Pound Slumps Over Fears Of Election Stalemate

(Telegraph) – THE VALUE OF THE POUND fell sharply on Monday as financial markets took fright at the growing possibility of a hung parliament.

Sterling fell by almost 3 cents, ending the day below $1.50 for the first time in nearly a year amid fears that Britain will be left with a weak government unable to cut spending and balance the budget.

Fears that no party would gain an overall Commons majority led to warnings that the pound was “staring into the abyss” and would fall further still. Figures suggest that traders are placing huge bets on more declines.

The markets’ growing fears about Britain’s economic prospects follow a slide in the Conservatives’ opinion poll lead over Labour. Recent surveys have put the Tory lead as low as two percentage points.

An Ipsos MORI poll last week suggested that Labour could cling on as the biggest party in the Commons.

Within minutes of London trading starting on Monday, the pound’s value began to slide.

At one point, it fell as low as $1.4781, the lowest level since May 1 last year. It rose slightly to finish at $1.4939 at 4pm — a fall of 2.85 cents. The slide also showed in the euro, which was worth 90.22p. Traders are unlikely to be reassured by a ComRes/Independent poll today that puts the Tory lead at five points, suggesting Labour would still have the most MPs but fall short of a majority.

Audrey Childe-Freeman, of Brown Brothers Harriman, a New York bank, said: “The risk of a hung parliament is increasing. You will need a government with a strong majority to push ahead with reforms that the UK needs.”

Simon Derrick, a currency strategist at Bank of New York Mellon, said: “The likelihood that we’re going to move to a rapid lessening of the deficit is being taken away.”

Mark O’Sullivan, of Currencies Direct, said: “As the pound drops, the currency markets appear to have run out of patience. Sterling could be staring over the edge of the abyss.”

Some investors fear that a hung parliament and a minority government would lead international credit ratings agencies to downgrade Britain’s status, making it more expensive to raise funds. A weak pound also drives up the cost of imports.

One international bank, Bank of Tokyo-Mitsubishi, predicted the pound would fall towards $1.40 this year.

A bank spokesman, Lee Hardman, said in a report that the worst outcome for the pound would be Labour clinging to power as a minority government because of the party’s high-spending agenda.

He wrote: “A Labour victory would further damage the fiscal credibility of the UK given their reputation for loose fiscal policy.”

Some currency traders also believe that the pound will come under greater threat if Greece’s crisis-stricken government is bailed out by other European Union members.

If Greece is rescued, some investors believe Britain is the European economy most exposed to market concerns about government deficits.

Gordon Brown angrily disputes comparisons between the UK and Greece, but independent analysts point out that the UK budget deficit this year is forecast to be 12.8 per cent of gross domestic product, comparable to Greece’s.

Downing Street and the Treasury refused to comment on the market movements. Privately, senior government officials have been contacting City banks to reassure them about plans to cut the deficit.

In a City speech last night, Lord Mandelson, the Business Secretary, accepted that Britain was “now unavoidably in significant debt”. But he said Labour was right to put off spending cuts until next year.

The Tories declined to comment. But the party has warned that the City will react badly unless they gain a substantial majority.

As the pound falls, the interest rate on gilts, British government bonds, is rising. That will ultimately push up the interest rates for loans.

Data from the Bank of England also showed that foreign investors sold off the most British bonds for nine months in January. Foreign investors sold £1.5 billion of gilts more than they bought during January, the figures showed.

On Tuesday the Treasury will sell off a new tranche of gilts. Investors said the strength of demand for those bonds would be a key indicator of market confidence in Britain.

Banks Facing Commercial Property Meltdown

(BBC) – AT THE HEIGHT of the property boom in 2006, Shrewsbury’s shopping centre was sold for £118m with only six of its 135 units lying empty.

The value of shopping centres had soared as money poured into commercial property.

Four years and one slump later, 29 units are empty in Shrewsbury’s centre which was sold last month at a price believed to be half of the 2006 figure.

All over the UK, negative equity is now widespread in the whole of the commercial property sector – one informed estimate says it could be as much as £50bn.

In the case of shopping centres, it is now common for centres to be worth less than the cash loaned by banks to allow the owners to buy them during the boom.

“£10bn worth of shopping centres are capable of being put into receivership, should the banks so wish,” said Mark Williams, of consultancy DTZ, who charts the buying and selling of shopping centres for BCSC (British Council of Shopping Centres).

He added: “That is one in five shopping centres in the UK.

“I’ll stress we don’t think the banks will put that volume into receivership.”

According to property consultant Andy Lamb, negative equity loans are so prevalent there is even a brand new jargon term in the business, the ‘Scooby loan’.

Mr Lamb said such loans refer to companies who re-financed their loans when the market rose but found themselves in negative equity when it fell.

“The income is just about servicing the debt….the loan and the loan values are completely underwater and that is called a scooby loan,” he said.

“What it means is a scuba diver i.e. he’s underwater but he’s still breathing, just!

“Because he can meet the interest payments, all other banking criteria are shot to pieces.”

William Newsom of property consultancy Savills has been trying to estimate how much negative equity there is in British commercial bank loans.

Basing his research on six monthly data compiled by DeMontfort University Leicester, Mr Newsom estimates a figure of £38bn worth of negative equity on investment properties. But this could rise to £50bn if the drop in land values on development property is considered.

“It is enormous,” he said, “but it could be significantly more.”

“It has never been seen before to this order of magnitude. It is 25% of the entire lending book in round terms.”

Such losses would devastate the balance sheets of the banks who offered the loans, according to Mr Newsom, who says banks are doing all they can to help under-pressure borrowers keep afloat.

The alternative is that if the company goes bust, the losses on the loans will turn up on the bank’s accounts.

“There a lot of banks out there who are burying their heads in the sand and not admitting the extent of the problems that they have, for obvious reasons,” said Mr Newsom.

But the British Bankers’ Association rejects claims bankers are hiding their losses.

“UK banks are subject to one of the most open and robust accounting regimes in the world and the full extent of their liabilities is open for everyone to see when they publish their accounts annually.”

The association added: “Banks make commercial decisions about the loans they grant and the repayment terms they impose. They lend based on the ability to repay.

“For large scale commercial property deals terms and conditions are individually negotiated and unique to that project.”

Banks have been renegotiating loan terms and extending loan periods hoping that the problems would be resolved in what is known as “extend, amend and pretend” or “delay and pray”.

Conor Downey, a specialist banking and commercial property lawyer with city firm Paul Hastings said not all loans could easily be extended.

During the boom a large number of so-called securitised loans were issued for property investors, and he said they were far less flexible.

He warned that a spate of forced sales was likely when these complex loans mature in the next two years.

“It is estimated there are 150 of these transactions across Europe, and about half are British.

“Each one runs to hundreds of millions of pounds in some cases billions,” he said.

He said securitisations accounted for between 15 and 25% of all property lending at the peak of the market.

As the number of these forced sales grows this will further depress prices in the commercial property sector making it harder for banks to cover their losses, squeezing the cash they have available to lend to businesses.

“Banks are required by government to maintain certain amounts of cash….to protect them against the risk that a very large amount of their investments go bad.

“As these loans go bad the amount of capital they have available to the banks will decrease unless they can raise it again on the markets so in the long term it will reduce the ability of banks to make loans at the same levels as they have historically,” said Mr Downey.

Economist Roger Bootle said banks were in a double bind, “I think it looks pretty bad whatever they do.”

He added, “I don’t think there is any way the government can dig the banking sector out of the difficulties with regard to commercial property whatever happens.

“There have been some pretty duff loans, the banks are going to register some pretty nasty losses and it’s not really a big surprise because it was a massive boom stroke bubble and someone’s got to pick up the tab.”

Britain’s Banks Downgraded By Standard & Poor’s

(Telegraph) – BRITAIN’S BANKS are no longer regarded as among the most secure in the world as the Government has failed to introduce proper safeguards in the wake of the global credit crisis.

One of the world’s biggest credit ratings agencies said that Britain’s ongoing “weak economic environment” and Gordon Brown’s failure to properly reform the financial system had led to its unprecedented decision to “downgrade” Britain’s banks.

The warning from Standard & Poor’s sparked an immediate slump in the stock market and the value of the pound last night.

The international creditworthiness of the country’s banking system is now on a level which is equivalent to poorer countries such as Chile and Portugal.

It could now cost banks more to borrow money on the wholesale financial markets – with consumers facing higher prices for mortgages and loans as a result.

The downgrade underlines the growing concerns over Britain’s financial state among international investors and is a major embarrassment for the Prime Minister just days after Britain only managed to limp out of recession.

Earlier this week, official figures showed that the economy grew by just 0.1 per cent during the final three months of 2009 – compared to expected growth of 0.4 per cent or more.

The downgrading of Britain’s banks could be followed by the entire country’s credit-rating being reduced. The credit-rating determines the cost of borrowing on international financial markets.

A downgrade would mean the Government has to pay more to borrow money which could have a major impact on the country’s finances.

In a statement released yesterday, Standard & Poor’s said: “We no longer classify the United Kingdom among the most stable and low-risk banking systems globally.

“This is due to our view of the country’s weak economic environment, the reputational damage we believe has been experienced by the banking industry, and what we see as the high dependence on state-support programs of a significant proportion of the industry.”

The ratings agency also warns that the high debts of the British government and consumers are likely to lead to banks accumulating losses.

Standard & Poor’s also implicitly criticises the Prime Minister’s response to the banking crisis. “In our view, enhanced regulatory oversight and reform of the framework for financial stability remains incomplete,” it said.

Britain’s banks were previously comparable with those in countries such as France and Germany. However, they are now considered less secure than Italy and Belgium. Over the past few centuries, the British banking system has been regarded as one of the best, and most secure, in the world.

Standard & Poor’s also warned that the banks may face a further downgrade if Britain “fails to strengthen” by tackling “persistent budget deficits”.

There is increasing criticism among financial experts at the Government’s failure to announce detailed plans for public-spending cuts to reduce record levels of public-sector borrowing.

Last night, Mark Hoban, the shadow financial secretary, said that the Government needed to take urgent action. “This is disappointing news and demonstrates the need for reforms to the banking sector so that we don’t repeat the mistakes of the last decade. Our reforms should help restore the reputation of the UK banking sector.”

The Prime Minister’s spokesman refused to comment on the Standard & Poor’s report. However, he said: “The Prime Minister and Chancellor have both made it clear that it is encouraging that the UK economy is coming out of recession.

“Every country has to have a regulatory framework that is appropriate for its banking system.”

Global business leaders are currently meeting in the Swiss resort of Davos where banking reform is high on the agenda. Mr Brown and Alistair Darling, the chancellor, have criticised radical plans unveiled by Barack Obama to break-up American banks.

President Obama has proposed that banks are no longer able to trade on the financial markets using their own funds following criticism of their behaviour in the run-up to the global credit crisis. This would make banks more secure.

However, the proposal is being vigorously opposed by banks – who are about to unveil huge profits, and bonuses for many staff, over the past year.

Yesterday, the heads of 30 banks including Barclays and HSBC held a private meeting in Davos to discuss how to rebuff the growing calls for new regulation.

Mr Darling, the Chancellor, travelled to the Swiss resort last night to warn banks that they must change their behaviour and culture.

The British Government has provided more than £1 trillion in support to the banking industry and taxpayers now own majority stakes in RBS and Lloyds Banking Group.

Last night, the FTSE-100 index of the country’s biggest companies fell by 1.4 per cent to close at 5,145. The stock market has now fallen by almost five per cent this month.

Sterling also fell against the dollar and yen.

“Sterling has come off aggressively in the wake of the Standard & Poor’s statement,” said Steve Barrow, head of Group-of-10 currency strategy at Standard Bank.

“The pound is vulnerable, especially against the dollar and the yen.”

Exodus Of Bankers Is A ‘Price Worth Paying’

(Guardian) – A SENIOR BANK OF ENGLAND OFFICIAL says that bankers moving overseas to avoid the bonus super tax could be a price worth paying to achieve lasting reform of the sector.

Andy Haldane, the bank’s head of financial stability, also said that banks had become too big and was sharply critical of a culture where bankers could take huge risks in the knowledge that the taxpayer would bail them out.

In an interview with the BBC World Service, Haldane said: “Some of the downsides of carrying around a big financial system are now evident to all.

“If some of that were to migrate overseas that would be unfortunate but given the costs of carrying that financial system around, it may be a price worth paying.”

His comments underline the gulf between Threadneedle Street and the City over how to deal with the fallout from the financial crisis.

In the Bank’s financial stability report published today, officials stepped into the row over bonuses by calling for banks to build up their capital rather than making large payments to staff as many are expected to do despite the sector being bailed out by the taxpayer.

Earlier this year the governor, Mervyn King, suggested that the largest banks should be split in two in order to separate the retail part from the high risk investment bank divisions.

Haldane said that the effort to reform the City should not be delayed.

“It’s true that the lobbying effort of the financial sector should not be under-estimated. Equally, the way to beat that back is by appealing to logic and to evidence.

Disputing the argument used by bankers that they need to be big to compete globally, he said: “There is not so much as a scintilla of evidence of bigger being better in banking …. A lot of the noise around that really is rhetoric,” he said.

“So in most industries we do think that bigger and wider delivers a better product for the end user. I think in banking the evidence on that is close to non-existent.”

“And we do know at the same time that bigger certainly isn’t better when the going gets tough. Bigger during this crisis has meant bigger bailouts not better bailouts.”

Haldane also spoke about what he described as a “Doom Loop” where banks take risks knowing that the state would bail out the sector because it was too important to be allowed to fail.

“It’s a loop we’ve been round repeatedly over the last 200 years which is that every time we have one of these events, the public sector has ridden to the rescue, it has written the cheque.

“And that has rather fortified the financial sector to double their bets for next time which means that when next time comes the cheque needs to be that much bigger … It will be a long-run battle.”

Bank To Pump 25 Billion Pounds More Into Economy

(Reuters) – THE BANK OF ENGLAND EXPANDED its quantitative easing programme by £25 billion to £200 billion today, continuing its unprecedented scheme to revive Britain’s recession-hit economy.

Sterling shot up around a cent against the dollar and government bonds tumbled as many investors had expected a bigger expansion of the eight-month-old programme to buy assets, mostly UK government bonds, with newly-created money.

The BoE, which also left interest rates unchanged at a record low of 0.5% as expected, said the bond-buying would take another three months to complete and analysts said that would probably mark the end of the programme.

‘We suspect that this will be the final extension to the QE programme unless the economy suffers a major relapse in 2010,’ said Howard Archer, economist at IHS Global Insight.

While the BoE noted that numerous surveys had indicated that a pick-up in the economy was in sight, it still believed the prospect was for ‘a slow recovery in the level of economic activity.’

‘That will continue to bear down on inflation for some time to come, offset in the short run by the impact of the past depreciation of sterling,’ the BoE said in a statement.

Two-thirds of analysts polled by Reuters had predicted the central bank would expand its asset-buying scheme, but opinion had been split evenly on whether the increase would be £25 billion or £50 billion.

‘The Bank seems to be weaning the market off QE and we strongly suspect that, barring any further negative surprises to economic growth, this will be the last instalment of the programme,’ said George Buckley, economist at Deutsche Bank.

Britain’s economy remained mired in recession in the third quarter. The United States, Germany and France have already started growing again.

FSA To Ban ‘Liar’ Home Loans

(Reuters) – THE FINANCIAL SERVICES AUTHORITY plans to force mortgage lenders to check the income of all borrowers, scrapping so-called ‘liar loans’ blamed for helping to fuel bad debt problems at the heart of the credit crunch.

In a long-awaited review of the mortgage market published today, the FSA said it would impose affordability tests for all mortgages; but stopped short of imposing ratio limits that could have effectively banned loans for 100% or more of property prices.

The review, which reflects a more intrusive style from the FSA, criticised for failing to prevent last year’s financial crisis, also banned products with ‘toxic combinations’ of characteristics and arrears charges when a borrower is already repaying.

It called for the FSA’s scope to cover buy-to-let (landlord mortgages) and all lending secured on a home.

‘The FSA needs to ensure that firms only lend to people who can afford to pay the money back,’ Jon Pain, managing director of supervision for the regulator, said. ‘The reforms that we have announced today will ensure that the mortgage market works better for consumers and that it is sustainable for firms.’

The FSA’s discussion paper will be open for consultation until the end of January, with the next statement, on industry feedback, to be published in March.

What Credit Crunch? Bankers Gorge On Bonuses And High Risk Mortgages Are Back

(Daily Mail) – BANKERS HAVE ALREADY FORGOTTEN the lessons of the credit crunch, it was claimed last night.

They were accused of recklessly returning to the practices that tipped the world economy towards meltdown only a year ago.

Executives are queuing up to collect multi-million pound bonuses and lenders have launched a hard sell on 95% mortgages, triggering a price war on the high street.

Politicians accused banks of ‘gorging’ themselves on the back of the taxpayer guarantees that were used to bail them out.

Their anger was stoked by the news that Goldman Sachs’ 5,500 bankers in the UK are in line to pocket £440,000 each after the business revealed a three-fold surge in profits.

In a separate move, banks and building societies attempted to light a fire under the property market.

The Nationwide began promoting its 95% home loans and also cut the price of 34 mortgage deals by up to 0.84%.

This followed a move by the UK’s biggest bank, HSBC, to promote a number of 90% home loans. Other major lenders are expected to follow suit.

The idea that ‘business as usual’ has returned in the Square Mile was met with consternation by politicians of every hue.

Critics point out that Goldmans and other survivors of the 2008 crash can only earn such sumptuous rewards because governments and taxpayers now provide a guarantee that they will not be allowed to fail.

Last night Business Secretary Lord Mandelson said the City was witnessing an ‘unacceptable return’ to past practices.

He said that the Financial Services Authority could step in to force banks to increase their cash stocks if they are deemed to have handed out excessive rewards.

‘Goldman Sachs and other banks operating in London know that governments around the world, across the G20, have taken decisions and adopted standards which they want to see implemented by every bank,’ he told Channel 4 News.

‘That means not returning to the bonus culture that led banks astray in the past and if they persist in excessive bonuses then the FSA have the power to set that against the capital requirements that they can impose on these banks.

‘We are seeing, if all these deals go through with these bonuses, an unacceptable return to the sort of behaviour that got banks into so much trouble in the past.’

John McFall, Labour chairman of the Treasury Select Committee, said: ‘There’s a lot government money sloshing around the system, which firms like Goldman are gorging on.

‘The industry has said it is going to change, but in fact, it’s back to business as usual.’

Vince Cable, Lib Dem Treasury spokesman, said: ‘People will be rightly furious to see Goldman Sachs paying out bumper bonuses just 12 months after it was bailed out by the U.S. government.

‘It is farcical that so soon after the reckless greed of bankers brought the world economy to its knees, we are seeing a return to business as usual.’

Tory Treasury spokesman Mark Hoban, said: ‘Public money should be used to build up bank balance sheets, not to pay out huge dividends and bonuses.’

The outcry came after Goldmans revealed that it is on course to shower nearly £14 billion on its workers.

The Wall Street giant, which has repaid a £6.3 billion emergency taxpayer loan, saw its profits leap 277% to £1.96 billion between July and September.

Some high-fliers could earn bonuses of millions, thanks to the commissions the bank is ‘earning’ for advising the Government.

In the British mortgage market, banks and building societies are now taking off the lending shackles.

Nationwide is reducing the interest it charges on 34 of its mortgages for those buying a property from today, cutting them by an average of 0.23%.

It is also cutting legal fees and registration fees for customers in a effort to drive up home loan applications and house sales.

The group’s four-year fixed-rate loan for those borrowing 60-70% of their home’s value will see the biggest reduction, dropping from 5.78% to 4.94%.

Historically, a loan to value figure of 80% was considered a prudent figure. However, the last boom saw loans from all the major lenders of 100%.

The Nationwide deals will allow new customers buying a home to borrow up to 85% of the value. Existing borrowers who are moving home will be able to borrow-up to 95%.

The society believes that loans of up to 95% are valid where they have a long relationship with a customer and they know about their income and spending patterns.

It said that it has always offered a 95% mortgage. However, it stopped promoting them once the credit crunch struck, and it also made them unaffordable by imposing very high interest rates.

Now, it is beginning a hard-sell of these deals and making them more attractive by charging the same interest rate regardless of the loan to value.

Nationwide’s mortgage director, Andy McQueen, said the cuts in rates and fees are about helping people, particularly first time buyers.

HSBC said it was offering 90% loans on the basis of its belief that the housing bust is over.

Goldman’s extravagant rewards come at a time of rising unemployment and extraordinary strain on family budgets.

Finance director David Viniar said: ‘We’re very aware of what’s going on in the world, but we have to trade that off with being fair to our people who have performed admirably throughout this crisis.’