Eurozone economics

[Gluestick]

Interestingly, Cathy, I was deeply involved in a major Irish financial project (capital restructuring) in 1979-80 and sort of commuting backwards and forwards for a bit.

I came away with an intense admiration for what they were going to achieve with their economy.

IMHO, the negative attitude towards the EU in Ireland has a lot to do with them being wrist smacked by the EU for being "too successful" and suffering fincacial and fiscal sanctions.

The EU, loves states like Italy, Portugal and Greece, let alone those Slavic and Eastern European states waiting in the wings!

Nothing like some misery economics and fiscal basket cases to encourage rising taxation and EU handouts....................

[Www]

[breizh]

I understand B&B are making a separate cash call in order to repair their balance sheet, something in the region of GBP250M, which in relation to it's mortgage book of GBP40B, and a deliquencey rate of 2.1%, is not a lot. TGP provide a strong partner which will provide the interbank system with a degree of comfort, thereby allowing access to funds at less punitive rates than B&B would acheive as a stand alone entity.

Whilst I understand the arguements regarding encouraging borrowing short and lending long, I have never subscribed to them. "Worst case scenario, my boy, worst case scenario" as my first boss told me, in this case what happens if they can't roll over the loans? However, to date the biggest losers in the credit crunch by far have been the Germano/Franco bloc banks. The archtypel conservative Swiss and German bankers. The free-wheeling Brit and US bankers have got away relatively lightly, looking forward the profit warnings are thin on the ground, and the debt financed companies that I have (by necessity) a close symbiotic relationship with, are all bearing up well, with further funding being opened up to them, as and when, they need it. In essence some of the facts do not fit the standard historical financial crisis models. The interbank markets have all those PetroDollars looking for a home, so they can't stay tight for ever.

The Chinese have turned themselves into international business lepars. They have a monoploy position in the supply of Phosphorus products, they upped the price by 200%, and stuck 200% export duty on the products in the space of 6 weeks. Net result, every customer of any Chinese product now makes sure they have 50% alternative supply, however low the Chinese price seems at the time. Would you bet your PetroDollars there? Talk about not understanding markets!

(I admit a professional position as a Credit Analyst, based in France, for a German company)

[Gluestick]

Please study the demise of Continental Illinois Bank in the 80s: and the comments from Paul Volcker.

A classic case of Borrowing Short to Lend Long which nearly tripped the ultimate domino effect.

[quote]in this case what happens if they can't roll over the loans?[/quote]

Err, it has already happened!

The Bank of England has had to bail out the banking sector: which in the end costs us all dear.

They were stuffed with new un-securitised loans and couldn't package them: and couldn't borrow any more on the interbank market!

Those lovely Petro Dollars are increasingly gravitating to Asia, as the OEPC producers distrust of the US $ increases and they seek an alternative value pricing model.

In any case, since they are wholesaled down in to the money markets by major deposit takers and the Arabs in particular demands such as ICC290s rather than CDs or any other form of deposits, any increasing squeeze on liquidity and uncertainty, may well have a pretty dramatic consequence.

 

[breizh]

[quote user="Gluestick"]

Please study the demise of Continental Illinois Bank in the 80s: and the comments from Paul Volcker.

A classic case of Borrowing Short to Lend Long which nearly tripped the ultimate domino effect.

[quote]in this case what happens if they can't roll over the loans?[/quote]

Err, it has already happened!

The Bank of England has had to bail out the banking sector: which in the end costs us all dear.

They were stuffed with new un-securitised loans and couldn't package them: and couldn't borrow any more on the interbank market![/quote]

That was my point, I did not go along with the herd, and we as a company have no non performing investments, absolutely none. Absolutely agree with you regarding Borrowing Short and Lending Long, pity NR, UBS and CreditSuisse didn't listen. However I do not accept the arguement that these loans are all 100% toxic. Deliquency rates in the US are currently topping at 5.3%, as an average, which would suggest a value of 94.7% of the original asset as more appropriate. You could make a damn good arguement that buying up these loans at the 95% discount rates currently being quoted would be the financial killing of all time! Not a bet I'm willing to take though. (Sorry currency markets are not my strong suite, I'll have to take your advise on that area, re the PetroDollars.)

[ams]

Talked to my 2 sons the other day and both are voting NO.

 

ams

[Logan]

[quote user="breizh"]

I understand B&B are making a separate cash call in order to repair their balance sheet, something in the region of GBP250M, which in relation to it's mortgage book of GBP40B, and a deliquencey rate of 2.1%, is not a lot. TGP provide a strong partner which will provide the interbank system with a degree of comfort, thereby allowing access to funds at less punitive rates than B&B would acheive as a stand alone entity. [/quote]

I am in agreement with breizh and take the view that private equity where profit is the motive is gold standard investment. Yes they may break up the institution in the future and sell bits of it on. So what? That's free market capitalism. SWF's on the other hand are different and much more sinister in my view. Not only are they investing for 'ownership' but I believe some also have a hidden political dimension. It does not take a rocket scientists brain to work out what that could be. I know that money and politics are part of the same mix but SWF's worry me. They worry me because in the unique circumstances of the sub-prime crisis, it's the SWF's who have rushed quickly to bail out so many US institutions. The spectre of some oil rich Arab states with nuclear ambitions and public statements that the 'USA is the great satan', rushing to that should make us all feel uneasy. 

[Gluestick]

[quote]So what? That's free market capitalism.[/quote]

Which can only work with certain controls and interventions, Logan.

Besides which, post Big Bang the UK has not enjoyed reciprocity.

And the core problem with unfettered capital's greed is that eventually, it leads to an effective feudal state; as well as the insanity of Enron, Tyco, Worldcom, Drexel Lambert,  Long Term Capital Management et al.

I must say I do find your perspective rather disingenuous: if it's fine for groups of rampaging, asset-stripping capital to take over key and core assets, why the beef over SWFs?

They have capital: they are buying assets. That, as you say, is capitalism at work.

 All major corporations enjoy "Political ambitions" and worse, unfair special interests. The Oil and Gas Lobby are perhaps the best example. And worse, they are unelected and unaccountable.

No doubt you are not all unhappy to be paying the current extra-ordinary price for vehicle fuel and heating? Capitalism once more. Certain groups are worried about the future and have hedged by scooping up Oil, Product and Gas futures. They have capital and have bought paper assets.

Same with food commodities, such as grain and rice.

So what does it matter that tracts of the poor in Asia will soon be out with the begging bowl?

Serves them right, eh! They should have migrated to Wall Street and become capitalists.

You can't, sadly, have it both ways!

 

[Logan]

No Gluey in my opinion it's not the same. SWF's are state assets mostly derived from oil revenues. It is not private capital. You may think that's splitting hairs. However who actually has power and control of those assets? The cabal of dictators and men dedicated to the downfall of western civilisation. Not accountable corporate management or share holders who's only motivation is weath creation. I think there is a difference there.

I know you feel the corporate world is out of control but the Enrons of this world don't survive for long. I accept a lot of damage gets done in the meantime and it's regrettable but again that's capitalism. Regulation and excessive contols will not make for a more prosperous world. It would just employ a few more functionaires and send investment elsewhere. The negativity is far and away outweighed by the positive effects free market capitalism brings, warts and all. 

Capitalism will always have negative and positive effects on us all. Markets rise and fall, most of us learn to live and plan for that. Prosperity helps the first world to help out the third. Regulate greed and you will remove the motivation, incentives and hope. The result of that is suffering everywhere.

[Gluestick]

But you want regulation against SWFs, but not against what you describe as "Private Capital".

Surely, we could level the same accusations of "Bringing down Western civilisation" against the major oil and gas companies?

And others?

And just how are not the oil and gas giants cabals? They have been price fixing for years. And how are they accountable? They are so huge with annual revenues greater than all except a few World states, they make their own rules.

Look at what Aramco and the US government did to Aristotle Onasis!

Look what McDonal Douglas acting on orders from Reagan's government under instruction from Thatcher did to Sir Freddie Laker!

As an example, they have acted in concert with CIA and the US government over Chavez: which is illegal.

All financial markets inevitably need levels of regulation and state-led intervention. Look at US history and the railroads and the vast excesses of John D Rockefeller led to the US government being compelled to pass the  Sherman Anti Trust Act to reign in their power.

If not, then the USA today, would have been 99% owned by railroad barons and Rockefeller! Forsooth! He even had his own subway station in New York!

It seems to me that you rather want the nice fuzzy warm bits of capitalism you like!

Yet not the bits you don't: but no regulation.

 

[chessie]

What lovely, intelligent, reasoned arguments...I have enjoyed all these posts.

I'm just an ordinary little ex-worker drone...with a little house that I own, and a little bit of savings and pensions....But I am desperately worried for the future - because I have a daughter and grand-children. And while the arrogant EU corrupt lot are in charge; while there are Sovereign Wealth Funds who DO have different perspectives on world affairs than other types of Capitalist Funds - then I worry deeply for the future of the world.

I can see mass starvation because of the stupidity of the EU CAP; also the EU bio-fuels idiocy is going to cause even greater starvation worldwide. The EU is a malign and evil influence. Unfortunately most of us worker drones are just so enmeshed in coping with our own lives that we are just sleep walking into disaster - and the media, the BBC, the whole damn lot of them are as bad as any SWF.  Because behind the EU there is the Bilderbank (?) - and there is a growing class of elites who care nothing for us 'ordinary's' - but my daughter and her grand-children will have to live with the consequences of what our generation has - and is allowing - to happen. And I am deeply ashamed of the legacy we will leave behind.

But it is enjoyable to read such interesting and knowledgeable posts - please continue.

Chessie

[Logan]

[quote user="Gluestick"]

But you want regulation against SWFs, but not against what you describe as "Private Capital".[/quote]

I did not say that! I am against any form of regulation which restricts free market capitalism. However I think corporate and political America ought to be made aware of the dangers of some SWF's and their potential for disaster. As far as I am aware the State Department have made no such demand for restrictions against the origin of foreign investments currently flooding into the country. They block and screen individuals but not money. That's a political leadership issue. At the moment that's missing in the USA. Money is far more corrosive than people.

Gluey, I know it's possible to quote endless historical corporate disasters. The list is endless. They were wrong then and they are probably wrong now. However that's not a reason to legislate, legislate and build restrictive humps in the road for today and tomorrow. Your examples read like a New Labour political manifesto. Reacting and legislating every time the media highlights a problem. Laws should not be made in such a knee jerk fashion.

Business is about risk. Risk is anticipating the pitfalls of what might go wrong and then trying to ameliorate it when it does. You either win and do well or it goes pear shaped and you move on. That's life in business and long may it continue. The alternative of feather bedding capitalist risk is in my opinion unthinkable. It simply won't work. France is a perfect example of that.

There are always concequences when markets fail. I believe we as individuals learn a little each time it happens and try not to repeat the same mistakes. However subsequent generations always try to buck historical experience. That's their call. That is the challenge which motives most of us in our lifetime, time after time.

Failure and success are twin bedfellows, two sides of the same coin. I personally cannot imagine a life living without risk. Fuzzy capitalism is not something I recognize.

You write well as a socialist and yet protest your capitalist pretentions. I am confused where you really stand. Those two poles just will not marry. 

[Logan]

[quote user="Gluestick"]

Same with food commodities, such as grain and rice.

So what does it matter that tracts of the poor in Asia will soon be out with the begging bowl?

Serves them right, eh! They should have migrated to Wall Street and become capitalists.

You can't, sadly, have it both ways! [/quote]

The current rising food costs in the world are caused by a combination of high demand through increased prosperity in the Asian sub-continent and China. (Successful capitalism bringing wealth creation.) Plus the crazy policies of sustainable, traditional agriculture being replaced by bio-fuels funded through subsidy. 

[Gluestick]

Logan, I must say I enjoy our debates which emerge from two people with developed perspectives who however are in diametric opposition on certain aspects of capitalism!

Additionally, it's very refreshing that two adults can participate in such dialogue with no need to descend to vitriolic ad hominem attacks and juvenile insults.

Long may it continue.

I am always amused when extreme right capitalists award me the perjurative sobriquet of "Socialist", as nothing could be further from the truth. I am factually anapolitical, since to me, politics is a process of mainly self-serving hot, self-adulation, self-aggrindisement and above all else, slavering incompetence.

Analysis of how idiot politicians manage to screw up societies and economies however, is another matter entirely.

Quite a few years ago I was regularly in correspondence with Andrew Alexander, the well know columnist, whom I much respected for his incisive nalysis of City affairs and his prescience. Before he became a City Editor, he was a Political Editor and had spent much time with politicians, cabinet ministers and PMs and he once sent me a short comment which said, "You are falling into the trap of attributing intelligence to politicians: don't!"

C'est la vie !

I cannot imagine a World in which there was no regulation, Logan.

The Bank of England setting interest rates is regulation: perhaps you would far rather the markets handle this via LIBOR?

The bank also enjoys sole rights to issue currency: perhaps we could allow all banks to print their own currency, as happened prior to the Bank Act?

Let's face it, why on earth should Northern Rock and B & B have to struggle for capital when they could simply start printing fifty pound notes!

Problem solved.

Let's also decide that Adrian Cadbury and his chums were and are fools and disband the FRC and the Auditing Practices Board and the Accounting Standards Board too, since the whole structure came about because of Cadbury.

Next we'll sort out those crazy old duffers at the London International Stock Exchange. Anyone in future will be able to float companies when and how they like. I have a great idea for a new company I am going to call the South Seas Company. It'll be a winner!

And whilst we're at it, let's set fire to Companies House: load of morons; what a waste of a busy capitalist's time! All that red tape. In future anyone will be able to set up a company, take in loads of capital from the gullible, float it the next week, raise millions and there you are.

Or probably more correctly, there you won't be, because if you have any sense you'll be hiding in Belize or Paraguay! Or Northern Cyprus like Asil Nadir.

Returning to relative sanity, however, all dynamic systems need checks and balance; or, if you like, some form of moderation.

If not, then like a nuclear pile,they are liable to run amok. It is sadly, a harsh reality of life and the momentum of interactive dynamics.

Most forms of regulation, such as Sarbanes-Oxley come about after an excess of greed overrules moral instinct.

In the frenetic global village of capital markets, certain controls and interventions become inevitable.

I believe it was Balzac who said, "The law is the crystalization of the prejudices of the majority." So be it.

At this time, despite the earnest or apparently earnest protestations of Norman Fowler and later others, serious pension reform has yet to happen.

Thus we have many thousands of men and women, past retirement age whose pensions were stolen by either incompetence or deceit.

This problem became so big, that Government were forced to compensate the injured, from the public purse.

Standing back from this matter, it is perhaps best to consider that the original directors have enjoyed seriously good lifestyles: destroyed pension member's own subscriptions and now Government is paying out our taxes in recompense, whilst increasing numbers of state pensioners et al live in increasing fuel poverty yet still pay such as Council Tax and income tax!

Workers of Turner and Newell and Ferodo in the UK, suffered great losses when the US parent company went into administration.

Another nice game for rapacious capitalists! Buy the business and its assets from the administrators for cents on the dollar, with the pension liability stripped out!

Hey! The NPGC (Federal Pension Guarantee) will pick up the tab. Except the cash calls have become so large, it's skint!

Meanwhile, Karl Ican, the rapacious hostile corporate raider and asset stripper adds to his billions. And in the UK, the already insolvent Pension Benefit Guarantee Corp is inundated with claims!

A simple change to pensions law, "Ring Fencing" both contributary and Non-Contributory pensions, would have saved all this nonsense and us, the taxpayer, from yet more expense.

I forecast this problem, with company pensions, way back in the early 90s, since in the meltdown, bank's corporate carewards were wheeling in their tame actuaries and telling company clients to take a pension holiday and withdraw cash (to reduce the bank's exposure, of course!). Lord Hanson and other asset strippers were raiding acquisition's pensions funds as a matter of course. Wheel on the tame actuary: job done.

No wonder there's no cash to build any decent roads!

What we learn from history, Logan, is hopefully how to avoid the same things happening time and again.

Perhaps we can say, in conclusion, that regulation moderates the worst excesses of greed and incompetence; nothing more and nothing less.

 

[Gluestick]

[quote user="Logan"][quote user="Gluestick"]

Same with food commodities, such as grain and rice.

So what does it matter that tracts of the poor in Asia will soon be out with the begging bowl?

Serves them right, eh! They should have migrated to Wall Street and become capitalists.

You can't, sadly, have it both ways! [/quote]

The current rising food costs in the world are caused by a combination of high demand through increased prosperity in the Asian sub-continent and China. (Successful capitalism bringing wealth creation.) Plus the crazy policies of sustainable, traditional agriculture being replaced by bio-fuels funded through subsidy. 

[/quote]

A majority of analysts and commentators as well as the UN ascribe a large part of the problem to hedge funds et al buying forward commodity contracts when they have no intention of taking physical delivery and aren't in that business anyway.

The suddenly booming profits of a number of food players are also worthy of consideration.

Google it: lots there.

 

[Logan]

An enjoyable read once more Gluey even if I can't agree. However we do have some common ground on our opinion of politicans. Politics can in the hands of some be a force for good in the world. Problem is historically the list is very short especially in this modern era where legislation and regulation seem an epidemic.  

The current food crisis can be overcome in my view with more efficient agriculture especially in Africa and parts of Asia. The huge demand side could be supplied if investment and expertise moved into agriculture in areas of the world where only subsistence farming currently exists. There are some documented cases where this has already successfully taken place. It's simple economics. When the demand increases it become viable for capital to move in and supply that demand for profit. Problems always create an opportunity. A similar example are the north sea oil fields. Now being extended and developed as a direct result of the high oil price. If too much regulation and restriction is forced upon venture capitalism it will simply move elsewhere.

Unfettered capitalism supplies solutions to human needs. Politicians and regulators mostly get in the way and make those solutions more complicated and sometimes impossible.  

[Gluestick]

Ummmm.....

Are you familiar, Logan, with the vast new sugar project in the Sudan, a few years back?

Funded by Saudia, as the two Islamic states held commonality in North Africa and the ME.

Back in the late 70s, I worked for a time with a Sudanese lawyer who was sort of attached to our company in the City, as the Chairman had adopted him as part of his normal process of ripping off the peripatetic naive when they came to the big bad City.

The project was a total unmitigated disaster.

It didn't really help that whilst it was aimed at the ACP states, the then global over-supply caused seriously significant downwards pressure on prices.

Examination of the South American project, charitably funded by the late Daniel Ludwig to the tune of more than $1 billion is also worth consideration.

That failed too.

One of the core problems with Africa is the "Unfettered capitalists who have moved in.................." etc, etc.

Their first step is usually to pay off the President and then agree his compensation in a Swiss bank, of course.

Unfortunately, right at present, unfettered capital is creating far more problems for humanity than it is solving.

The Sub Prime fiasco in the USA is one excellent example.

The Sovereign Loan biz in the late 70s (mainly through the Eurobond market; again totally unregulated, hmm?) to Third World states in Latin America didn't solve any human problems. It did make some bankers very wealthy. And local politicians.

However, not only has the subsequent destruction of the rain forest in the vain attempt to repay the obligations had a knock-on effect to the whole World, it has kept the population of the debtor states in abject poverty in the main, to this day.

Monsanto et al's way of solving the Third World food problems has much enriched Monsanto.

Hasn't made much impact on global poverty and hunger, however.

 

[Logan]

If you were an amateur statistician Gluey and researched in depth how often a project goes wrong and how often a project goes right and delivers real benefit to mankind. I think you would be surprised.

The history of man is littered with disasters and triumphs. That’s how we achieved a civilisation. Trial and error. War and peace et al.

Society and I mean global human society is made up of those who want to achieve something, those who want to steal or hurt something and those who want us all to believe in something. As well as those who’s only desire is to live from the labour of others.

Of course it’s possible to be pessimistic about any idea and quote historical disasters. However if you let that beat you none of us would move on and try to buck the trend. Nothing would get done. Society would move backwards.

It’s called optimism, motivation and incentive. When things go pear shaped we learn, change and adapt, then move on.

I do not doubt for a moment that the examples you quote turned out to be disastrous projects for whatever reason. However we humans learn from mistakes and experience. We actually try not to repeat the same errors again.

Your pessimisms perhaps come from clearing up the mess others leave behind. I understand that. Unfortunately it is also a core root of cynicism.  

Thankfully for us all however, new generations of entrepreneur will always have the enthusiasm for success and risk. Failure for them is unthinkable.

They just need to be left alone to achieve it.