Bonds, Italian style

The ECB's new long-term funding scheme is a cunning plan worthy of Baldrick himself.   The so-called LTROs provide cheap financing for the Eurozone's banks, which can then invest the proceeds in sovereign debt at a much higher yield. This allows the central bank to fool Kanzlerin Merkel's voters into thinking that it isn't bailing anyone out; it backstops the sovereign debt market;  and it allows the banks to rake in profits on the spread between what they pay for the LTROs and what they earn on the government bonds, which can be used to rebuild their balance sheets.  Everyone's a winner --  provided of course that the sovereign debtors don't default.  Trebles all round, as Private Eye might say.

Banks enthusiastically hoovered up the first tranche of LTRO money earlier this month, and the past couple of days have provided the first test for the whole scheme, as Italy has come to market with several tranches of debt. Two issues of short-dated paper were well-received, with yields falling sharply from prior levels.  Then came a tougher challenge, in the form of two tranches of longer-dated securities that were issued on December 29 (not, one might think, the most auspicious timing). Here is how the Daily Telegraph website reported the outcome:  

Italy raised €7bn (£5.9bn) in the first big test of the bond markets since the ECB opened its doors with €489bn of cheap loans in an attempt to inject liquidity into Europe's arid banking system. Rome paid 5.62pc to sell €2.5bn three-year debt – a much lower yield compared to the record high of 7.89pc paid a month ago. It paid 6.98pc to shift its 10-year bonds, compared with 7.56pc in November.

The total amount raised in the auction fell short of the €8.5bn target and the cost was still deemed to be unsustainable. The yield on Italian 10-year bonds closed at 7.06pc – stubbornly above the 7pc level seen as signifying the need for a bail-out.

The auction doused the optimism that followed Wednesday's auction of Italian six-month bills when the borrowing costs were halved from a month ago. Analysts said the auctions showed the ECB's action had eased pressure on shorter-term debt, but investors were still wary of longer-dated bonds. 

Let's look at a couple of aspects of that report, starting with the now-obligatory reference to 7% yield "seen as signifying the need for a bailout". Obviously the sub-editor was short of space and cut that sentence down; it must originally have read "seen by lazy journalists as signifying the need for a bailout".  Let's get this straight one more time: even if Italy were issuing all its new debt at 7% yields -- which it isn't -- that wouldn't mean its overall borrowing costs were at that level. The cost of its earlier borrowings is unaffected by today's market yields.

At least one reputable study has been carried out in response to this 7% nonsense, and found that even if Italy had to carry out all its refinancings and new borrowings between now and 2014 at a cost of 8%, the added interest cost would still equate to only half of what Italy expects to save through austerity measures, so the fisc would be better off overall.  That very much gives the lie to the notion that Italy is facing an insolvency problem, rather than just one of illiquidity.  (I have no real hope that repeating these verities will stop journalists from getting it wrong.  Still, I can but try).

Turning now to the somewhat different reception of the short-dated and the longer dated debt this week, an explanation is readily apparent, but unfortunately it's one that suggests that the LTRO scheme may distort the Eurozone's bond markets even as it calms them.  Maturity mismatches -- financing long-term assets like bonds or mortgages with shorter-term liabilities like deposits (or LTROs) -- are the lifeblood of banking, but prudent bankers know not to overdo it.  (Example: Northern Rock blew up because the funding of its long-dated mortgage portfolio relied much too heavily on very short-dated wholesale deposits. When those dried up, the Rock was finished).

The LTROs have a maximum term of 3 years, and every bank that has taken advantage of the scheme can happily count on a positive outcome as long as it buys assets of a shorter term than that.  Hence the enthusiastic response to Italy's short-dated paper.  There is a risk that banks will find themselves rolling this paper over into new issues at a lower yield when it matures in six or twelve months, but that would simply reduce the spread they earn, not drive them into losses.

Ten-year bonds are a different question, however, because the banks can't be sure whether the LTRO scheme will still be in place when the first batch matures in three years time.  If things have stabilised and the ECB is no longer providing such funding, the banks will be faced with raising market funding at much higher rates -- conceivably higher than the yield on the bonds -- or with liquidating some of their holdings.  If a large number of banks choose the latter option, the price of the bonds could plummet, creating substantial losses.

The bottom line here is that the performance of the various Italian auctions this week may well have been driven by the LTRO scheme itself.  The first quarter of 2012 brings a lot of new issuance in the Eurozone, and if we continue to see short auctions doing much better than long ones, the ECB may have some thinking to do.  A very steep yield curve might tempt some issuers into shortening the average maturity of their new issuance in order to save money, but that would of course be risky in itself, if the debt crisis proves very protracted.

Wow,  this is a very long and serious post, considering most people are probably gearing up for their New Year's blowout!  Happy new year to all readers of the blog.    

Doing God, in London and Beijing

Tony Blair's lacertilian* press secretary, Alastair Campbell, once remarked that the Labour government "didn't do God", even though Blair himself famously did, often giving the impression that his most controversial decisions had been taken after direct talks with the Almighty.

The problem with God, of course, is that whether you "do" him or not, he never seems to give up and go away.  Especially at the Christmas season,  He seems to bring confusion both to those who would rather not acknowledge even the possibility of his existence, and to those who aren't quite sure what to make of Him. Thus, in The Times for December 26, we saw a quite remarkable juxtaposition of stories.

The main headline on the front page of the paper was 'Archbishop under fire for "political" riot sermon'.  The Archbishop of Canterbury, Rowan Williams, had chosen to use his Christmas Day sermon to link last summer's riots in London and elsewhere with the activities of City speculators: "The most pressing question we now face, we might well say, is who and where we are as a society.  Bonds have been broken, trust has been lost....Whether it is an urban rioter mindlessly burning down a small shop that serves his community, or a speculator turning his back on the question of who bears the ultimate cost for his acquisitive adventures in the virtual reality of today's financial world, the picture is of atoms spinning apart in the dark".

Just a couple of weeks ago, PM David Cameron, who by his own admission "does God" a whole lot less than Tony Blair did, had taken it upon himself to call for a return to Christian values in Britain, calling on Archbishop Williams's Church of England in particular "to help shape the future of our communities".  Dr Williams may well have intended his Christmas sermon to take up that challenge; if so, he will have been disappointed by the reaction.  Though the government itself has refrained from commenting, a Tory MP, Gary Streeter -- who is, rather surprisingly in the circumstances, a Christian himself  -- pronounced that "The Archbishop of Canterbury is on safer ground when he sticks to moral and spiritual issues. He would be wiser to leave the politics to the politicians and focus on giving us much-needed spiritual leadership". Turn that on its head and it reads remarkably like an admission that there is no morality in politics, which rather proves the Archbishop's point.

The rest of the media paid little attention to this spat, preferring to focus on the Duke of Edinburgh's stent and the Downton Abbey Christmas special.  The fact that The Times made it the lead story for the day perhaps permits us to draw the inference that the paper agrees that Dr Williams and his ilk should butt out of politics.  This makes the editorial that appeared on the very next page of the paper all the more surprising.        

The editorial was titled "Darkness at Christmas: China's communists appear intent on snuffing out the growth of Christianity."  This is, as you would surmise, a robust criticism of the Chinese government's attitude to the rapid growth in  religious practice in the country.   A couple of extracts will give the flavour: "The party sees religion, and Christianity in particular, as a threat because it worries about the existence of a rival organisation whose members have a different loyalty and are guided by priorities set by others".  And "The real problem for China, as it was for the Soviet Union, is the growing cynicism and spiritual vacuum in public life.  This makes it increasingly difficult to underpin standards of ethics or to enforce respect for social norms".

Substitute Britain for China in that last quote, and it would have slotted seamlessly into Dr Williams's speech, whereupon The Times would presumably have seen fit to refute it on the front page!  There is, of course, an explanation for this glaring inconsistency:  The Times is now by far the most pro-Cameron newspaper in the UK, and seems increasingly unwilling to brook any criticism of him,  even from the head of the established church.      

* You can probably guess, but if you can't....look it up!

It's not all bad news!

This was buried deep on the BBC website today:

"Retail sales volumes grew in December for the first time since May, the CBI has said, but were still considered weak for this time of year. The CBI's monthly Distributive Trades Survey found 41% of retailers had seen sales rise in the first two weeks of December, while 32% saw sales fall. The positive balance of 9% was better than had been expected.

However, the CBI warned that the uplift was not expected to last, with sales expected to fall again in January. Judith McKenna, chair of the CBI Distributive Trades Panel, said: 'Early discounting helped retailers add a little extra sparkle to their sales in December, although the reprieve appears to only be temporary as they don't expect sales to continue to grow into January.'"

You can almost hear the little wheels spinning in the spokesperson's brain as she tries to find a way to put a negative spin on a positive survey. The last part is especially good: "they don't expect sales to continue to grow in January"! Well, they didn't expect them to grow in December either, but annoyingly, that's exactly what just happened.

Meanwhile, Germany's Ifo indicator, a key signal of business confidence, just recorded a sharp improvement, which was reported in the UK media as -- guess what? -- a surprise. Spain sold a big tranche of debt today at yields way lower than at the previous auction. And the US economy is continuing to do much better than anyone expected, the latest positive indicator being a big jump in housing starts in November.

So take a break from all the doomsters and gloomsters, and have a happy Christmas. Thanks for reading the blog over the past year -- there have been visitors from places as far-flung as Iran and Paraguay. Please stop by again in 2012, because I'm sure we'll have plenty to talk about.

 Update, 21 December: John Lewis says its sales this month are running 10% above last year's levels....UK government borrowing in November was 10% down on November 2010....

Bette Davis on the death of Kim Jong-Il

This has been quite a year for the Grim Reaper, and it shows no signs of letting up just yet. In just the last few days he/she/it has claimed the lives of Christopher Hitchens and Vaclav Havel, both of whom have drawn well-earned tributes.

Today it's the turn of North Korea's Dear Leader, Kim Jong-Il, and the global response has been, let's say, a tad different. I'm reminded of the comment made by Bette Davis on the death of her hated rival, Joan Crawford: "You should never say bad things about the dead. You should only say good. Joan Crawford is dead. Good". That goes double for you, Kim!

Still, with the Reaper having already removed Usama bin Laden and Muammar Gadhafi from our midst this year, we can be sure that Kim is unlikely to be lonely in his new home.

Isn't it rich?

So, the ratings agency Fitch has downgraded seven of the world's biggest banks, including Citigroup, Barclays and Deutsche, saying they are "particularly sensitive" to the challenges faced by financial markets. Meanwhile Standard & Poors has the axe poised over almost the entire Eurozone -- which has prompted a bizarre attack on the UK by the French Finance Minister -- and the third of the Axis of Drivel, Moody's, is also on the rampage, firing off warnings in all directions.

Here's the question: why do these people matter any more? Just three years ago, their abysmal performance made it abundantly clear that they wouldn't recognise pig manure if they were showering in it and drinking it at the same time. Why does anyone think they've suddenly become omniscient? It's perfectly obvious to anyone with the intelligence of an amoeba that the world economy is in big trouble, so why do these dolts get to charge fees for telling us what we already know, and why do markets pay attention to them when they do?

Actually, the real question is this: why do these agencies even exist any more? Whether their failure in correctly assessing the blizzard of structured deals in the mid-noughties was the result of greed, ignorance or incompetence, it was surely a major contributor to the financial crisis that followed. Now they seem to feel their role is to pour gasoline on the flames of the next financial crisis, through a string of crassly mistimed announcements.

Send in the clowns? Don't bother, they're here.

Anti-social behaviour -- now it's Canada's turn

First it was David Cameron flipping the bird to the EU, by refusing to go along with plans to revise the Lisbon Treaty in order to deal with the Eurozone debt crisis. (Great line from Ed Miliband, by the way: "It's not a veto if the thing you're trying to stop goes ahead without you. That's called losing".)

Now it's Canada giving an "up yours" to the world, announcing that it will withdraw from the 1997 Kyoto Protocol on climate change, rather than pay the $14 billion (yes, really!) in fines it has racked up by not meeting its commitments under the Treaty. (Story from The Independent here). The timing, just a day after the new Durban climate change agreement, looks bizarre, but in fact it is this new deal that has given Canada a figleaf of cover for its withdrawal from Kyoto. It claims that Kyoto never stood a chance of working because of the lack of enthusiasm from the US and China, the two biggest carbon emitters, whereas the Durban agreement stands a much better chance of being effective.

Truth to tell, the main attraction of the Durban accord for Canada is that it is not due to come into force until 2020, giving the country eight years to find a new set of excuses for non-compliance. Although the US and China create far more atmospheric carbon in the aggregate, Canada is probably the worst offender in the world on a per capita basis. Canadians drive big cars over long distances and tend to shun public transit in the cities, and the extreme climate requires huge amounts of energy use for heating in the winter.

Over the past decade, however, the biggest driver of a huge increase in carbon emissions (and in water wastage, another bone of contention for environmentalists) has been the rapid expansion in extraction of oil from the tar sands in Northern Alberta, in response to surging demand from the US. Because the tar sands are in a remote location and are frozen for much of the year, extracting the energy from them and getting it to market is itself a highly energy-intensive process. There is no realistic chance of any slowdown in tar sands activities over the next ten years -- Alberta would walk away from the Canadian confederation in a heartbeat if the Ottawa government attempted to force the issue -- so any warm words about the Durban deal should be taken with a bushel of salt.

Interestingly, the Canadian media are treating the Kyoto withdrawal in a very low key fashion, with even the heart-on-sleeve Toronto Star barely raising a peep. Just as surprising is the reaction of Independent readers to the story linked above. Judging from the comments, even the left-leaning Indy types are a bit jaded with the whole climate change thing. Environmentalists will have to ask themselves whether that's a natural consequence of the economic and financial crisis, or whether, just maybe, it has something to do with all the dubious data fiddling that scientists have resorted to in their zeal to prove that climate change is man-made.

London Olympics: unsportsmanlike conduct

If I haven't had a rant here about the 2012 London Olympics for some time, it hasn't been for any lack of provocation. The Games organisers ("LOCOG") continue to do infuriating things on an almost daily basis. Just in the last couple of weeks....

* A charity that had hoped to raise money by raffling tickets for the Games has been ordered to take the tickets back from the winners and return all the money it had collected. Spivs all over the world are dealing in the tickets at great profit, but LOCOG sees fit to stop a local charity from using them to raise some much needed funds. Considering that vast amounts of National Lottery funding has been diverted into the Games, at the expense of a large number of good causes, that's simply obscene.

* And speaking of obscene, the Government has agreed to allow LOCOG to spend an extra £40 million on the opening and closing ceremonies, which will now cost £80 million (including the Paralympics, which follow the main Games). For heaven's sake -- the ceremonies are basically a giant and tedious parade of athletes, most of whom would rather be resting up for their events anyway, followed by a big fireworks display. Apparently David "No Mates" Cameron saw the initial plans and felt that unless more money was thrown around, the ceremonies would not show the UK in the best possible light. Whereas, of course, his impetuous decision to veto the new EU treaty has won us a lot of new friends.

* It's being reported that LOCOG is planning to spend £15 million on food and drink for the international Olympic bigwigs during the Games. The on-site entertainment centre alone will cost as much as £5 million, and will no doubt be demolished as soon as the last canape and glass of Krug have been downed. At least we now know why half the main roads in London will be closed off so that the "Olympic family" can be shuttled around in limousines. These guys and gals are all going to be so stuffed and pickled that they'll barely be able to walk.

Lastly, and just in case you had forgotten the real purpose of these Games -- to allow a bunch of toffs to impress their foreign friends by spending unthinkable amounts of other people's money -- we have the news that Pippa Middleton is in negotiations to play some role at the Games. Ms Middleton is undeniably decorative, but her value to a sporting event, even one as overhyped as these Games, is hard to discern. Here's a suggestion, though. She could walk into the Stadium as part of the UK team -- bringing up the rear, obviously.

Cameron: stupide Dummkopf!

Evidently my previous posting greatly overestimated the strength of David Cameron's backbone. In making the UK the only one of the 27 EU members to reject outright the idea of a new Treaty (though three other countries have taken it under advisement for the time being), he has certainly delighted his Eurosceptic Tory colleagues. The rest of us, however, have precious little to be happy about.

Just consider the bare facts. The UK has a higher public sector deficit than any other country in the EU, aside from Greece. It has lower growth than most EU countries, but higher inflation. This doesn't sound like a very strong platform for "going it alone".

And why has Cameron taken this risk? It's to protect the UK's financial sector, which is by any measure the most bloated in the world. UK bank assets amount to more than 500% of annual GDP, far higher than for any comparable developed economy. In the US, for example, the ratio is closer to 100%.

Much of Europe believes, with considerable justification, that the financial crisis is largely the result of unregulated and unproductive growth in financial "services", with the City of London at the root of the problem. There have been times when the UK government has appeared sympathetic to this analysis, but evidently the Tories are not prepared to do anything that might jeopardise the huge tax revenues that the City currently provides. More than 10% of total UK tax revenues come from the City. That's a lot of money. Of course, it's just a fraction of what the financial crisis has cost the UK in the past three years, but evidently Cameron and his xenophobic cronies are choosing to ignore that side of the picture.

We can only hope that the UK banking system never needs to be rescued, because after last night's debacle in Brussels, it's hard to see who would come to Britain's aid.

With friends like these...

Charles de Gaulle, be he watching proceedings from Heaven or from Hell, must be chortling to himself: "J'avais raison. I always knew it would be a mistake to let the British into the EU".

UK Prime Minister David Cameron has lost no opportunity over the past three months to tell the Eurozone that it has to get its act together to save the Euro, and BE QUICK ABOUT IT!! He was so insistent that at one summit, President Sarkozy lost his Gallic cool (well, he is part Hungarian) and snapped to Cameron "You have missed a perfect opportunity to shut up".

Now that there are signs that the Eurozone countries really are moving toward a more durable deal to reform the way the single currency works, what's Cameron's reaction? He's delighted, relieved and supportive, right? Wrong! His first reaction has been to threaten to veto the deal unless "essential" UK interests (as defined by the UK itself) are protected.

President Sarkozy and Chancellor Merkel must be bemused and infuriated by this, but it plays well with the Eurosceptic wing of Cameron's own Conservative party, the kind of knuckle-dragging xenophobes who often manage to give the impression that they think the ghost of Hitler still stalks the halls of the Chancellery in Berlin. These people's political idol, Margaret Thatcher, supported UK entry into the EU at the time, but the party has since become a lot more hostile to the European "project", egged on by much of the tabloid press, which likes nothing more than a chance to bash Johnny Foreigner, especially foreigners of a German or French persuasion.

Cameron is being forced to walk a thin line between indulging this kind of xenophobia and following what still appears to be his main instinct, which is to offer as much help as possible (though no UK taxpayers' money) to those within the EU who are trying to sort out the crisis. The Europhobes want at a minimum to use the crisis to "bring powers back from Brussels" (though they're notably vague on which powers these might be); ideally, they would like to force a fresh UK referendum on the UK's entire membership of the EU. Cameron's initial goals, in contrast, are to see a solution to the Eurozone debt crisis take shape, and to preserve the free market in goods and services that is the EU's main raison d'etre. He is probably right to judge that the Eurozone will be much more willing to accommodate British concerns if the UK is helpful at this moment of crisis, whereas his right-wingers seem to want to give the wounded beast a good kick in the privates, and to hell with the longer-term consequences.

Non-UK readers of this blog (thank you for coming by!), who may be puzzled at this hostility, may like to ponder the usual mass media reaction in the UK whenever England prepares to play Germany at football. Pictures of Prussian helmets appear on the sports pages, along with phrases like "the old enemy" and slogans like "two world wars and one World Cup". It's bad enough that people on the football terraces can still be egged on in this way; the fact that a great chunk of today's Tory party appears to think along similar lines is truly depressing. There must be many moments when President Sarkozy wishes that President de Gaulle had won the argument all those years ago.

You're having a Laffer

Bank of England Governor Sir Mervyn King has come under fire for the gloomy assessment of the economic outlook that he delivered this week, but he's got nothing on the media, who are lining up to bombard us with "things can only get apocalyptic" features. Case in point: today's Sunday Times has a two-page Focus special (paywall-protected), with a zillion-point headline reading "By George, we're in trouble!".

Most of the content is not worth bothering with, on a Sunday when most of the media are giving wall-to-wall coverage to two giant pandas arriving in Edinburgh. (Non-UK readers: I kid you not). However, I was struck by a comment from the right-wing Tory grandee, David Davis, who proposes a very specific cure to the nation's ills: abolition of the 50% top rate of income tax.

Passing swiftly over the question of whether there's ever a time when David Davis would not favour reducing taxes on the wealthy, let's take a look at his logic. He asserts that it's "plain as a pikestaff" that the 50% rate is costing the Treasury money, because it encourages the better-off to take more tax avoidance measures. As evidence, he cites the fact that income tax revenues increased back in the 1980s, when Margaret Thatcher's government cut the top tax rate from 83% to 40%.

The view that lower tax rates will tend to produce higher revenues is often illustrated using the so-called Laffer curve, named after a Reagan-era US economist who supposedly first drew it on a napkin in a Washington restaurant. The graph plots the total tax take on the x-axis (that's the horizontal one, for the non-mathematical) and the tax rate on the y-axis. This article on wikipedia is accurate and comprehensive.

Without doing any research, we can safely assert the positions of two points on this curve. At a tax rate of zero, or at one of 100%, no tax will be collected, in the latter case because nobody would work if they got to keep none of the proceeds. Between those points, though, it's all to play for. Laffer, and presumably also David Davis, want to believe that the total tax rate starts to turn lower as soon as tax rates reach a moderate level -- Davis, evidently, is thinking the point of diminishing returns is a rate of less than 50%. However, as the wikipedia article points out, some of the academic evidence suggests the rate that maximises revenues might be more like 65%. If this is the case, then it's no surprise to find that the Iron Lady's cut from 83% to 40% boosted the government's take. However, it's quite wrong to use that example to assert that a cut from 50% to 40% would have the same effect today.

Leaving all that aside, you have to wonder how David Davis would seek to square a top-rate tax cut with the government's "all in this together" mantra, though presumably a man who employs similes about pikestaffs may not be a natural supporter of the "Big Society" anyway. If Davis has any evidence that a lower tax rate would induce tax exiles like Lewis Hamilton or Sir Philip Green to start contributing more to the British exchequer, he should feel free to produce it, but otherwise this all just sounds like a standard Tory whinge, and at a most inappropriate time.

Coming back briefly to the Sunday Times, one corner of today's two-page armageddon story was given over to a box containing three possible scenarios for the coming months, written by the economics editor (and blogger), David Smith. The three scenarios are each awarded a probability score, on an "X out of 10" basis. Why don't you count along on your fingers as I go through them? The "grim" scenario has a probability of 7 out of 10. The "Goldilocks" scenario: 5 out of 10. And Armageddon: 4 out of 10!

I don't know about you, but I ran out of fingers about half-way through the Goldilocks scenario. David Smith is a good and logical writer and it's very likely that those scores were assigned by the sub editors. Still, as a sign of chronic innumeracy in the business press, that's hard to beat.

Handbags at ten paces!

Britain's favourite rent-a-gob, Jeremy Clarkson, got himself into hot water this week by declaring on national TV that public sector strikers "should be shot". Then to emphasise the point he reiterated that they should be "executed in front of their families". The public sector unions were incensed and threatened legal action. Clarkson, to his credit, realised the offence he had caused and offered an apology, which the main union involved, Unison, appears to have accepted.

These days, such a spat would be inconceivable without an accompanying battle of words on Twitter. Sure enough, Clarkson was a trending topic there throughout Thursday. By my entirely unbiased reckoning, the "Clarkson is a thoughtless oaf" tweets marginally outnumbered the "don't you lefties got no sense of humour" postings.

One person who threw in his two cents' worth was the only man in the UK who may be more widely disliked than Clarkson: the TV "personality" Piers Morgan. Piers, whose tweets always seem to suggest that he is under the profound delusion that people actually like him, tweeted something to this effect: "Leave Clarkson to me. I owe him a slap".

Well! There's a fight I'd certainly pay to watch, while hoping for the same outcome as you'd want in a battle between Iran and North Korea: "Please, God, can't they both lose?"

Irrational expectations

Financial market theorists, or at least capitalist ones, profess to believe that the market prices of securities, either equity or debt, reflect a distillation of all market participants' knowledge about the state of the world and prospects for the future. This viewpoint, known as the efficient markets hypothesis, has become very hard to sustain this year, as global markets have oscillated wildly, often in response to little or no new information. Investors have been behaving less like the rational players that the theory demands, and more like schizophrenics who just dropped some bad acid.

Consider recent events relating to the Eurozone crisis. Wednesday's coordinated move by the major central banks to free up dollar liquidity was certainly a Big Event, but most pundits were quick to point out that it was no more than a sticking plaster, with the fundamental causes of the crisis still to be addressed. So how come stock markets rallied so massively? How come France and Spain have today been able to issue bonds at much lower interest rates than would have been the case a couple of days ago? If we rely on financial markets theory, those developments surely suggest that investors see the central banks' action as more than just a palliative.

In contrast, look at how markets have reacted to events that really might portend fundamental change. Over the past month, governments have fallen (or been voted out) in Greece, Italy and Spain, in each case to be replaced by new regimes committed to pushing through the reforms that the markets (and Frau Merkel) seem to be demanding. Markets wasted no time delivering their reaction to this news, in the form of further enthusiastic selling that has carried secondary market bond yields to new Euro-era highs.

One explanation that has been offered for this apparently irrational behaviour is that investors have realised that austerity might make it harder rather than easier for indebted countries to meet their obligations. This is very much the lesson that can be drawn from the experience of Italy, which has consistently maintained a primary budget surplus (government revenues in excess of spending other than interest payments), but has seen its debt/GDP ratio swell as a result of persistently low growth. Canada's escape from its debt problems in the 1990s is the flipside of the same coin: it was growth that fixed Canada's ills, not austerity. Even so, it would be a brave country indeed that tried to test investor sentiment by announcing a "go-for-growth" strategy as a means of getting out of debt.

Reverting to this week's coordinated central bank action, it seems reasonable to suggest that the positive reaction of markets reflects relief that at least someone was taking action to address a situation that, it seems, nobody fully understands. That reaction suggests that it would still be possible for Eurozone leaders to reassure markets and stabilise the situation, if only they could bring themselves to agree on a strategy, rather than perpetually bickering and procrastinating. We should all hope that they get on with it.

Looks a lot like Plan B to me

As expected, given all the pre-announced measures and semi-official hints, there were few surprises in the Autumn Statement delivered by UK Chancellor George Osborne today. The Statement itself can be found herein pdf format. Interesting that it shows a price of £45 for the paper version on the second page. Maybe that's how they plan to pay for some of the Chancellor's giveaways.

Unsurprisingly, Osborne and his "independent" advisers at the Office of Budget Responsibility (OBR) have had to mark their growth forecasts sharply lower. Real GDP is now forecast to grow by less than 1% both this year and next, with modest acceleration after that. Unlike the OECD, the OBR is not forecasting a return to recession -- the dreaded double dip -- but with such anaemic growth in prospect, this may prove difficult to avoid. Slower growth in turn means that previous fiscal projections have had to be ditched. Borrowing for the current fiscal year is now forecast at £127 billion, £5 billion more than before, with a decline only to £120 billion in the year that starts next April; and then, guess what, a more rapid decline thereafter. Experience strongly suggests such forecasts of fiscal improvement in the "out years" should be treated with extreme cynicism.

The price of this fiscal shortfall will fall heavily on public sector employees. Public sector wages, frozen until the end of next year, are to be limited to rises of 1% in each of the two following years. In addition, the shrinkage in public sector employment is now forecast to be more severe and more long-lasting than before. The OBR now expects over 700,000 jobs to go by 2017, 50% more than its earlier estimate. That should put public servants in a good frame of mind as they prepare for their pensions walkout tomorrow.

As expected there are a few giveaways, including deferral of the fuel tax hike scheduled for January and a cap on train fares. In an echo of Thatcherism, council-owned homes will be made available for sale to their tenants at a 50% discount to market value, though in a very unThatcher-like touch, councils will be required to invest the proceeds in new social housing. Against expectations, the government is not watering down the annual inflation adjustment of social benefits, with the rather perverse exception of the working tax credit that is supposed to encourage the lower paid to stay off benefits.

Probably the most interesting aspects of the Statement are the Chancellor's attempts to answer criticisms that he has no Plan B, by putting in place a series of measures to promote economic growth. One element of this is the £40 billion "credit easing" scheme, whereby the Treasury will underwrite bank lending to small and medium sized businesses. The hope is that the Treasury backstop will allow the banks to raise funds more cheaply, with that lower funding cost passed on to the borrowers. As always with such a scheme, it is likely to prove impossible to tell whether any truly new lending actually takes place, or whether banks will simply reclassify loans they would have made anyway.

Even more intriguingly, the government is planning a big infrastructure investment programme, with a long list of road, rail, broadband and other projects announced. About £5 billion towards this programme will come from public funds. Supposedly there will be no addition to government borrowing; the funds will be provided from interest savings resulting from lower-than-expected borrowing costs. (Thanks for the quantitative easing, Sir Mervyn King!)

The government is also expecting two pension fund groups to invest up to £20 billion into UK infrastructure. If it works, this could turn out to be one of the long-term benefits of the current (not-so-) short-term pain. Pension funds have long been important players in North America -- think of CALPERS in California, or the two big public sector pension funds in Ontario (Teachers and OMERS). In fact, the Ontario Teachers fund has already become a major investor in UK infrastructure, with a stake in HS1, the Channel Tunnel rail link. It's past time for UK funds to expand their horizons in the same way, so big up to Osborne, and potentially a big boost to the economy, if he can make it happen.

Just one thing, though: a few years ago, when the Canadian pension funds started to flex their muscle like this, the term "pension fund socialism" was coined. Don't tell Osborne -- we don't want to put him off!

Should be an interesting week!

The OECD's latest forecast for the UK economy, released today, shows the economy returning to mild recession in early 2012. The Bank of England sounded an equally gloomy note in its most recent update, and the government's arms-length forecasting unit, the OBR, will doubtless do the same when it publishes its latest update this week, to coincide with the Autumn (formerly Pre-budget) Statement.

The excellent Chris Dillow wrote an interesting piece on his blog recently about why politicians are always so anxious to keep the economy expanding. One of the reasons he gave was that rising GDP makes it easier to meet more of the competing demands of various segments of the population. When GDP isn't rising, or worse, when it's actually falling, politicians face unpleasant choices about which demands get met, and those who are passed over tend to get nasty.

Chris Dillow's analysis, together with the OECD's downbeat forecast, offers a useful framework for looking at the two big events in the UK this week: Chancellor George Osborne's Autumn Statement tomorrow -- in truth, a budget in everything but name -- and the mass walkout of public sector unions on Wednesday, in protest against planned changes to their retirement pensions.

The old British tradition of budget secrecy is long gone. There have been so many pre-announcements and heavy hints that there are likely to be few big surprises in Osborne's statement. There will be some focus on getting the economy moving, via a plan to boost bank lending to medium-sized businesses and a fresh commitment to infrastructure spending, though it's not clear how much of this will be truly new. There will also be a sop to the "squeezed middle", with a planned increase in fuel duties scheduled for early 2012 to be scrapped, and rail fare increases capped. Remarkably, it's likely that this will be paid for by scaling back the inflation adjustment of social benefits that normally takes place each April -- though there's every possibility that payments to the elderly will be exempt from this.

Notice any common theme here? The "squeezed middle"; cash-strapped entrepreneurs; the elderly. Tory voters all. It looks as if Osborne's response to the prospect of a shrinking GDP pie is to ensure that his natural constituency continues to get its share.

The public sector unions seem to be thinking on the same lines. They have been unable to prevent significant job losses over the past year, with the prospect of more to come. However, the likely scale of Wednesday's strike -- a walkout of more than two million people, the biggest since the General Strike of 1926 -- indicates that they are not prepared to give up one of their most prized possessions, the so-called "gold plated" pensions of their members, without a fight. The (largely true) argument that these pensions will be paid for by taxpayers who themselves enjoy much less generous pension schemes is simply brushed off by the union leaders. If the pie is shrinking, they intend to fight to hold onto their members' share.

Not much "Big Society" thinking here, either by Osborne of the unions, is there? Mind you, it has been some time since that vacuous term had much of an airing. More on all of this as the week progresses.

Electric shock

One of our neighbours just had a massive solar panel installed on their roof, and will benefit from the 45p per unit "feed-in tariff" for surplus power sold back to the national grid. However, there are fears that the boom in solar power in the UK may abruptly hit a brick wall. The feed-in tariff is to be cut to 21p per unit for any solar installation not completed and certified by 12 December. This change was only announced last month, so there has been a predictable uproar from installers, from consumers who had arranged installation but won't get the work done before 12 December, and of course from environmentalists. The government stands accused of hypocrisy, having loudly and repeatedly stated its aspirations to be the greenest government in UK history.

So why is the government doing this? Well, a little clue plopped onto my doormat this morning, in the unlikely form of our monthly free local magazine. Deep inside this little collection of advertisements for hairstylists and plumbers is a piece by one of the local firms that has been slapping solar panels on roofs all over the city. It bemoans the abrupt cut in the feed-in tariff, but then goes on to make a remarkable claim: even at the reduced tariff, consumers will still be able to lock in a return on investment of 6-8% per year "because of the expected decline in the price of panels after the new year".

Just why should the price of panels be expected to fall in 2012? This looks like the clearest possible admission that the cost of these installations has been driven up by the feed-in tariff, and bears little relation to the cost of materials and labour. Perhaps now we know why the government is cutting the tariff, and why it is unapologetic about providing so little notice. Many thanks, then, to our local contractor for (probably inadvertently) blowing the whistle on this scam.

Misreading the markets

Consternation ruled today as Germany's planned 6 billion euro 10-year Bund sale received investor bids for less than 4 billion euros, leaving the Bundesbank to sop up almost a third of the tender. "Disaster" was the general view: is no part of the Eurozone now exempt from the crisis?

There may be another way of looking at this. Just a day ago, the Buttonwood column on The Economist's website pointed out that if a Eurozone rescue deal does materialise, investors will rush to dump Bunds and buy Spanish and Italian debt. If you keep that in mind, then today's 10-year Bund auction may indicate that investors still expect that such a deal will be reached. If you really think that Spain or Italy will default, you certainly want to own Bunds; but if you think there's a deal brewing, why would you want to own 10-year Germany at less than 2% yield when you can strap on Spain or Italy at closer to 7%? Looking at the healthy bid-to-cover on Italy's auctions as recently as last week, it seems a good number of investors may be asking themselves just that.

Make no mistake: these are dangerous and scary times. But despite all the panic in the media, even today's market action seems to indicate that there are still plenty of investors willing to take quite a large punt.

A footnote to all this: one of the UK media websites breathlessly reported that the yield on the 10-year Bund had risen by "7 percentage points" (7.0%) today. The actual increase was 7 basis points (0.07%), so they were off by a factor of 100! One of the things that may be making this crisis so scary is that it's accompanied by a 24/7 rolling commentary from journalists who don't have the faintest idea what they're talking about.

Air Heads

The UK's four major airlines normally fight like weasels in a sack. Virgin Atlantic ratted out BA to the US authorities over the fixing of fuel surcharges, even though it was doing the same thing itself; the CEOs of Ryanair and BA (Irish Napoleons Michael O'Leary and Willie Walsh) are the kind of people who could start a brawl in a Buddhist monastery; EasyJet is riven with internal feuding and is about to relocate many of its London flights to distant Southend airport in the hope of grabbing a commercial advantage; and so on.

So it was a shock to see the four air heads, the CEOs of these airlines, sharing a podium in London last week. (BBC story, with video of Messrs Walsh and O'Leary pretending they like each other, here). They came together to present a petition to the Government to abolish its Airline Passenger Duty (APD), an admittedly sneaky tax that adds between £24 (for European flights) and £170 (long haul) to the cost of every airline ticket sold.

The airlines blame APD for reducing the number of flights taken in the UK in recent years, and for discouraging foreign visitors from coming to the UK. I'm sure they're right about that. That single tax is obviously much more of a turnoff for flyers than the plethora of add-ons that the airlines themselves tack onto every ticket they sell. Ryanair, for example, charges £40 if you don't print your own boarding pass; even the supposedly full-service BA now tries to bounce you into paying extra to reserve seats in advance; and all the airlines charge extra for paying with debit cards, while offering no real alternative to doing so.

If all that's not enough to put you off, there's the consistently dispiriting experience of the journey itself, whether you're doing the Ryanair rush for the best seats when flying from the glorified bus station known as Luton airport, or waiting for ages for your overnight flight to move onto a gate at spanking new T5 at Heathrow because BA can't get its departing flights away on time. When those things happen to you, it's unlikely that your first instinct will be to curse the APD.

APD is expected to raise £2 billion for the Treasury this year. Environmental campaigners have been quick to point out that this is dwarfed by the estimated £11 billion annual subsidy that the industry receives by virtue of the fact that airline fuel is not subject to the usual array of taxes and duties. And of course, you have to wonder how the four air heads would respond in the highly unlikely event that the government were to listen to their whining and abolish the APD. How much do you think fares would rise, in remarkably short order, if that happened? Best guess: somewhere in the area of £24 (for European flights) to £170 (long haul).

Don't blame me!

To nobody's surprise, the Bank of England's latest inflation forecast includes drastically lower growth projections, accompanied as always by an expression of confidence that inflation will soon fall much closer to the Bank's 2% target. Both in the report itself and in Governor Sir Mervyn King's remarks to the press, there's even more uncertainty than usual about the outlook for the UK economy. But there's one thing that Sir Merv is adamant about: whatever you don't like, whether it's slow growth or high inflation, it's NOT HIS FAULT!

That denial of responsibility even applies to the past. In the Bank's interpretation, the slow growth the economy has endured over the past year or so is a result of the squeeze on real household incomes. However, in his remarks at the media conference when the report was released, King was quick to deflect the blame:

"Real take-home pay should gradually begin to recover after a period in which prices have grown faster than wages. It would be wrong, though, to think that monetary policy was the reason for the sharp squeeze in real take-home pay. Instead the squeeze was an unavoidable consequence of movements in world energy and other commodity prices, the need to rebalance the UK economy, and the cost of the financial crisis in terms of lower productivity. Indeed, lower inflation would have been possible only with lower nominal pay growth and higher unemployment".

Just about everyone but the Bank is to blame, then, because "the need to rebalance the economy" is just code for "government cutbacks" -- and we all know how well that's working, with the Treasury quietly admitting that cumulative borrowing for 2010-2014 will be £100 billion higher than was projected in the budget. Leaving that aside, however, it remains difficult to accept that the Bank is blameless. UK inflation has been significantly higher than in the Eurozone, which is equally exposed to world commodity prices. Is Gov. King really saying that divergence has nothing to do with historically low interest rates, quantitative easing and the weakness in Sterling? Meanwhile UK growth has generally lagged behind not only that of larger Eurozone economies, notably Germany, but also that achieved by the United States, so the Bank can't even convincingly claim that it has accepted a bit more inflation in order to achieve higher growth. (Yes, I am aware you can't prove a counterfactual).

Looking forward, the Bank blames its downgrading of growth prospects for 2012 on the Eurozone crisis:

"The outlook for output growth is unusually uncertain. That reflects in particular the exposure of the UK economy to developments in the euro area. The euro area faces substantial challenges as several members seek to ensure the sustainability of their public and external debt and maintain financial stability. Implementation of a credible and effective policy response in the euro area would diminish uncertainty and so support the UK recovery. Even in this case, however, the scale of the imbalances means that there is likely to be a prolonged period of subdued growth within the euro area. But a failure to meet these challenges would almost certainly have significant implications for the UK economy."

Politicians from George Osborne to Barack Obama are eagerly shovelling all the blame for the world's ills in the direction of the poor old Eurozone, so King is unlikely to find much dissent about playing everyone's favourite get out of jail card. The big question is, what is the Bank planning to do about it? Most commentators seem to feel that the Bank is leaving the way wide open for yet more quantitative easing, despite the lack of clear evidence that this policy has had much impact on growth up until now. That media consensus may well prove to be accurate, but the Bank will need to be careful. For the first time in at least three years, the Bank's stale forecast of sharply falling inflation stands a reasonable chance of coming true. It will not want to risk reigniting inflation expectations with another bout of unproductive money printing.

When Chancellor Gordon Brown gave the Bank of England full independence back in 1997, the move was widely welcomed. Widely, but not universally. One dissenter was one of Brown's predecessors at the Treasury, Ken Clarke, who always felt it was a mistake to rob the government of the day of any overt role in setting monetary policy. Even now, Clarke's view would find very few adherents, but it's hard not to feel that the UK economy might be faring better with a slightly tighter monetary policy and slightly less fiscal retrenchment. That's just another of those counterfactuals that we'll never be able to prove.

Heard on the news...

* The lead story on all UK news bulletins today is the government's sale of Newcastle-based bank Northern Rock to Sir Richard Branson's Virgin Money. The Rock was the first UK victim of the financial crisis. Virgin wanted to buy it when the crisis hit, but failed to agree terms. The price agreed now, £747 million, means the taxpayer takes a big hit on the deal, but Virgin's expression of confidence, given all the doom and gloom at the moment, is important, at least symbolically. And, just in case wrong stuff starts to appear in the media, no, a sale like this doesn't automatically reduce the budget deficit.

Given Newcastle's well-earned reputation as Party Central, there must be all sorts of jokes to be made about Virgins, but we're above that sort of thing here.

* About the sixth item on the radio news bulletins this morning, and warranting only one sentence, was the report that UK retail sales rose 0.6% in October. Pop quiz folks: if sales had fallen 0.6%, do you think it would still have merited sixth place and only a single sentence? Me neither.

* FIFA President Sepp Blatter's cretinous comments about racism in football have attracted well-earned contempt from all quarters. Amazingly, Blatter has attempted to respond by posting a picture of himself hugging a black politician, the wonderfully-named South African, Tokyo Sexwale. Unsurprisingly, Sexwale jumped to the top of the Twitter trending topics list, where one wag has dubbed him "Blatter's Biggus Dickus". Sexwale, a businessman as well as an ANC stalwart, is one of the richest black men in South Africa, which means he's pretty damn rich. Second pop quiz then: does Tokyo Sexwale get his picture taken with Sepp Blatter (a) because he's black or (b) because he's rich.

At least try to get your facts straight

The Bank of England's quarterly report on "Project Merlin", its oddly-named agreement with the main UK banks to try to boost business lending, was released today. (BBC story here.)As the relative paucity of screaming, bank-bashing headlines in the online media would suggest, the four banks involved have largely met the targets they agreed back in February. In fact, lending for the first three quarters of this year was running at a rate about 11% above the target.

But wait! Small businesses are feeling short changed. There's a separate target of £75 billion for new lending to SMEs (small and medium sized enterprises). Hitting that target would imply a three-quarter figure of £56.8 billion, and the actual number in today's report was....£56.1 billion!

Most people would think that marginal shortfall wasn't worth blowing a gasket about, but then most people don't work for small business lobby groups. Let's hear from someone who does, via the BBC website:

John Walker, national chairman of the Federation of Small Businesses, said the banks had "yet again missed the small business target".

He added that the lending targets failed to address the "lack of competition" in the banking sector.

"We need to see a clear change: more competition and new lines of credit opening for small firms if they are to help boost the recovery," said Mr Walker.

"Yet again missed the small business target", is it? Let's look at it another way i.e. by examining the facts. The £75 billion annual SME target equates to £18.3 billion per quarter. The actual figure for Q3 was £18.8 billion. The figure for Q2 was £20.5 billion. In other words, pace Mr Walker, the banks have in fact exceeded the SME target in each of the last two quarters. The only time they failed to do so this year was in Q1, when SME lending was £16.1 billion -- but as the Project Merlin agreement was not signed until mid-February, that seems a very pardonable lapse.

Elsewhere in the media today (in The Times, behind the paywall), we read that the "help" promised by the Government to small businesses affected by the rioting in August has been slow to materialise. According to Libby Purves, "Of £250 million worth of claims filed, only £3,584 has been paid out. Small traders complain of a chaotic, slow, repetitive bureaucratic process, shunted between five or six different people and bodies.". In the meantime private insurers have paid out £200 million in riot-related claims. Perhaps Mr Walker and his members should recognise that the banks just might not be their biggest problem.

Mamma mia!

The Eurozone debt crisis seems to be causing a few folks at the News International media outlets in the UK to become a bit unhinged. In The Times today there was a long, finger-wagging editorial saying that to solve the debt crisis, it would be necessary for Germany to overcome its qualms about inflation, and allow the ECB to print money and wade into the bond markets.

Meanwhile, over in the business section, editor Ian King was sounding off against the ECB for....getting involved in the market in advance of Thursday's Italian debt auction! (To the chagrin of doomsayers everywhere, this went surprisingly well, with a bid-to-cover of almost 2). According to Ian King, if any private company intervened in the market just before it issued securities, the people involved would very soon find themselves locked up. Which may be true, at least theoretically, but is of dubious relevance here. Every central bank in the world involves itself in securities markets around the time of new government issues, and in most cases is itself a bidder for the bonds that are being auctioned.

Apparently in Ian King's world, it's fine for short sellers to push up the yields on the paper in advance of the auction, but it ought to be forbidden for the ECB to intervene to keep the market orderly. It's not as if the ECB's action pushed the yields down so low that it caused investors to boycott the auction -- the healthy bid-to-cover is clear evidence of that. As I've written here in the past, ensuring that primary debt sales proceed smoothly is one of the main things that the ECB should be doing as it attempts to navigate its way through the crisis.

Maybe before the next Italian debt sale (next week!), Ian King and The Times editorialists can get together and decide whether they want the ECB to step up its involvement in the market or not. Possibly to help them make a decision, News International stablemate SKY News has recruited a new expert to explain the Italian situation. Step up, on today's "Boulton and Co." lunchtime news broadcast.....Nancy Dell'Olio! Yes, the permatanned, permapouting celebrity hanger-on herself, described on screen as a "former advisor to Silvio Berlusconi". Words fail me, though alas, they did not fail her.

On, swiftly, to the next

The likely appointment of Lucas Papademos as Greece's new Prime Minister, charged with implementing the Eurozone bailout deal, should be received positively by the markets. Papademos served as deputy to Jean-Claude Trichet at the ECB a few years ago, and has a high level of credibility with both investors and Eurocrats. That credibility is, apparently, untarnished by the fact that before going to the ECB, he was head of the Bank of Greece, at a time when data about the country's economic and financial performance may have been subject to, how can we put this delicately, a certain amount of massaging.

There's an obvious comparison, though it may not be one that resonates too much with the Greeks, with the role played by Kemal Dervis in Turkey during that country's severe economic crisis at the start of the last decade. Dervis, a long-time player at the World Bank, was parachuted back into Ankara as Minister of Economic Affairs, and deserves much of the credit for the remarkable turnaround that Turkey has since achieved. If Papademos can do as well, both Greece and the Eurozone will be able to breathe a lot easier.

Of course, with things looking a mite more stable in Greece, markets have shifted their focus. The media formulation is that investors are now "worried" about Italy, but a more accurate way of putting it is that some investors have identified Italy as the next place they can make money by stirring up trouble.

Italy's main problem (aside from the ludicrous Silvio Berlusconi) is the level of its outstanding debt, which equates to about 120% of GDP. Its current budget deficit of less than 5% of GDP is well below those of many of its Eurozone partners, not to mention the US and UK. Moreover, and again in contrast to the US and the UK, Italy is a nation of savers, and has not historically relied to any great extent on foreign buyers to support its government bond market. That has, of course, changed somewhat since the inception of the Euro, which has led more banks to become involved in the market. Even so, Italy's debt situation cannot reasonably be compared with that of Greece.

Be that as it may, the result of the market's "worries" is, according to the media, that "Italy's borrowing costs have soared to unsustainable levels". As usual, this says more about the media than it does about Italy. While the effective yield to maturity on Italy's outstanding debt has certainly risen, the actual interest cost that the country has to pay has risen only slightly, if at all. The higher rates demanded by the market only have an impact when Italy is forced to raise new money, or to roll over previous debt. Even if an interest rate of 7% is "unsustainable", as media pundits keep saying (and just where does that figure come from anyway?), it would take several years of refinancing and new borrowing at current interest rates before Italy's actual interest costs even approached the 7% level.

This suggests that the ECB and EFSF should resolve to worry less about the falling value of Italy's outstanding bonds, and focus more on ensuring that the country's upcoming borrowing needs can be met smoothly. That in itself will be a challenge: a large tranche of Italy's debt comes due before the end of 2012. Still, it is a lot less daunting than pouring money into trying to preserve the secondary market value of Italy's entire existing debt stock, especially as only the most pessimistic believe that Italy will not ultimately be able to meet its obligations.

That last point -- that Italy is still solvent -- was cast in an interesting light by the recent failure of MF Global, supposedly as a result of its high exposure to peripheral Eurozone bond markets. Discussing the situation on CNBC, one commentator blurted out that MF's holdings of Italian and other PIIGS' bonds were almost certainly "money good". In other words, they would almost without doubt be repaid in full when due. What this means is that MF didn't collapse because Italy's or Portugal's balance sheet was rubbish; it collapsed because its own balance sheet was rubbish.

Debt markets, dysfunctional? You might think that. I, as a former international bond guy, couldn't possibly comment.

St Paul's epistle to the Occupiers

The OccupyLSX crowd are still camped outside St Paul's Cathedral in London, still displaying their "What would Jesus do?" banner and still occasionally brandishing crucifixes. It seemed a good idea to take a look and see whether St Paul might have had anything to say to the protesters...

"We gave you a rule when we were with you: not to let anyone have any food if he refused to do any work. Now we hear that there are some of you living in idleness, doing no work themselves but interfering with everyone else's." (2 Thessalonians, Ch. 3 v. 10-11)

"We do urge you, brothers, to go on making even greater progress and to make a point of living quietly, attending to your own business and earning your living, just as we told you to, so that you are seen to be respectable by those outside the Church, though you do not have to depend on them." (1 Thessalonians, Ch. 4 v. 10-12)

"Beware of dogs! Watch out for the people who are making mischief. Watch out for the cutters." (Philippians Ch. 3 v. 3)

Phew -- that's a relief. It was starting to sound as if maybe St Paul wasn't exactly on the side of the protesters, but that last sentence is amazing -- St Paul was obviously trying to warn people about Cameron and Osborne! Well, not exactly. The "cutters" referred to pagan self-harm practices. Either way, though, it looks like good advice.

O tempora! O mores!

You wait for months for a "racism in sport" furore to come along, and then two arrive at the same time. Here in the UK, the England football captain John Terry is in trouble for allegedly calling an opponent, Anton Ferdinand, a "f***ing black c***". The unloveable Terry's bizarre defence is that he did indeed yell those words at Ferdinand, but only for the purpose of denying that he had yelled them as an insult. Good luck with that, John.

Meanwhile, in the US, Tiger Woods's former caddie, Steve Williams, won a minor award a couple of days ago, and announced in accepting it that he was glad to be able to "stick it up that black a******", meaning Woods. Williams is by all accounts just as nice a man as John Terry is, but Woods has, probably sensibly, chosen simply to express his regret at the outburst, rather than going off on one and threatening to sue Williams's (white) a******.

Here's the puzzling part about all this. Neither Terry nor Williams resorted to any of the proscribed words that were once used to insult people of colour. The term "black" was by far the least insulting of the terms either man used (even though it's not entirely accurate -- both Ferdinand and Woods are of mixed race), yet it's that word, rather than any of the other thoroughly unpleasant insults, that have got them into trouble. Am I missing something?

Meanwhile, over at the Church of England, more evidence of changing times and values. Attempting to show his solidarity with the protesters at St Paul's Cathedral, the admirable Archbishop of York, John Sentamu, has a remarkable proposal:

"....the Archbishop of York yesterday entered the debate about the church’s relationship with City financiers, arguing that greed should be made as socially unacceptable as racism, sexism and homophobia".

A quick check of the 'net reveals that greed is still listed as one of the Seven Deadly Sins*, so it's a bit unclear whether Dr Sentamu thinks it would have to be upgraded or demoted to be in line with the other ills he mentions. One suspects, alas, that it's the former. It's news to no-one that our society has almost completely lost touch with religious values, but it's a bit of a shock to think that one of the most senior figures in the Church of England may have done the same.

* They have their own website!

Dummy variables

There are lots of jokes about economists. Few of them are complimentary, and even fewer are funny. "If all the economists in the world were laid end-to-end they wouldn't reach a conclusion".*

Or how about the one where a physicist, a chemist and an economist are stranded on a desert island, with only a single can of bully beef for sustenance. One problem: no can opener. The physicist proposes breaking it open with a rock, but they can't find a rock. The chemist wants to use seawater to erode the can, but they're not going to live long enough for that to happen. In despair they turn to the economist, who says, "Well, first let's assume we have a can opener". LOL (not).

The results produced by economic models are notoriously dependent on the starting assumptions, but there's nothing unique about that. Discovery Channel ran a programme this week called "Is everything we know about the Universe wrong?". Despite the title, the show was mainly a parade of cosmologists bragging about how good their "standard model" is at explaining the way the universe works. So well done them.

One problem, though. The model only "works" if you assume the existence of dark matter (never seen, measured or even described), dark energy (likewise), and the new kid on the block, dark flow (don't ask). As the cosmologists admit, their calculations suggest that these never-seen phenomena have to be significantly greater in scale than the bits of the universe that we can see if their theories are to hold. It casts a whole new light on the notion of something "working".

It seems as if economists have missed a trick here. "Yes, I know we forecast growth of 5% and the economy actually shrank, but that's fully explained by a swing in Dark GDP, which is entirely in line with our models".

Physics and economics may be coming together in another sphere too. The new book by baby-faced physicist Brian Cox, "The Quantum Universe", is sub-titled "Everything that can happen, does happen". As a summary of the last couple of days' events in Greece, that's unimprovable.

* Slightly funnier variant from David Frost some time in the late 1960s: "If all the dolly birds in swinging London were laid end-to-end, I wouldn't be a bit surprised".

Democracy, but only when it suits

The right-wing media in the UK are wetting themselves with excitement at the Greek government's plan to hold a referendum on the latest EU rescue package. According to The Times, Telegraph, Daily Mail and others, the will of the people must be heard, not least because those running the EU apparently react to democracy the same way a vampire reacts to garlic. Sample article from today's Telegraph: "Eurocrats: terrified of democracy".

There's a foul stench of hypocrisy here. Back in 2003, more than a million people took to the streets of London to protest against possible UK involvement in the planned invasion of Iraq. Prime Minister Tony Blair went ahead and did it anyway -- with the full, nay, enthusiastic support of the right-wing media. If memory serves, their position at the time could be summed up as, "governments are elected to govern". It now appears that noble principle doesn't apply when it conflicts with the media's deep-seated prejudices.

Consistency aside -- because hey, who cares about that? -- there's another reason for the Torygraph and others to ease up on the Euro-Schadenfreude. If things really do go horribly wrong in the Eurozone, the consequences for the UK are likely to be severe. No-one is likely to be exempt from the pain -- not even expats sipping tea at their boltholes on the costas, reading about "broken Britain" in the Mail and complaining about the lack of Marmite on the supermarket shelves.

Oi, Emmerich -- you're bard!

After his success with such cerebral blockbusters as Independence Day and 2012, director Roland Emmerich has turned his attention to an even greater fantasy: the notion that the plays attributed to William Shakespeare were in fact the work of someone else. "Anonymous" has just opened here in the UK, to uniformly contemptuous reviews that make it sound like Dan Brown on a bad day, if such a thing is possible. US reviewers have been almost equally merciless.

The "it wasn't Shakespeare" movement has been going since at least the mid-nineteenth century, without ever coming remotely close to either disproving Shakespeare's authorship, or even agreeing on an alternative author. Emmerich's candidate, one of the many out there, is the Earl of Oxford, Edward De Vere, known in his own time as a nasty piece of work and third-rate poet. Other putative candidates as the "real" author have included Francis Bacon, Ben Jonson and a host of lesser lights. Along the way, this nonsense has attracted adherents both distinguished (Mark Twain and Helen Keller both signed on at one stage) and comical, such as the appropriately-named J. Thomas Looney, a schoolmaster from that well-known centre of literary exegesis, Gateshead.

All of these claims have been comprehensively and repeatedly demolished by the US scholar James Shapiro, in "1599", an account of a year in the bard's life, and more recently "Contested Will", which trawls through the whole sorry history of Shakespeare denial. They are both worth reading. So is "Shakespeare's language", by the great Frank Kermode. While Kermode does not directly address the authorship question, his analysis of the uniqueness of Shakespeare's "voice" is very compelling.

Does any of this matter? After all, Anonymous is just a movie, and if it's as awful as people say, it's unlikely to be much of an opinion-former. Unfortunately, Sony Pictures has tried to up the ante by sending out study kits to US high schools, peddling the film's absurd conspiracy theories. Needless to say, James Shapiro doesn't merit a mention in Sony's fair and balanced look at the issues. It's a nasty and pointless piece of attempted brainwashing. One can only be grateful that they've stopped short of claiming that the Earl of Oxford was born in New Haven or somewhere, but perhaps they're saving that for the sequel.

Who are you calling incoherent?

The UK media have, for the most part, been either patronising or insulting about the Occupy protesters camped out at St Paul's Cathedral (odd choice) and Finsbury Square (not so odd -- that's where Bloomberg's London office is located). The main charge is that the protests are "incoherent".

Well, if the media were thinking about this lady, at the Occupy Atlanta protests, maybe they'd have a point.

Some of the protesters in London have been just as spaced-out, but as a group they seem to be very respectable. Many of them are even, gasp, gainfully employed. Now they've started to issue specific demands, which turn out to be very far from incoherent. They're looking for wholesale reform of the governance of the City of London, which is in many ways unaltered from mediaeval times. There's a summary of their wish-list on the website of, what else, The Guardian.

Their chances of achieving any of this are, of course, smaller than John Terry's conscience. Still, there's another story breaking today that may just serve to get them quite a bit more support. Apparently directors of the major FTSE companies saw an increase in pay of just shy of 50% in the past year, notwithstanding the poor state of the economy and a decline in share prices (which are, you might think, the ultimate measure of a director's value). The BBC's report on the story can be found here.

One of the named-and-probably-not-even-a-little-bit-shamed, Sir Martin Sorrell of WPP, has already responded by saying that the risks he takes are key to the success of his company. For goodness sake, Sir Martin! WPP is an advertising agency. You don't exactly face the same kind of risks as a coalminer, or a cop, or a bus driver or just about any other job you might name. (Blogging possibly excepted). The difference is that folks doing those jobs don't have a little cliquey thing going where they get to set each other's pay rates. Now THERE'S something crying out for reform, even if a tent city outside St Paul's is the wrong way to go about it.

Shave and a haircut

The most that can be said about the Eurozone rescue deal that was agreed in Brussels overnight is that it was significantly better than the markets had begun to fear in recent days. There is a lot of detail to be filled in over the coming months, but in principle the deal should buy the Eurozone the time it needs to carry out the reforms that will really put an end to the sovereign debt crisis. The Economist has a good summary and analysis of the deal here.

One of the hardest parts of the deal to finalise turned out to be the scale of the "haircut" that private lenders will have to take on their holdings of Greek debt. At the last Summit to end all Summits, back in July, a figure of 21% was agreed. That never looked to be enough, and now the size of the haircut has been raised to 50%.

Anyone who sees the financial crisis as being entirely the fault of the banks will no doubt be incensed that they tried to fend off the bigger write-off. After all, the loans were made voluntarily, and the fact that Greek bonds paid significantly higher yields than their German equivalents ensured that investors were being compensated for the risk they were taking on.

This is a good principle: you make a bad deal, you swallow the loss. In the normal course, it's up to investors to satisfy themselves about what they are buying, through s process of "due diligence". For purchases of Greek government debt, this would involve analysing Greece's budgetary position and prospects in considerable detail, to ensure that the country would be able to repay its obligations as they fell due.

Simple, right? Except that in this particular case, the lenders have much more of an excuse. We learned many months ago that the Greek government lied about its budgetary situation for years, in order to smooth its path into the Euro. Shouldn't investors and lenders have been able to figure that out? Well, maybe, but in this case Greece's misleading data were being awarded regular seals of approval by the EU authorities. If the latter, with much more complete access to the raw data than the private lenders could ever hope to have, were allowing themselves to be duped, what realistic hope did those lenders ever have of avoiding the trap?

We can't let the entire financial sector of the hook, however. It's been widely reported that Goldman Sachs undertook a fancy structured transaction that helped Greece to conceal the size of its debts, and they weren't the only ones. The banks that put such deals together must have had some knowledge of the real situation, but chose not to spill the beans to their clients. Still, the fact remains that a lot of insurers and fund managers just found themselves being bullied into a 50% haircut by the same Eurozone authorities that lured them into the Greek market in the first place. No wonder it was hard to reach an agreement.

So much for the past. There's also a more forward-looking reason why it was important to get the scale of the debt write-off right. A lot of commentators, especially in the US, have been voicing concerns that if Greece were allowed to walk away from its debts with relatively little pain, a queue of other borrowers would start lining up to demand similar treatment. Write-offs for Greece may be something the global financial system can manage, but if Spain or Italy wanted the same, the pressure on balance sheets could be devastating. The 50% write-off for Greece, while painful for the lenders, still leaves the country facing a mountainous debt and years of austerity. This should guarantee that this is not seen by other debtors as an easy option, but only time will tell if the right balance has been struck.

It's hard to say how much time this latest deal will buy for the Eurozone. Any backsliding on the details over the next few months could see a swift return to crisis mode. But never mind, there may be a diversion on the horizon. The bipartisan super-committee of the US Congress, set up as part of the resolution of the debt ceiling debate, is due to report in late November. There hasn't been much evidence of a meeting of minds, and today S&P fired a warning shot: it's ready to downgrade Uncle Sam again if the promised deficit-cutting measure show signs of falling apart.

Stay tuned! One way or another, 2011 is turning out to be a good year only for those very few who kept in mind the wise words of Polonius to Laertes: "Neither a borrower nor a lender be, For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry".

Scots wha hae

The possibility of a referendum on independence for Scotland has been a recurring theme of this blog, mainly for the purpose of making comparisons with the long-running Quebec separatist movement. (See, if you care, posts on 8 May 2011, 3 September 2009, 7 May 2008, and 16 June and 3 April 2007). After the past weekend's SNP conference in Inverness, the countdown to such a vote is definitely under way, so it's time to visit the subject again.

It's not good form to quote yourself, but parts of what I posted here back on 8 May bear repeating:

....back in the 1970s, Ottawa made no attempt to deny the PQ its right to hold an independence vote on its own terms and at a time of its own choosing. News reports suggest that David Cameron has made a similar commitment to SNP leader Alex Salmond, though not all of Cameron's Tory backbenchers are as equable about the prospect of a referendum. Some are urging Cameron to "call the SNP's bluff" by calling his own referendum on the issue in the very near future. There are two problems with this. First, Salmond isn't bluffing; he really does intend to call a referendum on independence, and thinks he can win it. Second, a Westminster-run referendum would stoke the us-against-them mentality among Scottish voters that Salmond desperately needs if he is to achieve his goal.

This is not to say that there is nothing Cameron should be doing. Canada endured two separate independence referenda in Quebec, the second of them defeated by the narrowest possible margin, before the federal government decided to take a more proactive stance. The right of the people of Quebec or of Scotland to decide their own political arrangements is hard to deny; after all, politicians in London and Ottawa have enthusiastically endorsed sovereignty movements in places as far-flung as Bosnia, Kosovo and Southern Sudan. However, the terms on which the national government would allow separation to occur -- everything from how assets would be divided to the wording of the referendum question itself -- are legitimate concerns of the national government. The government of Canada passed legislation defining its stance on these issues at the end of the last century, in the wake of the second referendum. The effect has been to remind Quebecers, in a non-confrontational way, that opting for independence would bring real costs as well as the putative benefits offered by its proponents.

....In the UK....the right to amend the constitution rests solely with the national government in Westminster. This makes it both appropriate and important for it to spell out the conditions on which it would accept a Scottish referendum vote for independence, and what its negotiating stance would be in the aftermath. The key message: you can check out any time you want, but you should clearly understand how much of the furniture we'll let you take with you.

A couple of extra points can be made, now that Alex Salmond's approach is becoming clearer. He seems to have absorbed the lessons of the two Quebec referenda in a rather surprising way. The Quebec separatists were defeated both on a "soft" sovereignty option and a straight YES/NO question. It appears that Salmond is thinking of including both the hard and soft sovereignty options in a single referendum vote. That should just about guarantee that the "no change" option wins less than half the vote, which is no doubt what Salmond will be counting on. However, it is almost certain to lead to the sort of messy outcome that is really in nobody's interest. If the Westminster government wants to compel the SNP to ask a clear question, it needs to speak up now.

The issue of "how much of the furniture we'll let you take with you" should also be clarified sooner rather than later. Alex Salmond seems to have taken note of a satirical comment many years ago by a Quebecois comedian, to the effect that what Quebecers really wanted was "a free and independent Quebec within a strong and united Canada". So he has pledged to retain the Queen as head of state, which the Scots seem to favour. (No word if this would also apply if Prince Charles takes the throne). That's probably acceptable. But what about retaining Sterling as the national currency? Right now it's unlikely that the canny Scots would want to cast their fate with the Eurozone, but it should surely be made clear that in the event that Scotland opted for independence while retaining the use of Sterling, it would forego any right to influence the policies of the Bank of England.

And then there's the issue of citizenship. In Quebec the PQ was a bit coy about this, but tried to hint that Quebecers might be able to retain their Canadian passports in the event that the Province became independent. I'm not sure that Alex Salmond has said anything about this, but the Westminster government should surely make it clear well in advance of any vote that if Scotland becomes independent, its people will lose their right to British citizenship.

This all starts to sound a bit confrontational, but in truth it's the exact opposite. The decision on independence belongs to the Scots alone, but the UK government has a perfect right to spell out some of the consequences. It's time to get started.

Hey, Dave and George -- here's a joke for you

There's an old joke -- a VERY old joke -- about a Pope who decides to go out on the streets of Rome to plead with sinners. He walks around telling the hookers to get off the streets and mend their ways, and hectoring the johns to go home to their wives. Finally one of the putanas has had enough and marches up to the Pope, yelling, "Hey, Papa, you no play-a da game, you no make-a da rules!"

Someone needs to tell David Cameron and George Osborne that joke, and hope they get the message. It's remarkable to see them throwing their weight around as the crucial EU summit meeting gets underway, demanding that the beleaguered Eurozone gets its act together and finds a long-term solution to the debt crisis, and warning that British interests must be taken into account in any decisions that get made. Once the UK opted, over a decade ago (correctly, one must now reluctantly admit) to stay out of the single currency, it largely forfeited the right to tell the Eurozone members how to conduct their business.

It's not as if, in their role as self-appointed advisors, Dave and George are speaking from a position of particular virtue. The UK has a higher budget deficit than almost all the countries it presumes to advise -- in 2010 only Ireland and Greece performed worse, and in Greece's case the difference was marginal. The UK's recovery ran out of puff sooner than those of the major EU economies, and of course inflation in the UK is rising at a much higher rate than in the Eurozone. President Sarkozy, Chancellor Merkel and the rest of them will surely be sorely tempted to tell Dave and George where to stick their advice, though no doubt, unlike the hooker in Rome, they'll do so in the most diplomatic way possible.

If Cameron and Osborne are not to be shamed into silence by the facts, you might think they'd want to keep quiet in view of the looming House of Commons vote calling for a referendum on the UK's participation in the EU. But of course, the need to put on a show of machismo for the Tory Eurosceptics is probably exactly why they've decided to large it up at the Summit.

UPDATE, 24 October: Looks like I was wrong about Sarkozy and Merkel being diplomatic. This from The Guardian: Sarkozy bluntly told Cameron: "You have lost a good opportunity to shut up." He added: "We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings." Go, Sarko!

The economic consequences of Mervyn King

The continuing rise in UK consumer inflation -- to a 3-year high of 5.2% for CPI, and a 20-year high of 5.6% for the broader RPI -- is set to have a number of unexpected consequences. Stephanie Flanders has a good summary on the BBC website.

September's CPI is used to calculate the inflation adjustment for social programmes for the coming year, so this is good news for pensioners, but bad news for the government, which will have to stump up the extra cash, adding to the budget deficit. Various welfare benefits will also be adjusted, with the result that those receiving such payments are likely to see a significantly larger increase in their incomes next year than those who are working. At least at the margin, this will make it more difficult for the Government to achieve its stated goal of reducing the number of people on benefits.

These minor perverse effects might not matter if there was any evidence that the Bank of England's ultra loose monetary policy was actually working. But as Governor Mervyn King admitted in a gloomy speech in Liverpool last evening, and as the latest MPC minutes confirm, such evidence is scanty at best. Very much the opposite, in fact: the case that the Bank is stoking inflation without doing anything to improve growth prospects continues to build.

Let's start with inflation. The Governor continues to argue two things here: that the rise in inflation is the result of factors outside the Bank's control, and that the worst will soon be over, with inflation falling back sharply in 2012. Looking at the first of these, the Bank's task was certainly made harder by the VAT rise at the start of the year, but the Governor also likes to cite international factors such as commodity and energy prices as key drivers of current price pressures. This argument is badly undermined by the fact that UK inflation is now by some distance the highest of any major economy, including Eurozone countries which are way more dependent on imported energy supplies. The UK's poor showing is, of course, explained by the weakness of Sterling, something for which the Bank, after years of low interest rates and money printing (QE), cannot escape responsibility.

As for the contention that the peak in inflation is near, the first point that should be made is that Governor King has been saying that for quite some time, so people are entitled to be sceptical. This time he may well turn out to be right, if only because the VAT rise will fall out of the year-on-year inflation calculation in January. However, the common media trope that the "squeeze on family budgets" will ease in 2012 is almost certainly wrong. Even if inflation falls all the way to the Bank's 2% target over the next 12 months, that will still outpace the likely gain in earnings. The fall in living standards imposed by this year's inflation surge -- the second in only three years, as Stephanie Flanders points out -- will not be recouped any time soon.

This fall in living standards, in turn, almost certainly explains why growth is so stubbornly resisting the Bank's persistent attempts at stimulus. For sure, the UK economy faces other headwinds, including the collapse in growth in the Eurozone and the tightened credit standards of the major lenders. However, consumption is the main driver of the economy, and it's hard to see how it can be revived as long as real incomes and consumer confidence are being decimated by inflation.

Stephanie Flanders, in the piece linked above, makes an interesting point in this regard:

But some, like Richard Jeffrey at Cazenove, think the causation runs at least partly the other way; growth has been slow, because incomes are being squeezed and households have less and less to spend.

Spending by households was actually 9% higher, in cash terms, in the second quarter of 2011 than at the low point of the recession. But in real terms, spending has barely risen at all - the level of spending is just 0.1% higher than in 2009.

You'd like to think that Mervyn King is at least giving some thought to this kind of dissenting view. On his personal website, David Smith declares that after reading the latest MPC minutes, he believes the Bank has quietly given up targeting inflation, and is now targeting growth. Whatever it is that they imagine they're targeting, they don't seem to be doing a very good job of it.

The Occupiers

In one of the best-remembered scenes in the '50s biker movie "The Wild Ones", a citizen asks leather-clad Marlon Brando, "What are you rebelling against?". Brando curls his upper lip and says, "Whaddaya got?"

The "Occupy Wall St " protests, now spreading worldwide, seem to have taken a bit of a lesson from Brando. A young female protester interviewed on the BBC this lunchtime was stunningly incoherent. Unable to explain why the focus of the protests was that temple of Mammon, St Paul's Cathedral, she said she was angry about "high government taxes and corporate banks' high interest rates". Maybe I haven't been paying enough attention, but I'd be surprised if many of her fellow protesters were in favour of tax cuts. The London protests have also been blighted by the presence of the creepy opportunist Julian Assange, who delivered a ludicrous "human megaphone" address to the crowd before throwing them candies.

The supposed lack of a coherent message has been picked up by the more right wing US media, who have been brought to an incandescent rage by the whole "Occupy" movement. The shrill blonde harpy Ann Coulter has suggested that the Occupy crowd lack three things that the Tea Party has: jobs, soap and a point. Well, maybe so, Ann, but one thing they may just have is support. A poll published today on Slate suggests that twice as many respondents support the occupiers as support the Tea Party.

Mark Steyn has joined in the occupier-bashing, but his latest piece on the subject provides, perhaps inadvertently, a plausible explanation for the phenomenon. (The article first appeared in the Orange County Register, but it's reprinted on Steyn's own website). Here's a key quote:

Beneath the allegedly young idealism are very cobwebbed assumptions about societal permanence. The agitators for "American Autumn" think that such demands are reasonable for no other reason than that they happen to have been born in America, and expectations that no other society in human history has ever expected are just part of their birthright. But a society can live on the accumulated capital of a glorious inheritance only for so long.

That seems right, if incomplete. Steyn is suggesting that the post-WW2 generation of Americans, the self-proclaimed "greatest generation in history", developed a having-it-all mindset of endless entitlement that has been passed on to today's young people. What today's generation is now realising is that even their forebears were only able to have it all because they mortgaged the future to pay for it. For the first time in many generations, the prospect of living better than one's parents did is becoming remote for all but a few young people. It's surely no surprise that they're not happy about it, even if they're more than a little confused about what they can actually do about it.

Post-war Europeans maybe didn't cash in quite as much as Americans did -- though not for want of trying -- but the copycat Occupy protests are highlighting similar issues. For example, there was a demo on Saturday in Madrid, capital of a country in which 45% of under-25s are unemployed. Sure, it might be preferable if the protesters had solutions to offer, rather than just inchoate rage, but can anyone really be amazed that they're taking to the streets in protest? Surely the only real shock is that it's taken so long for this to happen.

There's a surprise!

In a development that most observers are labelling "catastrophic" -- but few are surprised by -- a proposed deal to sell the London Olympic stadium to West Ham United football club has fallen through. Legal challenges from two other clubs -- Tottenham Hotspur and the mighty Leyton Orient -- led the Olympic legacy folks to conclude that it would be better to scrap the deal and start afresh. They will now start the search for a tenant, with the favoured bidder likely to be....West Ham United! There's a good summary of the story in The Guardian.

Who are the winners and losers here? One big winner is West Ham United, which will avoid the capital costs of converting the stadium into something more suitable for football, and -- assuming they wind up renting the place -- will find it much easier to walk away when they realise it's a lousy football location, as they inevitably will. (Because of the running track, the closest seats for football will apparently be 35 metres from the touchlines). UK Athletics, the governing body for track and field sports, is another winner. The track will now definitely be retained, at government insistence, so UK Athletics can now proceed with a bid to host the World Athletics Championships in 2017. This is another event that promises to be a bottomless money pit, though as the main competitor appears to be Doha, Qatar, the London bid's success cannot be taken for granted.

And the losers? Well, imagine that, it's the UK taxpayer! You may not have managed to score any Games tickets in the farcically botched lottery, but you can still feel like you're involved, because Lord Coe and his pals will shortly be visiting you with another bill that needs paying.

The estimated £95 million post-Olympics conversion cost will now have to be met out of the public purse, with the taxpayers of Newham, one of London's poorer boroughs, likely to have to cough up £40 million. Estimated rent for the football tenant (probably West Ham) is £2 million a year -- this for a stadium that will have cost the better part of a billion pounds by the time it's ready! That rent won't even cover half of the estimated post-Games running costs of £5 million per year. Unless concerts and other events can be found to make up the shortfall, the taxpayer will be on the hook for that too, for as long as the stadium remains in use. And that's not to mention the subsidy that will be needed if UK Athletics gets to host the 2017 World Championships.

Remember the Millennium Dome, another fatuous vanity project that was only turned around when private investors took it over and turned it into the successful O2 Arena? It looks as if the Olympic Stadium could be an even bigger boondoggle, because the private sector just threw up its hands and walked away.