold.

Here is a brief account of some of the most influential economic powers written by Phillip Butler, currently on placement at the Bank of England, and contributed to by Christian Esposito and Bhavin Dhanani, currently on placement at Goldman Sachs and Morgan Stanley respectively.

The questions we are asking are;
· Which economies will suffer the greatest economic impact?
· Which economies are likely to be dragged into the longest deepest recession?

UK

With the Bank rate at the lowest level for 50 years, unemployment and debt rising, technical recession all but official and a stalling housing market is the fiscal stimulus package announced in November enough to stop the UK entering a long deep recession?

Strictly BIF view: A Recession that will certainly compete with the 90’s and 80’s, all dependant on the success of the fiscal package and the credit stream made available.

US

Job losses have breached the 1990’s recession lows and are inevitably going to sink past the trough of the mid 70’s. Bank rates calamitously close to the dreaded 0% and the country has a budget deficit of over $400bn with predictions suggesting it will breach $1000bn in 2009 after the full implementation of its TARP and TALF initiatives.

Strictly BIF view: More likely to see a deep painful Recession than a long drawn out depression.

Euro Area

Already in recession and consumer confidence appearing to be the weakest since the formation of the Economic area, but bank rates seemingly well placed for more manoeuvre in the short term will the Euro area avoid the worst?

Strictly BIF view: Recession but eastern economies may help the Euro Area to a quick recovery.

France

After releasing a €26bn fiscal stimulus package to alleviate fears of a sharp downturn in the economy experienced an economic unicorn of third quarter. Unemployment however stands at 8.2%, 0.5% above the euro zone rate, and this is set to get worse as France’s manufacturing sector begins to feel the brunt of slowing consumer spending. France has some good news though the country is set to leap frog the UK in terms of economic size due to our speed of economic decline and the weaker pound.

Strictly BIF view: Long recession fuelled mainly by its proximity to other floundering European countries.

Germany

Output in the Euro area’s largest economy fell by twice that of the euro zone average for October at 2.1%, signalling the usually robust economy will suffer a third straight quarterly retraction at a forecasted rate of -1.5%. This contraction rate is the largest since the country’s reunification in 1990, there is yet to be any substantial fiscal stimulus offered due to policy maker concerns at throwing money at the impending recession.

Strictly BIF view: Long deep Recession of which only the UK and Spain can compare.

Spain

It is hard to extract anything but negative news from the Spanish economy which is set to enter recession for the first time in 15 years. The country’s unemployed number is increasing rapidly, the housing market is collapsing due to an increase in supply and PMI data is showing 28.2, especially bad when economic growth starts at 50.0.

Strictly BIF view: Long Recession set to last into 2010

Italy

If it was not for one single quarter of positive growth in Q1 of 2008 then Italy would already have had a full year of retraction. However this is not a surprise as Italy has been in recession four times in the last ten years. A lack of control over monetary policy and not being a European super power could spell trouble for the one of the world’s most Jekyll and Hyde economies?

Strictly BIF view: Recession guaranteed for 2009, but will it make a quick recovery for 2010 amid fears of catastrophic inflation.

Japan

Interest rates are anchored at their historic lows, they have not passed 1% since 1995. The economy is technically in a recession and revised Q3 GDP figures show a worsening in the economy. Fears have increased that the 2nd largest world economy could be facing the longest contraction ever. This is primarily fuelled by the fact that Japan has not fully recovered from the last banking crisis.

Strictly BIF view: Pro-Longed Shallow Recession.

China

Industrial output has fallen to 5% the lowest level since the Asian Crisis, exports have fallen nearly 20% since October and GDP growth is projected to fall by as much as a third. Will the rigorous interest rate cuts, 4 trillion Yuan stimulus package and a desire to keep growth above 8% be enough for the economy which could save the world from a 1930’s style recession?

Strictly BIF view: Little chance of recession unless the Chinese economy implodes from reverse migration and a collapse of world demand, worst case scenario would suggest 5% growth for 2009.

Russia

With natural resource prices falling following the lack of global demand, the Russian economy is being hit hard. Construction output data shows that yearly growth has halved indicating that Russia could be the hardest hit out of the so-called BRIC’s. Standard and Poor’s seems to agree with this hypothesis it has downgraded Russia to just two places above Junk.

Strictly BIF view: Flirting with recession, but growth of 2-3% should be realistic, however this is half the GDP growth of the current decade.

India

Expected GDP growth of 6.8% for 2008 and yet India needs to prepare further for second wave of tightening in the economy. With interest rates cut by 100bps to 6.50% and a 280trillion rupee injection planned it is hard to believe the Indian economy will stutter in 2009. Contrary to this, is this the time for the economy which is less reliant on foreign demand to outpace its BRIC cousin China?

Strictly BIF view: Markedly slower growth but will lie between 3-5%

Brazil

Boosted by the higher than expected 1.2% Q3 GDP growth, the Latin America economy is on course to achieve above 5% growth for 2008. However with interest rates at 13.75% and the financial crisis spreading to the tenth largest economy the unemployment figures are set to increase as businesses retreat.

Strictly BIF view: Growth will slow, but with Interest rates in their favour recession should be a long way off.

Global downturn finally hitting China

The biggest rate cut in 10 years and an economic growth forecast which is the lowest for nearly two decades, it appears the wheels of the Chinese economic boom have become derailed as the financial crisis powers in to Asia. China’s prospects darken with social unrest and unemployment on the up…

Are We Doomed?

With 170,000 banking jobs lost since the American sub-prime market collapse and a further 180,000 expected to go worldwide just in the next 6 months. Will graduate placements be culled in the process?

Citigroup threatening to cull 52,000 jobs is just the latest twist in the banking sector job outflow. Recent survey state that graduate job opportunities will decrease by around 15% this year with certain areas affected harder than others. Areas such as Mergers and Acquisitions will be hardest hit as this region of banking has almost halted due to the increase in credit spreads and lack of longer term funding. Other divisions such as Private banking are still growing strong, one of the very few parts that look healthy on banks interim reports.

Competition is going to be a lot higher with more applicants after fewer jobs whilst graduate recruitment may be reduced due to banks picking experienced bankers over junior recruits.

But is all lost? Not at all. The one thing banks love is young graduates who they can mould and carve to meet their needs but now we as Cass graduates will have to be more flexible. Being willing to move to areas such as Dubai will help no end as this is one of the few places in the world where job cuts have been non-existent. Do we have what it takes to set us apart from others? Cass is an iconic business school which is well known in the corporate world and is regarded as one of the most up and coming schools not only in London but the world. This puts Cass graduates in the upper segments of the graduate recruitment wish lists, meaning top financial institutions will still want to acquire our skills.

Panic, worry and doomed are not words we should be using when describing our future prospects. Our employment opportunities have diminished but it is just a time when you have to set yourself apart from other applicants and having Cass on your CV is the first step to achieving this. The rest is up to the individual and how much you want a job in finance…

Interest rates not cut but slashed by Bank of England

The BoE is seen to have taken decisive action by not concentrating on the level of rate cuts but by deciding on what level is appropriate for these unprecedented times, hence the record cuts! But with US rates at 1% and EU rates at 3.75%, has the UK taken the initiative again in world economics?

During this financial crisis the BoE has been finding credibility very hard to come across with our goals differing from our cross Atlantic counterparts. The BoE focus is fully on inflation, economic stimulus is second on the list, and this makes the latest rate cut even more interesting. Medium term inflation seems to be dipping just at the right time giving the BoE an excellent opportunity to assist our ailing economy where fiscal stimulus, from a once well respected chancellor, now prime minister, seems non existent.

Now that all the main lenders have passed on these full rate cuts the wider economy, from households to firms, the hope is to stimulate demand and supply now that mortgage and loan costs are considerably lower. It seems that this is step one in an aim to make sure that the UK does not hit a long hard recession the like that have crippled Japan. All the news is positive, we have targeted the original problem by making banks recapitalise and then aided the economy early and not waited before we are in the first recession for over 15 years.

However there are a few key issues. What does the Bank of England know that we don’t know? Have they reduced rates by such a steep margin because they are courageous and believe that now that have the appropriate market rates or is the economy outlook a lot worse than the market believes?

The further issue is that, yes, this rate cut will be stimulus to our economy but only in the short term. Remember the banks lending is all based on how easily they themselves can get credit and they do this based on Libor rates (London Interbank Offer Rates) which are still high. If these themselves do not come down then it is a vicious cycle where banks cannot get finance to in return give to the market. It seems the huge cut has solved a tiny slice of a massively entangled web of problems.

The next question persists is how much lower can rates go? 2%? 1%? Dare we even say 0%? The US is currently at 1% but they not only have different policy beliefs than us but acted quicker. If the UK were to approach 1% that would almost be check mate for monetary policy because the room for manoeuvre would be next to none. The Japanese have this problem, what effect did the 0.2% rate cut have? Very little if any! It would be a very tricky situation indeed.

On the other hand the European rates are higher standing at 3.75%. Have the EU got anything to be worried about. It does seem the economic slowdown is appearing to affect the EU less than UK and US, so are the rates appropriate? Or have the EU left it too late? In a world where globalisation is becoming more and more prominent it is amazing that the three most important economies on the planet have such different views on how to tackle this global recession. At this important time in the economic markets the Bank of England must believe that it has the better hand over the Federal Reserve and the European Central Bank!!!

OPEC oil cut

OPEC’s decision to cut oil supply has caused outrage among political leaders. Is it a case of OPEC protecting its industry or being rapacious for high profits? Simple demand analysis suggests excess supply has merely been removed but OPEC seem to be abusing power to maintain high oil prices…

OPEC has been slammed for its timing of its supply cut due to the world recession which seems ever closer. When the current over production is also put to an abrupt stop in November barrels closer to 1.8mn will no longer flow out of the 13 country strong oil cartel. Even if oil demand in the US, who receives one in four oil barrels produced by OPEC, which has fallen 10% in the current year, the oil barrel cut seems certain to edge up the present free falling oil price.

It looks like the decision will work in one of two ways but only achieve one outcome! If global demand continues to become ever lower, negating the oil supply reduction, this will cause oil prices to decelerate but continue to fall. In the event of this scenario OPEC have stated they will continue to keep cutting oil production, inevitably leading to prices going up at some point. If the current production reduction does increase oil prices in the boundary of $70-$90 per barrel then we will be going in to a recession with oil prices adding to the woes of individuals around the world who are already facing a massive squeeze.

OPEC announced their decision in light that certain members of the cartel such as Qatar and Nigeria require prices to be on the top end of $80-$90 per barrel for 2009 budgets to be unchanged. Arguments to this is that they have been rubbing their hands for the past six months whilst oil has been at record highs, reaching $147 in July, and a price which it has not been at for the last eighteen months. How can their budget have been affected so much by the recent price decreases to warrant this supply tightening?

In relation to the UK we look in a dire situation. Being half way to a technical recession which the Governor of the Bank of England says will be long and deep whilst sterling falling to lows not seen in decades this OPEC news is adding to the misery. Due to the weak pound only a proportion of the oil price falls have been passed on as oil becomes relatively more expensive for us. If oil prices starts going up the UK may well be the first ones to have their pockets empted by the gluttonised Organisation of the Petroleum Exporting Countries.
Lets hope that OPEC have not ensured that the world enters a long dark recession and supply constraints do not back fire causing a collapse in either Brent oil demand or due to market volatility and nervousness a commodity free fall as investors abandon the so called ‘bubble implode’ of the oil market.