Lie bore

OK, let's have a quick primer on the latest banking scandal.

There's overnight LIBOR, one week LIBOR, one month LIBOR, three month LIBOR.  There's US dollar LIBOR.  There's Sterling LIBOR.    There's LIMEAN.  There's LIBID.  There's LUXIBOR. There's EURIBOR. 

These interbank rates are often described as "the rate at which banks lend each other money",  but that's not exactly right.  Each bank sets its own rate for interbank lending on a minute-by-minute basis.  Once a day, however,  sixteen large global banks tell the LIBOR compilers (Thomson Reuters) what their lending rate is on that day.  Reuters eliminates the high four and low four numbers and averages the rest to come up with the LIBOR rate, which it then publishes.  That rate is then used as a benchmark,  for example in calculating loan interest or pricing the floating rate side of interest rate swaps.

With so many banks on the panel, it isn't easy for any individual institution to manipulate the rate to its own advantage.  If you look at the e-mails that have been quoted in the Barclays case ("done for you , big boy") you find they were talking about shifting the rate by as little as a basis point (one hundredth of one percent). Moreover, again staying with Barclays, it appears that while the traders occasionally attempted to get the day's LIBOR setting nudged higher, there were also occasions when they tried to set it lower, in order to conceal the pressure on the bank's own funding costs at the height of the financial crisis.

Barclays shouldn't have done it, of course, but its actions scarcely merit the scandalised tone of much of the media coverage we've seen over the past couple of days. The FSA's report on its investigation is very nuanced: while asserting that the Bank's traders attempted to influence the LIBOR setting,  it does not claim to have proof that they actually succeeded in doing so.  Not that the lack of evidence of harm is deterring the press, though: the Daily Mail is suggesting that mortgage borrowers will seek to sue Barclays even in the absence of any such proof, and there is unlikely to be any shortage of lawyers ready to take the case on.

Anyway, is this all clear to you?  No?  Good! Let's get you down to make-up, and you can lead off the news bulletin at the top of the hour.




     

Osborne's double whammy

UK fiscal data for May, released this morning, are ugly.  Borrowing for the month was almost £18 billion, up from £15 billion in the May 2011.  The main culprits: a 7% fall in income tax receipts, which appears to be mostly due to the slowing economy, though high earners' efforts to avoid the 50% tax rate are getting some of the blame too; and an 8% jump in public spending, driven by an 11.7% rise in welfare payments.

Opposition spokespeople have naturally pounced on the data, saying that they prove that the Government's austerity programme is fundamentally mistaken.  That's true, but what George Osborne and his pals have achieved is worse than that.  As the rise in spending shows,  they haven't actually imposed any real austerity.  In fact, Government spending has been virtually the sole source of growth in the economy in recent times.  But by banging on about budget cuts all the time, they seem to struck a serious blow to consumer and, more importantly,  business confidence.  The unwillingness of businesses to invest , even though many are sitting on significant piles of cash, is making it all but impossible for the economy to mount the sustained recovery that might allow the country to start to "grow out of" the debt problem.

The latest data will hasten efforts already under way in Whitehall to find a second round of spending cuts, which is just what the economy doesn't need. In the firing line:  welfare programmes.  David Cameron signalled this week that the Government wants to end the "something for nothing" culture that supposedly exists among welfare recipients.

One brilliant idea on the table is to reduce welfare payments in poorer regions.  I suppose it wouldn't occur to anyone in the Cabinet that such a policy might tempt a good number of benefits claimants to migrate to areas where the payments remained higher.  That would presumably include London and the South East, where local authorities have already been trying to move benefits recipients in the opposite direction because they can't afford the cost of housing them.  It was Tony Blair that used to talk about "joined-up government".   We don't seem to be any closer to achieving it.        

"We're not very good, we're not very good..."

England going out of Euro 2012 at the quarter-final stage, after a penalty shoot-out -- who'd have expected that?  The optimists, that's who -- pessimistic (or even just realistic) fans never expected them to get beyond the group stage. Last night's game was so lopsided that it's actually a relief to have the team on its way home -- fluking their way into a one-sided semi-final thrashing by Germany would have been downright embarrassing.

The tournament did allow us to dispel a few myths, however.  For example:

Myth #1: that England lose because their rope-a-dope tactic,  waiting for the opposition to come onto them and then hitting them on the break, causes them to tire out.  How many times have you heard commentators say that "it's far more tiring chasing the ball than passing it around"?  Well, at the end of the group stage, the OPTA statistics showed, as anyone who watched the games would realise, that England had enjoyed far less than 50% possession of the ball in all of their games -- yet the total distance covered by England players was actually the lowest of any of the sixteen teams that started the tournament.  Seems England players don't rush around like madmen trying to harry their more skilled opponents into making mistakes;  they mainly just stand around waiting for the ball to hit them.

Myth #2: that Wayne Rooney is a world-class player.  Wazza hasn't scored a goal in the final stages of a major tournament since 2004, but his apologists have always been able to cite injuries in mitigation.  This time he missed the first two games as a result of a suspension, but was confidently expected to turn up for the final group game "loaded for bear", and to carry the team forward from there.  In the event he was heavy-legged and clumsy.  Sure, he scored in the Ukraine game, but as the columnist Giles Smith put it, it was a goal Pele could be proud of -- the current 71-year old Pele, that is, not the Pele of old. After this tournament, anyone who calls Rooney a world-class player deserves to be bitch-slapped by any and all of Lionel Messi, Cristiano Ronaldo, Andrea Pirlo and Bastian Schweinsteiger, to name but a few.

Myth #3: that Roy Hodgson is a good manager.  Sure, he didn't have much time to work with the players, and there were a lot of injuries, but really! He selected Stewart Downing for the squad, a man who recorded neither a goal nor an assist in league football last season.  Predictably, Downing didn't get on the field.  And what of those who did get on the field?  Well, we've already looked at Rooney, but what about Ashley Young?  At the end of the knockout stage, the OPTA stats rated him as the least effective player in the England's group -- the whole group, mark you, not just the England squad.  Yet Hodgson allowed him to  start the quarter final, where he turned in another startlingly disengaged performance, and then became the first England player to fail to score in the penalty shoot-out.

Myth #4: despite this latest setback, the future still looks bright.  On what possible basis??  England's best players over the past two weeks were Steven Gerrard, John Terry, Ashley Cole and Joleon Lescott.  The first three of that quartet will be getting quite long in the tooth by the time of the World Cup in Brazil, in 2014.  The various up-and-comers in the squad either got only limited playing time (Oxlade-Chamberlain) or no playing time at all (Phil Jones, among others).  Unless you really think travel broadens the mind, it's hard to see how the experience of flying around Eastern Europe, only to watch games from the sidelines, can have  done anything for these players' future development.

I've mentioned the OPTA statistics a couple of times here, and this post gives me the opportunity to cite my favourite OPTA number of all time.  A few years ago the Swedish striker Zlatan Ibrahimovic was substituted after about 60 minutes of a Champions League Game. At that time, he had only run 500 metres further than his own goalkeeper!  Yet Ibrahimovic would walk into the current England team. Quite literally, perhaps.            

 

Dodgy data

At the world's least ecologically sound event -- the Rio +20 "earth summit" shindig -- Nick Clegg has announced that starting in 2020, the UK will no longer use GDP data as the sole measure of economic progress.  I wasn't aware that we currently did that, and I'd be the last to deny that GDP is a pretty ropey statistic -- more of which below -- but what Clegg appears to be proposing seems downright daft.  No real surprise there, I guess.

According to Professor Clegg, GDP will give way to something known as GDP+, which will take account of the impact of economic activity on the nation's "natural wealth". Just how will that work? If a particular activity uses up non-renewable resources, will that be deducted from "GDP+"?  Or will it be even more airy-fairy than that, as the linked article from the Telegraph website rather ominously hints?  Would anyone really think, to quote the example in that article, that there's a reasonable way of deducting damage to the Chiltern Hills from the economic growth that the HS2 railway project might create?  Who gets to quantify the damage?  The local NIMBYs, who would presumably assess it as being close to infinity,  on the basis that it would be effectively irreversible?  Or the people who use the new train line, who would assess it as almost zero,  on the basis that they themselves didn't actually live in the Chilterns?

The key problem with GDP as it currently stands is that it aggregates hard-to-measure things in a way that all too readily obscures any real meaning.  If an economy produces ten apples and ten oranges, we can say that its GDP amounts to twenty pieces of fruit, but even by doing that, we've lost a level of information that may be crucial.  In aggregating production for a much more complex real world economy into a GDP figure, that becomes much more of a issue.  If you then decide to stick in all sorts of unmeasurables -- resource depletion, loss of amenity for people near train lines, erosion of mediaeval gargoyles as a result of increased air pollution, or whatever -- you come up with a measure that's both intrinsically unreliable and impossible to interpret.

None of this is meant to suggest that the existing GDP data are ideal, even for the relatively narrow purposes for which they were designed.  The ONS has reported that UK real GDP fell by 0.3% in the first quarter of this year, a number that seems wildly at odds with all of the more upbeat anecdotal evidence that has come to hand, especially the sectoral PMI surveys compiled by the good folks a Markit.  Yesterday we received a labour force report that casts even more doubt on the GDP estimate.  Between February and April, unemployment fell by 51,000,  while the number employed rose by 166,000,  with big increases in both private sector jobs and full-time employment.  That's simply not consistent with the GDP numbers, a conclusion that still holds true even if you regard employment as a lagging indicator of growth -- after all, the economy was supposedly shrinking in the final quarter of 2011 as well, so just how long is that lag supposed to be?

Meanwhile, what about the current quarter?  The sectoral PMI data have generally moved lower, which sounds bad, but today we learn that retail sales jumped 1.4% in May, a development apparently attributed in part to warm weather during the month, a happy meteorological event that I must somehow have missed.  Individual stores, especially in the consumer electronics field, are also offering some upbeat trading reports.

So what does all this tell us about GDP for the current quarter?  Frankly, who knows?  And that's why it's important not to become fixated on GDP as the "sole measure" of economic progress, to use Nick Clegg's term again. By all means let's look at better indicators -- but I don't think we should rely on Clegg and his pals to tell us what those might be.

       

Greek impasse, coming soon to an election near you

What with Greece being the "cradle of democracy" and all that, I suppose we shouldn't be surprised that the results of Sunday's elections appeared so soon after the polls closed.  By mid-evening,  we not only knew  the final result with a high degree of accuracy, we could also discern one of the most disturbing and portentous features of the voting: a clear split between the preferences of younger and older voters.  Those above the age of 54 -- in effect, the baby boomers -- largely voted for pro-bailout parties such as New Democracy and the venerable PASOK; a clear majority of younger voters chose the anti-austerity parties, notably Syriza.

Is this just a case of older and wiser heads resigning themselves to a return of tough times, while the young delude themselves that Greece can restore prosperity by defying its creditors?  If only that were so.  The truth is much less simple and palatable than that.  The generational divide in the Greek vote is something that we are very likely to see replicated all across Europe as the era of austerity rolls on.

Greece joined the EU as long ago as 1983, a time when the baby boomers there and elsewhere were just starting to move into more senior positions in politics and business.   Greece's public debt/GDP ratio at the time was near 20%.  Three decades of self-indulgence by the baby boomers -- retirement at 50 for workers in "hazardous" professions, unfunded public sector pensions,  14 months pay for 12 months work,  an extravagantly unaffordable Olympic Games,  and so on -- have multiplied that ratio eightfold.  In the meantime, the economy has become increasingly "hollowed out" and dependent on one sector: tourism. 


Now the years of Greece living wildly beyond its means are over, regardless of this weekend's election results.  The baby boomers,  on whose watch all the debts were run up, voted to try to keep the creditors happy for a bit longer, but the young people who will actually have to pay back the debt seemingly beg to differ, preferring to take their chances with the untried (and slightly wacky) folks at Syriza.  It's hard to be surprised: how would you feel if you were told you had to cut back on your own meals in order to pay your granny's whisky bills? 


This is not just a Greek phenomenon.  Spain has a youth unemployment rate nigh on 50%: how do you suppose an austerity referendum would turn out there?  Ditto Portugal.  In Ireland, the response to austerity on the part of the young is a tried-and-tested one: they're leaving the country in growing numbers. All across the developed world* -- the US and Canada not excepted -- the blank checks written by the baby boomers are starting to be presented for payment, and the young people who are expected to honour them are getting restless. Add in the demographic element -- Western countries have not been having children at anything like the "replacement rate" -- and you have a recipe for a slow-burning and intractable crisis.  Have a nice day.  


*  We do things better in the UK, though, right? Well, read this cautionary tale.                  

Pushing on a string

In coordinated announcements after the markets closed on Thursday, Chancellor George Osborne and Bank of England Governor Sir Mervyn King unveiled new measures to get the UK economy moving again.  The centrepiece is a plan for the Bank to make £80 billion in new funding to the banking system,  on condition that the cheap money is used to increase lending.

Wondering who will benefit from that?  Well, let's look to the markets for a clue.  In Friday's trading session, the overall FTSE eked out a 0.2% gain -- but shares in Royal Bank of Scotland surged 7.9%, while Lloyds TSB shares rose 5.2% and Barclays, 4.2%.  Economists and pundits have been quick to pour cold water on the likely effectiveness of the scheme, and the banks have said all along that the reason lending has been growing so slowly is not that they are unwilling to lend, but that businesses and homebuyers are reluctant to borrow.  Labour Shadow Chancellor Ed Balls's reaction seems about right: "If business is not investing and creating jobs and if our economy is not growing, that's the fundamental problem, and I've said consistently for two years that you can't do this simply by throwing money at the banks."

Of course, none of that will stop the banks from scooping up the lolly.  If you see the lights on late in the City and at Canary Wharf  this weekend,  that'll be teams of accountants trying to figure out how to assign the new funding to loans they were going to make anyway.  
   

A tragedy of errors

It probably doesn't make any difference at this stage, but it's important to remind ourselves that critics who say that the Euro was "flawed from the outset" or "doomed to fail" don't know what they are talking about. The technocrats who designed the single currency knew perfectly well that the currency bloc would only survive if the key economic fundamentals of the participating countries were more or less in alignment.  To ensure this, they devised a series of tests, generally known as the Maastricht criteria, to monitor and enforce  the so-called "convergence" process.

There were three separate criteria, relating to inflation, exchange rate stability and budgetary performance. The rules set by the technocrats were so strict that, not long before the Euro was due to come into existence, only one would-be member met all three criteria: Luxembourg!  So the politicians, fatefully, got themselves involved.  It was decreed that actual compliance with the Maastricht criteria would not be a sine qua non for membership, as long as a country was deemed to be heading in the right direction.   Even on this basis, the experts warned that Italy was not ready for membership, but as it was one of the original six members of the old EEC, and as excluding it would have been politically unthinkable, it was admitted alongside its more compliant neighbours.

Once that decision was taken, the floodgates of Euro admission were well and truly open,  with little regard to the underlying condition of the economies of the candidate countries, as measured by the Maastricht criteria. The most egregious example is, of course, Greece, which secured admission to the single currency through bare-faced mendacity about its true fiscal situation (ably assisted by its friends at Goldman Sachs).  

Briefly stated, it was not the Euro's architects that set the currency on a dangerous course, but the politicians, through their reliance on expediency and deal-making rather than sound principles.  That pattern of political grandstanding and fudging continues to this day, and largely explains why a tricky but manageable crisis has been allowed to career towards the brink of disaster.  

Consider last weekend's bailout of Spanish banks, for example.  Instead of finding a way to solve the problem directly by recapitalising the institutions themselves, the EU deemed it necessary to lend the money to the Spanish government as an intermediary.  Spain's debt-to-GDP ratio, which was not excessively high before the bailout, suddenly rocketed.  Moreover, since the EU's loans are deemed to rank above those of other creditors, it immediately became riskier and more expensive for Spain to raise money in the markets.  The result?  Ratings agencies are falling over themselves to downgrade all things Hispanic, and today the country's 10-year bond yield hit 7%, the level at which (at least in the minds of lazy journalists) a bailout of the country itself will soon be inevitable.

And there's more.  Even though the bailout funds were loaned directly to the Spanish government, the EU did not impose a new austerity package as part of the deal.  On one level this is fair enough: Spain's government has already imposed stringent controls on public spending.  However, it sends a very odd message to Ireland, which had to swallow very tough EU-mandated measures when it needed a bank bailout.  More significantly, it may well reinforce the anti-austerity-but-still-in-the Euro position of the Syriza party in Greece, ahead of this weekend's elections.

Most bizarre of all, the bailout loans to Spain are the several responsibility of the other Eurozone members, in proportion to their share in the region's GDP.  This puts Italy on the hook for about 20% of the bailout (of up to 100 billion Euros).  It will be receiving 3% interest from Spain -- on money that it must itself borrow at rates of 6% (and rising).  Little surprise, then, that Italy is being tagged as the next domino to fall.

It's hard to think of any recent decision, by any government anywhere, that threw off unintended, adverse consequences in so many directions at once.

The EU's biggest error, of course, is its bullish insistence that austerity is the only way out of the crisis.  Everyone but Angela Merkel now seems to realise that what's urgently needed is growth.  Word to the Chancellor: the ratings agencies and the bond vigilantes are going to squawk whatever you and your fellow leaders do. It's long past time to ignore them, and just do the right thing.            

Do the sheep get to vote too?

The Government of the Falkland Islands has announced that it will hold a referendum on its "political status" in 2013, in a bid to scupper Argentina's long-standing claim to sovereignty over the islands. David Cameron has been quick to say that the UK government will support the result of the vote, which suggests he has an inkling of how it's going to turn out.

And why wouldn't he?  If you take several thousand people of British extraction and plunk them down on a piece of uninhabited territory, and then spend millions of pounds (and hundreds of lives) in defending them, how would you expect them to vote?

A Kim Jong-Il style 99.9% result is inevitable but will prove absolutely nothing. Argentina knows perfectly well that the islanders consider themselves British.  Buenos Aires's claim to the territory is based on its geographical position.  It's not a strong claim;  the islands have never been occupied by Argentines, and even their "Argentine" name,  las Malvinas, is a reference to the French fishermen from St Malo who landed there centuries ago.  The referendum will solve nothing,  unless the aim is to rile not just Argentina but most of Latin America as well.      

No comment necessary

The Government is to call for an end to what it describes as an "it's not my fault" culture of excuses, which has allowed 120,000 "troubled families" to avoid taking responsibility for their own lives. (Independent on Sunday, 10 June)

“Our recovery, already facing powerful headwinds from high oil prices and the debt burden left behind by the boom years - is being killed off by the crisis on our doorstep.” -- George Osborne

The economy is already in a double dip recession. Mr Osborne’s blunt rhetoric suggests he places the blame for the economy’s failure to grow squarely on the shoulders of countries - particularly Germany - which have so far dragged their feet over the eurozone crisis. (Sunday Telegraph, 10 June)

Vulture culture

Isn't capitalism wonderful?

So-called "vulture capitalists" are reported to be flocking to Madrid, looking to pick up "distressed assets" from beleaguered banks for as little as 20 cents on the Euro.  The term "vulture capitalists" is evocative enough, but in truth doesn't quite convey how this particular group of worthies makes its living.  In nature, carrion birds wait patiently for their victims to die before descending to eviscerate them.  In modern markets, by contrast, the vultures play an active part in killing the victim,  using techniques such as naked short selling, before pouncing on the corpse -- sorry, the "distressed assets".

At one level this looks quite acceptable, if a bit Darwinian.  One group of capitalists, the Spanish banks in the current example, have got themselves into trouble through a series of bad decisions, so now another group of capitalists, the vultures, turns up to grab choice assets at knockdown prices.  'Twas ever thus. The problem is, this is not just a bloodsport among consenting adults.  There's a whole lot of collateral damage along the way.  We're not just talking here about "distressed assets", a phrase that evokes visions of fainting virgins in a Restoration drama.  There are also distressed people whose lives,  fortunes and dreams are getting put through the shredder, and distressed nations facing lost years and even decades to get back to the living standards they so recently took for granted.

When the writedown of Greek debt was agreed a few months ago,  vulture capitalists who had snapped up  bonds at distressed prices refused to go along with the restructuring, gambling that the Greek government would not take the risk of a court action that could have torpedoed the whole deal.  They were right: Greece had no choice but to pay them out at full value.  In any other context that would be called blackmail,  but in the bond business, it's just canny investing.  The hundreds of millions that Greece paid to keep the vultures at bay could have been used to boost the economy or at least to keep the deficit in check. The fact that the Greek rescue package may now be on the brink of falling apart is at least in part due to the vultures -- and you can rest assured that they're circling again, waiting for their next feed.

Isn't capitalism wonderful?                

Will they call them "Osbonds"?

According to The Guardian, Chancellor George Osborne has asked the Treasury to come up with a scheme to encourage individual savers to invest in a new type of bond that would be used to finance infrastructure development.   The government may agree to "take the first loss" on any deals that go bad, in order to keep the level of risk to individual savers at an acceptable level, and may offer tax breaks similar to those on the existing ISA (individual savings account) scheme.

The fact that this idea is under consideration probably means that hopes of getting pension funds to step up to the plate for infrastructure financing are fading.  Indeed, the latest data suggest that these funds have been stepping back from the sector, in the UK and elsewhere.  Getting individual savers involved seems like a decent alternative, although the setup and administrative costs could be very high.

But aren't the banks going to scream blue murder? The existing National Savings & Investment (NS&I) programme,  which used to provide investors with a variety of risk-free ways of lending money to the government, has been under sustained assault from the commercial banks ever since the financial crisis, because it had the temerity to offer rates higher than those that the banks themselves saw fit to pay.  The government -- i.e. George Osborne -- has bowed to the pressure from the banks and forced NS&I to withdraw much of its product range.

"Osbonds" may be even more inimical to the banks' interests.  Not only will they compete for individual deposits, potentially boosting the banks' funding costs; they will also make it harder for banks to compete for the financing of infrastructure projects, which are generally a low-risk, long-term asset that's very nice to tuck away on the balance sheet.

Boosting infrastructure investment is such an obvious way of getting the economy moving that Osborne should ignore the cries of woe from the banks.  But when it comes to the crunch, will he actually dare to do that?        

St Albans, twinned with Aberystwyth (and Detroit)

The pleasant Welsh university town of Aberystwyth is ending a disastrous year-long experiment. In their wisdom, the town elders decided last year to fire all the traffic wardens, believing that decency and common sense would cause the citizenry to park responsibly and safely even without the threat of a ticket.  Bad call! With the wardens off the streets, the locals all turned into John Terry, parking wherever they liked and turning the town into a chaotic hell-hole. Now the wardens are coming back, to the relief of all concerned.

Here in equally pleasant St Albans, we could have saved them the trouble. A number of years ago, our parking wardens staged a long strike.  With the regulations unenforced, the result was mayhem, and there was great rejoicing (maybe I'm overstating the case a bit) when the tubby guys in blue were back on the prowl.

Not that the return of the wardens has put an end to all parking grievances in our fair city.  The big issue: people don't want to have to pay for the privilege of stashing a ton of metal by the side of the road.  Parking for free seems to be some kind of human right, which the local council messes with at its extreme peril.  One gent from a nearby village wrote indignantly to the local paper last month that the twice-weekly St Albans market was no longer on his must-do list, thanks to the parking charges.  The opportunity to take part in something that has been a tradition in the city for more than a thousand years, and to support local farmers and businessmen, is as naught compared to the outrageous imposition of having to pay a pound to park his precious steed.

Elsewhere in town, there is outrage at the local council's attempts to stop visitors to the ruins of Roman Verulamium and the (unruined) Abbey from parking on the grass verges in order to avoid parking charges.  One local councillor warned that the City could not afford to be seen as unfriendly to visitors, though it's not clear why we want to be friends with the kind of people who won't pay for parking:  those cheapskates probably bring their own sandwiches too.

It's not just in parking that St Albans leads the way.  Recently the once-great city of Detroit announced that it would be dousing a lot of its streetlights to save money.    Hey, Motown, get with the program!  Here in St A, the local council started doing that some time ago, and very well it's gone too.  The sensors initially installed on the lights -- all 40,000 of them across the county -- were faulty, and had to be replaced, and there were stories from all over the area of lights turning off mid-evening, and not at midnight as they were supposed to.   However, Detroit may avoid that fate, as it's going down a cheaper route -- almost half of the city's streetlights have failed anyway, and they're simply not being replaced.   Let's hope St Albans council doesn't get wind of that.