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Consumers celebrated a victory yesterday against payment protection insurance providers after the Competition Commission concluded a two-year investigation into mis-sold policies.
There has been mounting criticism over the way banks and credit card companies have been selling PPI with loans and mortgages. The insurance is intended to protect the consumer in the even they are unable to make payments due to sickness, unemployment or injury.
The Commission, however have now ruled that lenders had an unfair advantage selling PPI policies with credit products, when a cheaper policy may be found elsewhere. Their findings has resulted in PPI providers being banned from offering policies with credit cards or loans.
Starting from 2010, banks and other companies who offer loans or credit must observe a 7-day period before they can sell PPI to the borrower.
The Commission have also banned single premium PPI, which combined the cost of the loan with the insurance meaning the consumer paid interest on both.
Consumers have been complaining for years about the way in which PPIs are sold. The costs and terms of the policy are often not fully explained and only 11% of policyholders are eligible to claim. People who are unemployed, self-employed or who have a history of back problems for instance, will not eligible for cover.
Debts.org is among other consumer interest groups in welcoming the new ruling. This website has already been running a claims management service for people who have been mis-sold PPI and expects many more to be applying for compensation as a result of this extra publicity.
The British Bankers Association, however, had some grievances with The Commission’s decision. A spokesperson argued that in times of uncertainty surrounding job security, insurance cover was a must for anyone with debt. Adding; “It is totally without conscience to encourage people to borrow without back up. This is an irresponsible decision exposing vulnerable customers to economic difficulty when they may need help most.”
It has to be said, however, that The Commission was not implying cover was unnecessary but rather that the way it was sold was unfair to the consumer. Consumers would be advised to buy payment protection insurance after shopping around for the best deal and in full knowledge of the terms and conditions.
Lloyds gave first time buyers some hope last week by reintroducing a 95% mortgage. Before the bunting is put up and the street party commences, however, take care to note there is a condition to their generosity – parents must stump up their savings as guarantee.
First time buyers’ relying on their parents to help them obtain a mortgage is nothing new but the devil is in the detail of this new offering from Lloyds. To be eligible for a first time buyer mortgage – aka Lend a Hand – parents are required to invest 20% of the value of the property into a fixed-rate savings account with
Lloyds for three-and-a-half years.
No small matter, but then Lloyds have two reasons to be fussy. Firstly the market is still fluctuating and unemployment is a growing threat therefore prudence is expected. Secondly, not many other lenders are willing to offer 95% mortgages. Halifax for example, pulled out of the market in November. While Clydesdale Bank and Yorkshire Bank are offering 95% loans, their interest is 6.99% compared with just 4.39% on the Lloyds deal.
So how does it compare to Lloyds pre-housing crash first time buyer mortgage? Say your son or daughter wants to buy a £200,000 property. Prior to the crisis,
Lloyds would have asked for a 15% deposit or £30,000. Lloyds, under the new deal, are currently asking for a 5% down payment or £10,000. Thus making repayments on the 95% loan £1,044 on the £200,000 property.
The parents, however, back up the purchase by depositing £40,000 in a Lloyds savings account at 3.5% interest. While this is a reasonable level of interest, it isn’t the best on offer — Birmingham Midshires pays 4.35% — and the cash is tied up for three and a half years.
The danger with Lend a Hand is that if the home needs to be repossessed, the house and the savings disappear into the bank’s coffers.
A parent who has the cash and is willing to help their child get on the property ladder may be better contributing to the deposit which will ensure a lower interest rate.
The market-leading rate on a three-year, fixed-rate mortgage is 3.95% from Market Harborough building society. The deal has a £999 fee and is available for borrowers with a 25% deposit.
If your child has a deposit of £10,000, as in the Lloyds example above, parents would have to put up £40,000 towards the deposit to get the Market Harborough deal, but monthly repayments would be £787 — £257 less than the Lloyds deal.
Credit card companies have been criticised for increasing interest rates at a time when consumers are suffering under the weight of recession. The Financial
Ombudsman Service, who received scores of complaints over the past year, reported that virtually all complaints were upheld resulting in compensation for the customer.
Numerous credit card providers such as the Nationwide building society and the online bank Egg increased interest rates on some individuals by as much as 10%. The FOS are reported to have received more than 18,000 complaints over credit cards alone in the year to the end of March. Of this amount, 75% of complaints were upheld.
Yet for complaints pertaining to interest rate hikes in particular, almost all cases were upheld resulting in credit cards paying their customers compensation.
In their investigation into credit card interest rate increases, the FOS asked providers to complete a questionnaire outlining how the risk assessment was conducted and their reasons for imposing tougher lending costs.
“Almost all the credit card companies subsequently chose to settle the complaints that had been brought against them, rather than have our investigation continue,” the FOS said.
This year, Egg raised its rates by an average of 4.39 percentage points. Some customers saw their rates rocket from 16.9% to 21.9%, while Nationwide lifted its rates by as much as 2 points to 19.9% two weeks ago.
Complaints about credit cards have surged in recent years. The Financial Ombudsman Service reported a 30% jump in disputes this year, an increase of 14,000 in 2007-8. A figure all the more striking when compared to the mere 2,650 complaints averaged over the previous four years.
Mortgage lenders gave little cause for cheer today as figures revealed gross lending dropped to £10.4bn in April, down 9% from the previous month. It also represented a huge 60% drop in total lending value from April 2008.
The Council of Mortgage Lenders (CML) were quick to put a brave face on the statistics saying that figures were affected by the Easter holiday, however, they conceded that both March and April lending had fallen by 57% compared with the same period last year.
Director general of the CML, Michael Coogan, insisted it’s still too soon to declare the housing market as fully recovered, despite suggestions from other commentators. Coogan described activity as “weak” saying: “Our forecast for gross lending of £145bn in 2009 remains unchanged.”
It isn’t all gloom and doom from the CML, who reported an rise in mortgage lending for March to £11.5bn – an improvement on £9.9bn for February. It also said 31,000 loans were approved in March compared with 24,000 in February.
The CML data reinforce the belief of many economists that the housing market has turned the corner and passed its low point. That said, the recovery will continue to be gradual with a few more stutters along the way given very poor economic conditions and tight credit criteria.
House prices look likely to fall further in most parts of the country but the rate of decline to appear to have steadied to something more progressively moderate. Economists expect house prices to fall by another 15% with hopes pinned on a mid-2010 bottom out.
While homeowners are understood to be anxious about falling values, the truth is for the market to recover prices need to drop well below 2007 prices. At their peak, house prices could not be sustained due to stagnant wage levels so a drop in values like we are witnessing is a bitter pill to swallow but a pill all the same.
Estate agents have reported increased interest from potential buyers since the beginning of the year and yesterday the chief economist at the Royal Institution of Chartered Surveyors said the market was “nearing stabilisation.” Simon Rubinsohn optimistically forecasted house prices to stabilise from around July of this year with the overall decline reaching 25%-30%.
All hopes depend on a relaxing of the credit restrictions impose by banks, which are still keeping many interested buyers out of the market. Mortgage lenders are insisting on large deposits or small deposits at high interest, which is especially difficult for first-time buyers.
Add to this the problem of unemployment and it is clear there are a few hurdles left to jump before we can say without any doubt that the housing market has fully recovered.
The recession has left no stone uncovered and almost every area of the country has seen the scars left by the economic crisis.
The Office of National Statistics has released figures that show the extent of the problem in the worst affected areas.
Unemployment rates have been soaring in Birmingham, the worst affected of the country’s large cities, where the number of people claiming Job Seeker’s Allowance (JSA) more than tripled over the past 12 months.
The largest jump in people claiming benefits due to unemployment have been found in the North, West Midlands and north of the border. These areas, known for manufacturing, have been hit particularly hard and there is no sign of a recovery happening fast enough to safeguard existing jobs.
The number of unemployed workers rose most significantly in:
The above list of small to large-scale cities tells only part of the story. Council areas on the outskirts of many of these cities are suffering sharp rises in unemployment, which is especially harsh given that these areas were bypassed by the last decade of prosperity. The fact that many council areas were untouched by the more affluent years has left them particularly vulnerable to the recession.
Naomi Clayton, senior researcher at The Work Foundation, has called on policy makers to deal with the recession on a local level and not just for the cities. Ms Clayton warned policy makers to “ignore how recessions play out locally at their peril”.
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Chancellor Alistair Darling boldly predicted Britain’s recovery will begin in October, saying the economic slump will stabalise in the last quarter of the year. Many will be hoping his forecast is correct, not least the Government itself with a general election just being over the horizon.
Mr Darling clearly has ideas much distinct from the The National Institute of Economic and Social Researc, who last week predicited economic growth won’t resume until 2012.
That said, some economists support the Treasury position: for instance almost half the City analysts polled this week by Reuters thought Britian’s economy will at least stabilise in the last three months of the year – some even predected a resumption in growth.
The Bank of England’s recent report is one reason for optimism. Banks have agreed to start lending to families and businesses in the months ahead. With rising unemployment however, whether families will be looking to borrow when job security is at risk, remains to be seen. Similarly, companies are trying to cut costs with many making redundancies in order to stay afloat – for those companies, borrowing must be off the agenda.
Across the Atlantic, some ecomomists are cheered by President Barack Obama’s recent statement. The President said he sees “glimmers of hope” for a recovery.
Globally, optimism is also on the rise. The Organisation for Economic Co-operation and Development said last week that despite world wide GDP contractions, all major economies are experiencing “tentative signs of improvement” – most notibly in France and Germany.
Signs of green shoot recovery in Britain will do little to lift the sombre mood of an otherwise gloomy Budget. The Chancellor is ready to conceded that during a year-long contraction that started last year, Britian’s economy shrank by more than 3%, the steepest fall for a generation.
We can expect tax rises over the long term as well as substantial spending cuts for the public sector in a bid to balance the books over the coming six years.
Whitehall are currently in negotiations to offer £2,000 to people trading in used card for new models. With redundancies on the rise however, the Government would be aswell offering a discount on around-the-world vacations.
Mr Darling’s prediction of a last quarter recovery is three months later than his previous prediction made last November. Since that time he has amended his statement, admitting he ‘under estimated’ the severity of the recession. Time will tell if he needs to adjust his recovery timeline yet again.
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Halifax have been accused of manipulating the mortgage market to their own advantage, after customers complained the building society were unvervaluing their property.
Downward evaluations mean customers seeking to remortgage their homes are no longer eligible for the best mortgage deals and instead have to pay a higher interest rate. Halifax charges 5.29% for a five year fixed mortgage if there is equity of 5% or less in the property. This compares to a very competitive 3.99% for equity of 25%, a difference of £2,600 a year on a £200,000 home loan.
Mortgage brokers have continually warned homeowners that 40% may yet be wiped off the value of their property, although prices have fallen by an average 21% from the summer 2007 peak, according to Halifax’s own house-price index.
Government pressure on banks to lend to customers has been considerable ever since the £750 billion bailout. The intention of the bailout was to encourage lenders to issue loans to low risk borrowers and attract a new wave of first time buyers into the market. However, the Halifax controversy appears to suggest underhand conditions are being imposed which means even low risk borrowers cannot access the best rates.
HSBC have already committed £1 billion in loans to borrowers with deposits of 10%, as part of the £15bn it pledged to lend this year. HSBC are offering a very competitive fixed rate over five years at 3.99%.
Yet one Sunday Times reader complained her application was refused despite having the required 40% equity. The apparent reason was because she did not have 75% of the value of her mortgage in savings — £160,000.
Financial adviser Neil Avery of Timothy James, said: “We’re increasingly finding that what lenders are saying and what they are doing is very different. The outcome implies Halifax is working the property market to its advantage.”
Mortgage brokers have witnessed some alarming incidents of downward evaluations. They claim thousands of customers on Halifax’s cheap two-year deals taken out just before the 2007 credit crisis are now applying to the bank for a “transfer deal”. Brokers, however, have been shocked at the manner in which
Halifax has slashed its online price index by thousands of pounds within the space of a few days.
The building society then offers existing customers transfer deals at interest higher rates.
Mr Avery told a familiar story of one client living in an expensive London home. “On Friday their property valuation according to the Halifax’s computer system stood at £1.3m. This was already down 19% on what the client paid for the house two years ago,” he said.
“Halifax published its new valuations on Tuesday, just three days later. The house was worth £965,000 — a further correction of 25%. This will mean the couple pay about £290 a month more, or £14,000, over the next four years,” Avery said.
Halifax defended their price indexing system claimin it reflects changes as the the market fluctuates and any complaints would be dealt with on an independent basis.
Britain’s economy is thought to have contracted by a further 1.5% in the first quarter of the year, prompting many economists to compare this recession with that of 1979.
One of the most respected trends forecasters, the National Institute of Economic and Social Research (NIESR) estimated that our economy contracted 1.5% between January and March. If accurate, our situation has remained unchanged since the last quarter of 2008, when GDP dropped 1.6%.
The Office of National Statistics (ONS) are expected to publish data on the 24th April that will confirm the pessimistic view that the economy has not improved.
The state of our gross domestic product bears striking similarities with the recession Margaret Thatcher faced in 1979. NIESR stated: “If the 1980s profile were followed, output would continue to decline for up to another year and it would take two further years before the level of output enjoyed at the start of 2008 would be reached again.”
Figures yesterday showed British manufacturing sector shrank the most since records began in 1968 in the first quarter of 2008. Much of which was attributed to the ailing car manufacturing sector – production fell by over 30%, say the Office for National Statistics. Generally, manufacturing contracted by 12%.
If there is any good news to be gleaned from this information it is that manufacturing’s output was not as bad as predicted. Production shrank by a smaller than anticipated 0.9% in February, which is a marked improvement on the 3% drop in January – the lowest decline for six months.
Economists are hoping that the rate of decline is starting to moderate, encouraged by February’s figures.
People with debt problems have been given 30 days breathing space thanks to a new agreement between The Credit Services Association (CSA) and the government.
The CSA, the national association for debt collection agencies, met with the government in a bid to help solve the growing debt crisis. The government has been increasingly concerned about the amount of people who are refusing to seek professional debt counselling or advice. It is hoped the new 30 day rule will encourage debtors to seek professional help and establish repayment plans with creditors.
The CSA are prepared to allow debtors 30 days breathing space, starting from the date they are contacted by a debt counsellor informing them that they are in consultations with the debtor. This agreement is set to come into effect by the end of May 2009.
A spokesman for the CSA has admitted however, that in some case the 30-day agreement actually imposes a tighter timeframe on the debtor. He said: “It was not untypical for this to have gone beyond 30 days,” said a spokesman for the Credit Services Association (CSA).
The majority of consumer debt is for unpaid utility bills, credit cards and banks loans.
“This new 30-day rule will give people a breathing space to help them take control of their finances as well as encourage them to seek help from debt advisers,” said Consumer Minister Gareth Thomas.
Debt collection firms prefer when the person with unpaid debt has contacted an advice service because it demonstrates a willingness to repay. The new rule will now be added to the CSAs code of practice that all 300 of its member must follow.
The CSA have estimated that the average debt per head may currently be £27,000. In reference to claims that the recession is something of a jackpot for debt collectors, CSA director Kurt Obermaier, insisted that this was not the case.
“We also need to recognise that even though the volume of debt being put out for collection - the number of cases - will far exceed last year’s total of 21 million, that does not mean a bonanza time for collectors,” said Kurt Obermaier, director of the CSA.
“There will simply be more people who cannot rather than will not pay, and therefore more money lost to the economy.
Consumer debt tends to hog the headlines while commercial debt goes largely ignored. The amount of money lost to the economy because of unpaid business debts is an entirely different prospect. What the government hopes to achieve as a result of this new agreement however, is simple – to recoup money back into the economy.
The new clause in debt collection comes at a time when people with low incomes and few assets are able to clear debt under another government initiative – Debt Relief Orders.
As of April 6, people with debt below £15,000 and who do not own a property can avail of a Relief Orders. For more information, click Debt Relief Order.
The world economy received a major boost in the shape of a $1.1 trillion pledge to the international community yesterday. The rescue package was given a warm reaction by most who believe the G20 member, who met in London, have put in place measures that will “stop the rot”.
While Alistair Darling, Chancellor, warned “thing will not be fixed overnight”, there was a very real sense among the 20 leaders that the global economy has turned a corner and the gloom of recession is evaporating.
Stock markets reacted immediately to the news that the big twenty had promised to plough $750 billion into the International Monetary Fund (IMF) sending stocks into new highs around the soared. The IMF will give emerging nations access to $250 billion of emergency reserves as well as an extra $250 billion in credit for trade finance.
Gordon Brown, who hosted the London summit, said: “This is the day that the world came together to fight back against the global recession.”
The Prime Minister and President Obama played an instrumental role in convincing other G20 members to increase the resources available to the IMF, which helps countries that get into difficulties. The IMF is to receive $750bn into their coffers for the purpose of lending money to struggling nations as and when they determine.
It is also contributing $250bn to help counteract the contraction of global trade and fight protectionism.
G20 members also agreed on new measures that will regulate financial institutions and promote transparency, especially in tax havens, which up until now have not disclosed information.
It may sound like a lot of new money, but the reality is much of the $1.1 trillion is already circulating in existing programmes and tied up in export guarantees in wealthy countries, with just $50bn available to poorer nations.
However, the pledge of $250bn in free money from the IMF is a surprising new development, but just $19bn will be made available to the poor countries.
Greater transparency for tax havens and more stringent regulations will cheer a lot of people but Luxembourg has already been told they will not be affected by the new measures. Pay caps and codes of practice are undoubtedly a good thing, but it’s a case of bolting the barn door after the horse has bolted - at least until the next crisis.
The downturn in the world economy is gaining speed so the cash injection given to the IMF won’t be enough to pull us out of recession. Plus, only some of the money given to the IMF will be lent out, and importantly it will have to be repaid with interest.
In the past interest has been as high as 30%, which makes it impossible for developing nations to repay it and prosper at the same time. When they default on mortgages, many countries have had to relinquish control of their natural resources.
The reality is the banking system is broken. Obama asked us to picture the banking system in hospital where it is receiving care but it seems they are rubbing salt into the wounds. Banks are asking us to borrow, when we really need to save and the US government is asking the world’s nations to lend them money, when really they would be forgiven for running a mile.
It is interesting to see how far countries will go in continuing fiscal stimulus programmes. Gordon Brown for one has said that Britain’s stimulus initiative would total $5 trillion by next year.
Gordon Brown has been using the term “new world order” in many speeches since he became Prime Minister and yesterday’s stimulus package was another opportunity to remind everyone that the world is heading towards a global currency.
The G20 did not, however, discuss a one world currency at this meeting but with China asserting pressure for its introduction it won’t be off the agenda for long.
Especially as China continues dominate production exports to the USA and Britain, where the currencies are faltering.
Nor was the subject of global imbalances mentioned, such as the need for China to spend more and the US to save more. In fact, the US seems set to continue its spending spree by printing more money, give more bailouts and encouraging its consumers to buy cars.
Peter Schiff, the American economist who is nearing legendary status after his accurate predictions from as far back as 2004, said “The government should be encouraging us to save, not spend. Asking us to buy cars when we fear losing our jobs is like asking us to put swimming pools in our yard”.
The first rise in house prices since 2007 has been met with muted reactions after the price of the average home rose 0.9% last month compared with a 1.9% decrease in February.
The shift in property values takes the average house price in Britain to £150,946.
Nationwide Building Society were quick to down play the significance of rising house values, saying there was not enough evidence to show that the market had bottomed out.
Economist Howard Archer at HIS Global Insight said, “Housing market activity remains extremely low and any pick up in activity over the coming months is likely to be gradual and fitful.” He went on to say that he fully expects property prices to fall by another 12% in 2009 due to the ever-increasing unemployment problem. “House values could drop 5% in the first half of 2010, taking the total slide from the peak in October 2007 to 31%”, he added.
On the subject of interest rates and quantitative easing, Nationwide’s chief economist Fionnuala Earley believes it will take time before we see the benefits of such measures filtering into the housing market.
News of rising house prices came hot on the heels of figures showing a rise in mortgage approvals – the highest level since May last year. Home loan approvals for the month rose to 37,900, above the average 32,000 per month in the second half of 2008. While encouraging, this level remains “far below” Nationwide’s average.
Meanwhile, Halifax was quick to dismiss January’s rise in house values as just a blip. Joining economists and rival mortgage lenders in the belief that more evidence of a recovery is still to be seen.
February gave hope to many as the number of mortgage approvals leapt by almost 20%. It also marked a time when borrowers repaid a record amount of their debt, said the Bank of England.
Home loan approvals hit 37,937, up from 31,791 in January and above the six-month average of 31,500 – the highest level since May 2008, the Bank of England said.
The record amount of loans being repaid is an indicator of the insecurity sweeping the nation. Consumers are bracing themselves for tough times as wage cuts and job losses make the headlines on a daily basis. Repaying debts has suddenly become a priority in incase redundancy strikes, making net loan repayments the highest on record.
Britons repaid £245 million in credit during February, compared with a net borrowing rise of £165m over January.
People also seem determined to save rather than spend. Building Societies reported a steep increase in deposits last month as consumers came looking to safeguard their money. Deposits of £1,595m were deposited in building society accounts during February - the highest February net receipt on record.
Brian Morris of the Building Societies Association said: “The record February net receipt of £1.6 billion shows that building societies’ attractive savings products are helping them to compete for deposits. Despite the bank rate being so low people are still keen to save, probably in response to the uncertain economic outlook and reduced job security.”
Gross mortgage lending by building societies in February was £1,214 million, compared to £3,861 million in February 2008.
The surge in mortgage approvals has attracted a positive message from many economists who are quick to suggest the worst may be over for the housing market. Vicky Redwood, of the UK economist at Capital Economics, however said for house values to stop falling the pick up activity would have to be substantially greater. House prices have tumbled by 20% since the market peaked in summer 2007.
“Housing market activity may finally have turned a corner. This might suggest that the pick-up in new buyer enquiries is feeding through into actual activity.
With new buyer enquiries still rising, this is clearly quite promising,” she said.
“However, approvals have a long way to go before they get to levels that are no longer consistent with falling house prices.”
Britain’s recession is marginally worse than forecasted according to figures recently released. Gross domestic product (GDP) for the last quarter of 2008 was down 1.6% and not 1.5% as forecasted.
The sharp decline is being contributed to the building sector, which has all but collapsed making the recent figures the worse quarter on quarter performance since 1980.
Annually, the GDP dropped by 2%, above the 1.9% previously expected, marking the worst year-on-year fall since 1991, when Britain was last in a recession.
The declining demand for new houses has been something of a wrecking ball to the ailing building sector. It’s therefore no surprise that the sharpest decline over the last quarter of 2008 was in this sector.
To give a little more perspective on the extent of its problems, output in construction industry swooped by 4.9% during the final quarter of last year compared with an earlier estimate of 1.1%. Slowdown in manufacturing hit 4.5% in comparison with the 1.8% fall in the previous quarter.
Consumer expenditure was down 1% over the same period but government spending rose by 1.3% at the end of last year - 4.4% above the same period in 2007.
Britain has been in a recession officially since January when the Office for National Statistics revealed that GDP had contracted during two consecutive quarters - the technical definition of a recession.
The International Monetary Fund (IMF) extinguished hopes last week that the UK economy would see some recovery by Christmas this year, instead it predicted the recession would continue into 2010.
The IMF forecasts that GDP will fall by 3.8% this year, a great deal worse than the initial expectations of a 2.8% contraction. It went on to say that the GDP will shrink by a further 0.2% next year.
Spencer Dale, chief economist at the Bank of England took a different outlook yesterday, when he said that “economic conditions may start to improve later this year” when the “substantial” stimulus begins to take effect.
Howard Archer, chief UK and European economist at IHS Global Insight, warned that consumer spending will be under greater pressure from rising unemployment, currently at 2.03 million and expected to peak at 3.3 million by the end of 2010. As a result, income growth is expected to falter.
Gordon Brown’s plan for another stimulus package was dealt a severe blow yesterday after the Government failed to sell gilts for the first time since 1995.
The Prime Minister had hoped the sale of government gilts to investors would raise the money necessary to borrow billions of pounds. Instead there is fear within the Treasury and in the City that Britain will not be solvent enough to repay the huge mount of debt it has already acquired for the purpose of bailing out banks.
For the first time in over a decade, investors refused to take up the full complement of gilt-edged bonds sold at an official auction. Gilts are financial instruments that the Government sell to raise funds for public spending or to fund borrowing. Issued by the Treasury, investors can expect to receive an annual rate of interest from the Government in what is considered to be the safest way of investing.
Brown’s government are planning to increase public spending as well as make tax cuts, designed to get the country out of the grips of recession.
The shadow chancellor, George Osborne spoke for many when he expressed his grave concern for Britain’s economic future. He said: “The failed gilt auction, the first for many years, should be of real concern to everyone.” Adding, “It is too early to say, but the risk is that at some point the Government will not be able to fund its huge debts.”
The Treasury is usually oversubscribed with investors looking to snap up government gilt bonds, however, yesterday’s performance at auction served as another reminder of the dire straits we are in as a nation – interest was said to be at the lowest ebb in history.
Once knock on effect could be that Britain’s credit rating could be cut, which makes any future borrowing more expensive. Interest rates on the Government’s debts rise when gilt prices fall.
David Cameron, the Conservative leader, warned that we could face an even longer recession. He said the gilt auction was a “worrying sign, because higher interest rates will increase the cost of paying for the national debt and could deter the investment we need to get us out of this recession. That would make the recession longer”.
Britain’s national debt is forecast to rise to more than £1 trillion by 2013, with the PM already having scrapped the usual “golden rules” that limit public borrowing.
Going into the G20 summit in London, Mr Brown was expected to encourage other nations to stimulate the growth by revising their financial approach to the recession. He may be forced to change tact if his gilts remain left on the shelf.
Mr Brown already has a tough challenge ahead. Many of his European counterparts are increasingly concerned about scale of borrowing being embraced by the USA and Britain.
Mirek Topolanek, the Czech prime minister, who held the presidency of the European Union as part of the six-month rotation system, called the Anglo-American recovery plan a “way to hell”.
In what may already be seen as a 180 on public spending and tax cuts, Mr Brown appeared to support quantitative easing as the preferred means of rescuing the economy.
Quantitative easing is the practice of ‘printing money’ in order to inject finance into the economy during times of economic crisis. The Bank, having already lowered the base rate to 0.5%, has undertaken some quantitative easing as a means of buying £75billion worth of assets. But will quantitative easing work?
Printing money – although in reality the money is credited electronically – is what happens when the government believes there is insufficient money circulating the economy.
Therefore quantitative easing is to increase the money supply to consumers through banks. The ultimate aim of this practice is to force banks to lend to consumers, to reboot the stagnant property market and increase spending, which safeguards jobs.
This new money will be used to buy corporate and government bonds, but whatever it is used for the goal is to reduce the cost of borrowing. The Bank of England had hoped cutting interest rates would revive the economy but 6 successive rate cuts to a historic 0.5% has failed to cut the mustard.
Quantitative easing and hyperinflation are easy bedfellows. While the threat of unparalleled inflation may be a couple of years away, increasing debt to solve a debt problem is only going to come back and haunt us. Larry Bates, a former bank CEO described it as “crack cocaine for the economy.”
There is the danger that pouring new money into the economy may see inflation take off and the value of our currency take a nosedive. Picture carrying your money in a wheelbarrow next time you visit Tescos.
Central bankers on both sides of the Atlantic assure us however that this will not happen and if you don’t believe them just take a look at their track record so far (sic). This comment is not meant to be pithy, but rather point at the absurd notion that we can count on bankers to fix the problem they not only initiated but have been unable to control.
When the economy has enough money poured into it through quantitative easing, they will turn off the tap and turn their attention to steadying the ship. Sounds reasonable but in practice is it really that simple?
For instance, who are the banks expected to lend money to? Most consumers are threatened with redundancy and are knuckling down to pay off their debts quick smart. People who are interested in buying a house will hardly be willing to take on a mortgage for a property that may be in negative equity by the time they move in. Also, what about businesses? Are banks really going to fall over themselves to give credit to a company who may fold at any time? All of these scenarios are unlikely.
It is time for cool heads, which is a tall order when a walk down the high street provides first hand evidence of a recession. Shops and other small businesses are closing up every day and the evening news provides more evidence of how deep and far reaching this recession is moving.
All of which doesn’t take away from the fact, however, that attempting to solve a debt problem with more debt is not the way forward.
Worryingly, the general policy (if you can call it that) is “act now and worry about the consequences later”.
You could say is it precisely this type of gun-ho attitude that got the world into this mess in the first place. Capitalism has burnt fingers and a more cautious approach to correcting the economy is what’s required. Already people are cutting back on luxuries and conveniences, embracing a new way of thinking about spending and starting new behaviour patterns.
One of the ways in which the government has attempted to kick-start the economy has been to punish savers. Interest rates on savings accounts are almost down to zero, which is hoped to force savers to spend. In actual fact, savers are looking offshore and to alternative investment products, such as bonds, rather than spend.
Pensioners are the only social group likely to use their savings for spending because they have no jobs to lose. If they are financially comfortable they will give their family some of their savings earnings to spend, therefore cutting interest rates is counter productive.
Many economists say Britain needs a period of saving not spending. High interest rates would attract savings that would then eventually be inputted into the economy though spending. It would also allow people to reduce debt.
Related article: 2009: The Year of the Great Recession
The International Monetary Fund announced this week that the global economic crisis would cause the world’s economy to contract for the first time since the Second World War. The IMF was careful not to create panic in an already volatile situation, so avoided using the word that we all dread being associated with the economy and instead used the term ‘great recession.’ ‘Recession’ on its own seemingly falls short of describing the predicament we are in.
The recession is indeed shaping up to be more than an average recession, such as the one experienced in the 90’s. But really the word that the IMF could have used, the most appropriate but the most feared, is ‘depression.’
It doesn’t take a degree in business and economics to know that companies are almost unanimously cutting back, reducing or abolishing capital investment and expenditure frills, which inevitably hurts other companies’ earnings. To take an example at random, restaurants are feeling the squeeze as businesses have stopped taking clients out for lunch.
Companies are also freezing or reducing wages and are certainly culling their workforce when necessary. Businesses are also reducing spending in order to pay back creditors.
As the US follow Britian’s lead with quantitative easing – the Federal Reserve are to ‘print’ $2.2trillion – the governments of the world hope that this last and drastic measure will stimulate growth. Which means they hope banks will start lending to each other as well as to consumers again, which in turn means the mortgage market will be revived and consumer spending in general will boost the economy.
Again you don’t need to have a degree to realise that it’s not as cut and dry as all that. Can banks realistically be expected to lend to people who already have debt they cannot afford – which after all started the problem in the first place. Are people going to rush into the property market while house values continue to fall? Much of the western world had what can be called ‘fake wealth’, in other words they had thousands of pounds in credit and a huge mortgage on their large house.
This group of people have already woken up to the fact that they weren’t as comfortable as they first thought and now with unemployment looming they are desperate to get out of debt – fast. Do the banks expect this group of people to come knocking for more loans?
The FT put it this way: “Now the tide has gone out, $50 trillion of perceived wealth in the US (stock and real estate) has fallen to below $30 trillion, leaving a
critical £25 trillion of debt stranded … Bankers today want more, not less, cover.”
Then there are the businesses. Does the Fed realistically expect businesses to apply for more lending when they are simply trying to survive? Even if they have a good credit history and present a low risk option, not many banks will want to lend while the recession is just gaining momentum. The businesses that really do need the money are probably the less likely to receive anything from banks, so there is something of Catch 22 situation here.
What happened to Japan in the 90s is similar to what we are seeing in the rest of the world. Interest rates fell to zero but instead of companies borrowing more, they tightened their belts and ferociously paid down debts. They had realised that their stock and other assets were worth nothing while they had debt.
On one hand they embraced a period of austerity, while on the other hand they exported their goods to the world, but here is where the similarities to then and now take a fork in the road. Japan had a fabulously prosperous world economy to export into, which is exactly the opposite to the Great Recession of 2009 – and possibly beyond.
Savers have been pulling their money out of saving account in their masses as falling interest rates have made deposit accounts almost unproductive. Interest rates were cut to a record low of 0.5% last week, marking the sixth consecutive rate cut. It is anticipated that almost 50% of savings accounts will offer 0% interest on savings in the coming months.
As a result, savers have been looking at alternative ways of investing their money, such as premium bonds and corporate bonds. Funds managed by the Halifax, Scottish Widows and HSBC have soared by £900m since autumn last year.
However, consumer groups and MPs are becoming increasingly concerned about the mis-selling of these investment options, especially at a time when the mis-selling of financial products is attracting a lot of high profile attention. The fear is that savers could be risking their entire savings on supposedly “low risk” investments.
Dominic Lindley of consumer group Which? was amongst others who have voiced there concern, saying that many investments such as premium bonds are not being properly explained to the public. He added, “Some of these products are being marketed as alternatives to deposit accounts; people of 75 and over are being sold them, even though they don’t want to take any risk.”
Mr Lindley went on to stress that the current practice should be stopped before it becomes the next big mis-selling scandal.
Banks are also accused of pushing “protected” products, despite many investors having lost all their capital
John McFall, head of the Treasury committee, called for an investigation by the Financial Services Authority (FSA). Mr McFall said: “There needs to be total clarity and transparency with these products — some of which are sold as 100% secure, but that’s not the same as 100% guaranteed.” Adding; “People don’t understand the risks”.
Savers withdrew £2.3 billion out of deposit accounts in January with a record £1 billion going into corporate-bond funds, statistics show. Corporate bonds are yielding an average interest rate of 6.5% — eight times that of a typical savings account.
Corporate bonds do not come without an element of risk, especially in a recession. There is always a danger the company may fold and default on returns.
With the IMF predicting further downturns for the UK economy, a growing number of firms will be unable to make good on investments throughout 2009.
Even big funds run by government-backed banks don’t present a safe haven for savers. Halifax Corporate Bond, a £2.1 billion fund, lost investors 16.7% of their capital since September. Despite this, it accumulated an extra £140m of savers’ money over the same period.
Likewise, the Scottish Widows Investment Partnership Corporate Bond Plus has lost 16.5% in the past six months, and received £400m from savers over the same time period.
Banks and building societies made 36% of corporate-bond sales in January, the Investment Management Association said.
Which? meanwhile urged the FSA to clamp down on misleading advertising that promotes high returns even when interest rates are falling, and without a clear explanation of the risks being offered.
Banks have insisted they will continue to treat customers fairly.
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A leaked International Monetary Fund report has warned that Britain will endure a deeper recession than any other major economy.
The report, to be published this week also warned that the British economy will suffer its most severe downturn this year, while the world economy will contract for the first time since the second world war.
The IMF has predicted that the British economy will contract 3.8% in 2009 and a further 0.2% in 2010. A shrink of this nature would be the worst of any major country and a stark reminder of how badly affected the nation is by the world economic crisis.
The US will contract by 2.6% this year and will grow 0.2% in 2010, while the world economy will shrink by 0.6% this year but is expected to rebound by 2.3% in 2010.
The report comes at a time when the Prime Minster has expressed some regret over not doing more to avert the crisis. Shadow Chancellor, George Osborne, singled out Gordon Brown saying the Prime Minister’s economic model and policies were to blame. “These IMF forecasts show that Britain is set to have the longest recession of all the major economies. It is further evidence that Gordon Brown’s economic model is fundamentally broken and his policies on the recession aren’t working,” said Mr Osborne.
Bank of England governor, Mervyn King recently issued his own stark warning, that the world was facing unemployment of unknown proportions. He also called for a complete overhaul of financial regulation.
Lord Turner, the chairman of the Financial Services Authority, will today propose a a ban on instruments such as collateralised debt obligations (CDOs) – which are complex packages of debts from multiple sources.
Some financial instruments are overly complex and cannot be used without unacceptable risk, his report is expected to say. The report will also herald much tighter rules on mortgage lending and will propose a new regulatory structure where the state sets limits. He will also ask if the FSA should ban some types of mortgage.
It is already known that Lord Turner prefers lending limits based on salary multiples.
The government is planning regulation that will prevent credit card companies from enticing people further into debt. The legislation, which is to be introduced “at the earliest opportunity” will prevent credit card firms from increasing credit limits without request.
Additionally, the government also wants to stop credit card firms from sending unsolicited credit card cheques.
Of concern to the government is the misconception held by many credit card consumers who believe that an increased limit is a sign of affordability. Similarly, unsolicited credit cheques are often posted to people who cannot afford to pay the money back.
Consumer Affairs Minister Gareth Thomas said: “We are concerned that people may be tempted to borrow irresponsibly if credit card companies increase
borrowing limits without this being requested by customers, or send out unsolicited credit card cheques.
“It’s vital we protect consumers at this time and we are exploring these issues carefully.”
The UK payments association Apacs, however, refuted claims that credit card companies raised spending limits on accounts held by people in financial difficulty and insisted that only 7% of the cheques sent out were actually spent.
Credit card cheques are indeed unusual and represent a more expensive line of credit than credit cards. The cheques are sent to customers who are invited to use them for purchases on the basis the bill is paid in full with their next credit card invoice.
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Britons who have been overcharged Capital Gains Tax on Spanish property are now entitled to a mega payout thanks to a discriminatory ruling by the European Court. Spanish capital gains tax claims are now on the agenda for up to 10,000 British who paid 35% tax on the sale of their property in Spain.
The European Court ruled that capital gains tax levels of 35% for foreigners compared to just 15% for Spanish national was an act of discrimination and could not be upheld by law.
In response to the EC’s ruling, the Spanish government has levied capital gains tax to 15% for all property owners in Spain irrespective of nationality.
It is expected that close to10,000 Britons who owned homes in Spain could now be entitled to reclaim more than £140m in overpaid capital gains tax (CGT). Britons and Europeans combined are expected to receive up to £350m in compensation.
One couple form Surrey, England have already successfully reclaimed a capital gains refund of £3,000 after they paid 35% tax on the sale of their holiday home.
“This is a great result,” Mr Roy said. “But we’re just two in thousands of people who’ve been treated this way.”
Alan and Margaret Roy bought their Spanish property for €150,000 in 2001, and sold it three years later for €160,000. They were charged the tax rate of 35% on the gain instead of the 15% for Spanish nationals.
The Spanish Court upheld the Roys’ claim for a 20% rebate, plus interest — avoiding a hearing at European Courts of Justice.
In light of the sudden influx of capital tax claims, the Spanish tax office is no longer dealing with claims but instead is directing all applications to the courts. As a result, lawyers anticipate handling thousands of cases on behalf of Britons and Europeans seeking capital gains tax compensation. A conservative estimate of how much Britons can expect to receive has been set at approximately £14,000, plus an annual 6% interest - £18,000 per person.
Claims are expected to take 2 years from start to finish.
Be aware that there is a limited window for registering claims with a solicitor. If you sold a property in Spain before November 2004 you do not qualify. Nor can you make a claim if you sold your house post the January 1st, 2007, when the tax rate was levied for foreigners and nationals alike.
You are entitled to make a CGT claim if you sold your Spanish property between July 2004 and December 31 2006, and you were not a fiscal resident in the country. You must also have paid capital gains tax on the property having sold it to an individual, and not as part of company.
You will need:
Britons desperately seeking a saving account are turning to foreign providers in increasing numbers. ICICI and the Indian Bank are among some of the foreign savings providers that are offering a high return on investments.
The Bank of England’s latest interest rate cut to 0.5% has made it almost impossible for British banks to offer customers a good return rate on savings. As a result offshore providers are offering 4/5 of the top paying savings accounts.
What is most startling about this recent trend is that fact that British savers prioritise interest rates over security – savings with offshore banks are not covered by the UK’s compensation scheme.
It seems to fly in the face of current events when people are concerned about the safety of their money. Which in turn only goes to demonstrate how determines savers are to pursue better returns on investments despite the risk.
The Bank of England’s base rate has fallen from 5% to 0.5% since October, which has seen interest rates on savings fall to close to zero percent.
The ICICI, however, is leading the market with its 4.10% interest rate on the Hi Save account, fixed for a year. Second best is HBOS-owned AA’s one year fixed rate bond at 3.75%. However, Bank of Cyprus and First Save, offer a highly competitive 3.7% and 3.6% on one-year bonds respectively.
Bank of Ireland-owned Post Office is also offering better rates than British high street banks with 3.4% on its one-year Growth Bond.
Savers with ICICI and First Save are entitled to £50,000 protection under the UK’s financial services compensation scheme should either go bust.
The Bank of Cyprus is only part-covered by the FSCS. Savers who invest in Bank of Cyprus must first apply to the Cyprus deposit guarantee scheme for €20,000 compensation. The FSCS would then “top up” the compensation to a maximum of £50,000 - but only after the Cyprus scheme has paid.
Post Office savers are covered by the Irish government, which pledged to reimburse 100% of savers’ deposits until September 30, 2010 if the bank defaults.
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The Bank of England has slashed the base rate of interest from 1% to a new historic low of 0.5%.
Further rate cuts by the Bank of England was overshadowed yesterday by news they are to print £75 billion in new money. Printing money, or quantitative easing to go by its more technical term, is a highly controversial move designed to tackle the recession.
The Bank confirmed the new strategy would see additional money being injected into the economy over three months.
It is something of a double whammy by the bank on the economic crisis because yesterday was also the day the Old Lady of Threadneedle Street decided to cut interest rates from 1% to another historic low of 0.5%. Many economists have long been of the opinion that cutting interest rates no longer has the influential leverage it once did, which the Bank may be concurring with after multiple rate cuts since September last year.
Some economists remain perplexed by the Bank’s reluctance to cut rates right down to zero, seeing the Bank’s attempts to hold onto the last card as somewhat futile.
The Chancellor gave the go-ahead for quantitative easing in a letter to Mervyn King, the Bank’s Governor, released alongside the Monetary Policy Committee’s announcement that they will use their new authority to inject cash into the economy in a bid to jump-start growth.
The MPC’s immediate action will include buying are range of corporate bonds from commercial banks, such as businesses’ IOUs and Treasury gilt-edged stock.
As a result, this cash will be credited to banks’ Bank of England account, enabling them to increase lending to businesses and consumers alike. This increase in funding is what is hoped will claw the nation out of a recession.
The Bank’s intervention in the markets will also be carefully designed to drive down commercial interest rates paid by consumers and borrowers.
Mortgage lending has plummeted by more than 60% for January according to figures just released by the Bank of England. This figure represents just a 10th of what was approved 12 months prior.
Net mortgage lending for the month, said the Bank, was down to £690m from £1.79billion in December.
January’s mortgage lending statistics represent the second lowest monthly total ever recorded by the Bank since records began in April 1993, and represents an alarming dive from the £6.91 billion lent in January 2008.
Mortgage advances meanwhile dropped to £13.64bn in January, a level last seen in July 2001. However, the number of mortgages approved for house purchase remained unchanged at 31,000, in line with both the previous month’s figure and the recent six-month average.
Estate agents have reported a pick-up in interest during recent weeks as steep interest rate cuts and falling house prices tempt potential buyers into the market. Whether interest in properties will convert into real sales remains a sticking point, as buyers struggle to obtain the necessary mortgage.
Remortgaging figures have continued to fall because people have less equity to trade with – property prices have fallen 20% in 12 months. Therefore information that remortgaging in January dropped to 34,000 – less than half the 72,000 who switched home loans in October – is not surprising.
Aside from equity problems, another reason remortgaging figures have fallen is to do with interest rate cuts which make it cheaper for people to remain on their lenders’ standard variable rate.
The average home has lost £1,300 off its value every month in the year to January, marking a 15% fall in house prices.
The price of a typical mortgage in England & Wales – a three bed semi-detached – fell 0.8% to £156,700 according to Land Registry figures. These figures represent the most accurate because they do not include new build properties.
One of the biggest providers of home loans, the Nationwide Building Society, said that prices fell by 17.6% during the year – statistics are based on their own mortgage approvals.
While some estate agents have reported a pick up in the amount of queries they have dealt with, the truth of the matter is these have yet to be converted into sales. In fact, analysts have said that the gloom over the market was set to continue. Howard Archer, chief UK and European economist at IHS Global Insight, said: “The latest Land Registry and Nationwide data reinforce our belief that house prices are likely to fall by a further 15% in 2009.”
Wales was the worst hit last month, according to the Land Registry who said values dropped 8.8%, taking the yearly decline to a staggering 20%.
It was good news for homeowners in the East Midlands and East of England, they saw the value of their homes rise 0.3% and 0.1% respectively. While these inclines are modest to say the least any increase is welcomed in 2009.
Other figures released today showed that housing supply in England rose 4% in the year to March last year.
January was a good month for mortgage approvals which rose from 22,416 in December to 2,3376 – marking a 4% rise.
Other figures released by the British Banking Association (BBA) on Tuesday, said mortgage approvals remained 43% lower than the same period a year earlier.
Total mortgage lending – loans that do not include redemptions and repayments – was £2.9bn in January, down from £3.3bn in December. The value of total mortgage advances made in January remained unchanged from December at £9.9bn.
Remortgaging figures were also on the rise with 30,710 loans approved for people who wanted to switch to a better home loan during the month, up slightly from 30,500 in December but still 60% lower than the same month the previous year.
People who would traditionally be taking out new mortgages when their deal expires have been unable to do so due to lack of equity – the result of falling house prices. This accounts for a steep fall in the number of people taking out new mortgages.
David Dooks, BBA statistics director, said of the latest data: “The high street banks’ mortgage lending is still seeing double-digit annual growth, albeit in a much slower market. Lower borrowing costs and falling property prices have underpinned demand at these lenders, who are providing over two-thirds of all new mortgage lending.
“There is only limited demand from households for unsecured credit, while a fall in their deposits in January reflects a tendency to draw on cash or to move into alternative financial products. Lending to non-financial companies rose after two monthly falls, with modest increases in several industrial categories, while finance for other financial companies reversed the year-end fall in lending.”
The Bank of England governor Mervyn King has hit out at claims from leading MPs suggesting more could have been done to avert the financial crisis. Mr King refuted criticism directed specifically at the Bank of England and insisted it was not responsible for the banking crisis but said it ‘simply had no powers to take any actions’. He added, ‘We don’t have a single power that we didn’t have before and I hope you will remember that when you try to hold us accountable for things.’
He did lament on one fact however, admitting he ought to have pushed the FSA for more power. Mr King said the Bank of England was determined to avoid a ‘turf war’ with the Financial Services Authority, but in light of current criticism he wishes the Bank had been more robust in its relationship with the FSA.
He said that one lesson learned from this crisis is ‘not to expect too much from regulators’. He went on to say that had anyone attempted to warn banks about their excessive risk taking before the crisis took hold, they would have been shot down in flames.
Mr King remarked that the Bank was limited to flagging up the issues through speeches and reports. Referring to the Banking Act, he said the Bank’s powers have now been defined, “don’t hold us to account for things for which we are not responsible.”
Discussing the Government’s plan for quantitative easing (printing money) he was quick to calm fears that it could lead to more inflation. “We are not going to allow a great inflationary surge. The problem at present is not that the amount of money in the economy is growing too rapidly, threatening an inflationary surge, it’s that the amount of money in the economy is growing too slowly,” he said.
“And that is why we’ve asked the Chancellor for powers to engage in asset purchases in order to increase the amount of money in the economy and I would expect that to happen over the next few months,” he added.
Rising tax bills, falling wages and redundancies has seen disposable income plunge by over £150 a year for the average family.
Families had an average of £143 disposable cash a week to spend on non-essential items, ie, restaurants, holidays and recreation last month, down from £146 in January last year, according to Asda.
Charles Davis, economist at the Centre for Economics and Business Research (CEBR), who provided the figures on behalf of Asda, said: “Downward pressure on discretionary incomes is coming from rising unemployment and weaker earnings growth. This is one of the key reasons why families are still worse off than a year ago, on this measure.”
Unemployment teetered closer to two million in the last quarter of 2008, and economists predict that more than three million could be out of work by 2010 — the highest level since 1986.
Interestingly average income for families continued to rise from £657 to £680 per week, however, taxes and basic expenses accounted for a larger proportion.
And despite falling inflation, the tremors of last year’s consumer price hike is still being felt by many homeowners, with essential costs such as mortgages and groceries rising by £23 over the last 12 months.
A survey of 10,000 customers by Asda revealed that a third of their customers are seeking to supplement their income, by working extra hours or by selling items on eBay.
Familes in the South West of England and Northern Ireland are being hit the hardest, with average weekly disposable incomes in these areas falling by 3.2% and 2.7% respectively. Northern Irish households are spending £6 more on utility bills per week and £7 a week more on food, meanwhile South West consumers have seen their food bills rise by almost £30 a month.
Philip Hammond, the Shadow Chief Secretary to the Treasury, said: “This report shows how the recession is squeezing family budgets still further. And while the Government goes on a borrowing binge, stagnant wages and fear of unemployment mean ordinary families are likely to continue tightening their belts throughout 2009 as they struggle to make ends meet.”
Chancellor Alistair Darling today asked taxpayers to fund the latest rescue package designed to ease the nation out of recession. The government needs £500bn to insure banks against ‘toxic assets’ – debts that cannot be repaid without emergency measures being taken.
Alistair Darling last night said all banks had to do more to identify their toxic assets and under the asset protection scheme, the Treasury will underwrite bad debts. Clearly, however, the Chancellor was keen to stress that banks must prove to be better assessors of risk. So while the Government aims to increase lending, borrowers will still have to meet strict criteria, for example, they must have a polished credit record.
Banks that are expected to adopt the asset protection scheme include the Royal Bank of Scotland. It is expected that it will place at least £250 billion of toxic assets in the scheme to protect it against future losses.
As of last year, the RBS is already 70% state owned and with the Lloyds and Barclays also expected to access the scheme, taxpayers will be underwriting up to £500 billion.
Despite conditions laid down at the time of last year’s £37 billion bail out, banks have not used the money to start lending again but have held onto it leaving the markets in a perpetual frozen state. Banks argue that until forecasts improve, the money they have received will be needed to offset future losses.
It is hoped that under the latest scheme, banks will be able to see how much their debts are worth, which will give them confidence to start lending. In addition, the Prime Minister and the Chancellor are expected to announce other measures on lending to coincide with the asset protection scheme.
Speaking on BBC Scotland’s Politics Show, Alistair Darling said: “The banks, not just RBS, HBOS, but all banks, frankly, have to do more to identify the bad assets, these so-called ‘toxic assets’, investments that have gone wrong.”
Mervyn King, the Governor of the Bank of England, has said: “I am in no doubt that the single most pressing challenge to domestic economic policy is to get the banking system lending in any normal sense. That is more important than anything else at present.”
Meanwhile, the RBS are to announce losses of £28 billion this week, which will mark Britain’s biggest corporate loss. Lloyds Banking Group are also expected to unveil a staggering £10 billion loss for last year.
An alliance of housing organisations, unions and local councils has called for the government to invest £6.3billion into the construction industry. Group 2020 says the investment is needed for the building of 100,000 affordable homes between now and 2010.
Collapsing housing prices and a drop in construction threatens up to almost 500,000 jobs between now and 2010, something that can be avoided according to the alliance and in the process help avoid a major skills shortage.
The alliance of housing organisations, unions and local authorities said building more homes would give a desperately-needed boost to the economy, saving thousands of construction jobs and avoiding serious skill shortages.
Kate Barker, an economist who heads Group 2020 said: “Support for housing today offers excellent value in terms of sustaining economic activity, and reduces the risk of a very severe loss of capacity in the housing and related industries. There is real concern that the present fall in home building is sowing the seeds of the next boom. Social housing waiting lists are rising. This package meets a real and urgent need.”
Ms Barker, who sits on the Bank of England Monetary Policy Committee, is a member of the 2020 Group alongside the National Housing Federation (NHF), housing charity Shelter, the Local Government Association (LGA) and the Trades Union Congress (TUC).
David Orr, chief executive of the NHF, said: “Without radical action many people in construction will lose their jobs, and up to five million people could find themselves on housing waiting lists by the end of 2010 - this is the Government’s chance to help us to make sure that neither of these things happens.”
The call by the 2020 Group comes just prior to the budget, due in April and insists “major investment” in house building is needed as part of a economy rescue plan.
Adam Sampson, chief executive at Shelter voiced concern over existing poor housing, he said: “As house building dries up and thousands of construction workers face the dole queue, building the homes this country needs can not only help the thousands of people living in poor housing, it can also give a real and much needed financial injection to the economy.”
TUC general secretary Brendan Barber said: “When the private sector stops spending, the public sector must fill the gap, otherwise the recession will be deeper and longer than it need be.” He went onto say that the union’s case for new social and council housing was irrefutable.
The Government is preparing a package for Northern Rock in a bid to free up the credit markets after figures revealed the economy had retracted by 1.5% in the last quarter of 2008. What is a u-turn on the government’s initial decision, Northern Rock will increase their mortgage portfolio and hope other lenders follow suit.
The government are to invest heavily into Northern Rock in an attempt to fill the void left by foreign investors, but it is clear they have a major rebuilding job on their hands. Alistair Darling, the Chancellor, said “I want to ensure that when we come into the recovery phase, the money is there for businesses, the money is there for people who want to buy homes.”
Homeowners have seen their property values decrease by 20% over the last 12 months and mortgages have been put out of reach for everyone but for those who have large deposits and spotless credit records.
Northern Rock, like many other lenders, have been criticised for offering loans way above house values. Darling said the days of 100% mortgages are a thing of the past for Northern Rock and the future demands more responsible borrowing. He added; “I really have severe doubts about the 100 percent-plus loans that were made available. That is ridiculous,” he said. “Most of the mortgages will be at a sensible mortgage. Northern Rock aren’t going to do 100 percent. They can go up to 90.”
Northern Rock are expected to increase home loans by up to £14billion over the 24 months. In spite off the 1% interest rates, banks have cut lending as they try to rebuild their capital base and avoid even moderate levels of risk.
Northern Rock became the first victim of the credit crunch in 2008 when it was nationalised after receiving emergency funding from the Bank of England.
George Osborne, the finance spokesman for the Conservatives said the U-turn by the Government was “rather bizarre”, adding “other policies to restart the housing market were clearly failing.”
Home repossessions soared by 70% last year to 45,000, prompting the government to pledge £500m for homeowners struggling to meet mortgage repayments.
Ministers are expected to announce details of the scheme today, which will be an attempt to reverse the fortunes of thousands of homeowners, many of whom are at least three months behind on their mortgage.
Current trends may make this multi million pound assistance seem like small change as slumping house prices and large scale redundancies continue to make the headlines.
A rather gloomy prediction from the Council of Mortgage lenders anticipates that 75,000 people will lose their home in 2009 with half a million homeowners expected to default on mortgage payments.
The government’s Homeowners Mortgage Support scheme will enable borrowers with mortgages up to £400,000 to receive a payment holiday if they become redundant or had their working week reduced, events that the government have labelled as an “income shock”.
The scheme is believed to allow mortgage holders the chance to defer payments on 70% of their mortgage interest for two years. A borrower taking part in the scheme with a £300,000 mortgage at 3.5 per cent interest would fall from £875 to £262.
If the borrower continues to default on their home and loses their property, the Government has pledged to act as guarantee for 80% of the deferred payments.
If the repossessed home is sold at a loss, the lender will claim the money from the Treasury.
Some mortgage brokers have voiced concern over the plan, saying it should not be seen as a gift. David Hollingworth, of London & Country, the mortgage broker, said: “It will ease the pain for borrowers in the short term, but they will have to pay back the interest, plus added interest in the future months,” he said.
Additional information just revealed that Labour undershot its home construction target by 40% in 2008 as the number of new builds fell to a 30-year low in the final three months of the year.
The Council of Mortgage lenders delivered a hammer blow to any hopes that the housing market was having a revival. Mortgage lending fell by more than half in the past 12 months and the CML warned any expectation of a reverse in fortunes in the coming months was “unrealistic”.
Mortgage lending fell to £12.4bn in January, marking an 8% fall from £13.5bn in December and a 52% fall from January last year. For the time of year, this modest decline is not unsurprising but significantly, these figures are the lowest monthly total since April 2001.
While a slight decline is typically experienced between December and January, the decline marks the lowest monthly total since April 2001.
Head of research at the CML, Bob Pannell, said: “Mortgage lending activity continues to be very weak and while people are searching eagerly for some signs of recovery, it would be unrealistic to expect a meaningful revival in lending in coming months. Even when conditions do improve, gross lending will be one of the later measures to recover.”
Mortgage brokers have called on the Government to force banks to start lending, seeing the property market as central to the country’s economic woes. Fixing the housing market will fix the economy is the widely held believe, shared not just by mortgage brokers but also by those across most financial sectors.
There have been some encouraging signs for estate agents across the nations, who have reported an increase in the number of property enquiries in recent weeks. As yet these enquiries have failed to convert into sales as borrowers struggle to find a mortgage without a large deposit and gleaming credit record.
The UK’s public finances deteriorated dramatically in January as the Government’s bank bail-out boosted debt levels and tax revenues dropped sharply.
National debt hit £703.4bn in January – equivalent to 47.8% of gross domestic product –heralding the largest proportion of debt since 1978, when national debt was 49.1% of GDP, according to latest figures from the Office for National Statistics.
One leading contributor to our nations’ debt level is the £20bn bailout received by the Royal Bank of Scotland in December, which was just the first to reap the rewards of the Government’s bank rescue programme.
January is normally a good month for the Government when tax receipts are harvested, which enable the Government to repay on a portion of its borrowing.
Last month however, tax receipts slumped enabling the Government to pay back just £3.3bn, compared with £13.9bn the year before. A clear sign that the recession has taken its toll on individuals and businesses across the country. The £3.3bn figure was the lowest surplus since the mid 1990s. The surplus was also considerably limited by large public investment over the last 12 months.
What does this mean for Government borrowing? Naturally the knock on effect does not bode well as figures show that borrowing for the financial year now stand at £67.2bn, compared with £23.1bn for the same period the year before. Borrowing to this extent is also explained in part by unemployment, which is rising by thousands on a daily basis, meaning state benefits are also increasing.
Howard Archer, chief economist at IHS Global Insight, said: “The public finances for January are terrible, coming in even worse than feared.”
Banks are set to employ a new system designed to help them identify customers who may default on loan repayments. Recent history has proven that a simple credit check is no longer adequate, as thousands of ‘credit worthy’ consumer have flunked on repayments. This new early warning system, developed by credit reference agency Callcredit, promises to give lenders a more thorough profile of each borrower.
The new system will assign lenders with an over-indebtedness score between 1 and 1,000, based on credit history and ongoing commitments. It will also consider the change in their level of debt over the previous year and the ratio of debt to monthly income.
Major high street banks are already showing much enthusiasm for the new system. Halifax and Lloyds TSB, HSBC, and the Royal Bank of Scotland have signed up to the service that will help them identify consumers likely to default on their mortgage or loan, as well as spot people in danger of becoming bankrupt. All of which will make credit applications a much tougher prospect for consumers.
Graham Lund, of Callcredit said: “We’ve been working with high street banks and building societies since 2004 to share current account data as a way of identifying consumers who appear to be on the cusp of over-indebtedness.”
The Department for Business, Enterprise and Regulatory Reform, defined an individual as over-indebted if 25% of their net monthly income was used to pay debt commitments.
The new system will make borrowing more difficult for even the most credit worthy if their financial commitment/monthly income ratio is too high.
Chris Tapp, of CreditAction, the debt charity, said: “Borrowers might be up in arms about the kind of personal data which is now being exchanged, but if lenders are going to make wise decisions they need to access as much information as possible.”
Bank enthusiasm for new credit check system is unsurprising, as latest figures reveal that over 900,000 mortgage holders have missed at least one repayment in the last six months. With the gloom over the economy refusing to budge, lenders are bracing themselves for a tough year as half a million homeowners are expected to be at least three months in arrears by 2010.
The Insolvency Service released figures last week which showed that the number of individuals declaring bankruptcy jumped by 20% in the last three months of 2008 compared to the same period the year before.
The thousands of mortgage holders who are on a collar free tracker mortgage have welcomed the Bank of England’s latest half per cent rate cut to 1%. Today’s move by the Bank of England means people who have already benefited from the several rate cuts in recent months stand to make bigger savings.
For this fortunate group of home owners, a £200,000 mortgage means a saving of around £80 a month, in addition to what they have already gained from previous rate reductions.
Their interest payments will have crashed from £836 a month to just £191 since October, when base rates stood at 5%.
The problem remains however, for the majority of people who desperately need help, yet are stuck on a fixed rate, or other type of mortgage unaffected by the rate cut. It’s also a kick in the teeth for consumers with tracker mortgages who never spotted the implications of a “collar” written in their small print.
Many of these borrowers will be unable to remortgage to a cheaper rate due to early redemption penalties or because of a lack of equity.
The Bank of England made another much-expected cut in interest rates today as they battle to end the recession by reducing interest rates to a historical 1% from a previous record of 1.5%.
The latest move follows a steady stream of bad news in recent weeks including figures that showed the GDP for the last quarter of 2008 fell by 1.5%. The true depth of this recession still seems to be a mystery and never before in her 314-year history has the Old Lady had to reduce interest rates so drastically.
The International Monetary Fund warned only last week that the United Kingdom
is going to experience the harshest downturn of any leading economy in 2009.
The IMF predicted a GDP drop of 2.8 %, which would be the worst performance by the UK economy for 60 years. There wasn’t much optimism from the IMF for 2010 either if an expected growth of only 0.2 % proves accurate.
Rising unemployment – up 78,000 in December – has promoted some economists to question the Bank’s Monetary Policy Committee latest action, holding the belief that a more drastic rate cut, to below 1%, would have been more appropriate.
Other economists have publicly aired the view that reducing interest rates no longer has the power to effect change.
Many City experts, however, predicted the MPC would choose to move gradually toward 0% and not make unheralded cut from 1.5% to zero. Significant data
released this week may also have convinced the Bank to act with caution.
Manufacturing, construction and services sectors all reported that that the previous month’s activity has been less damaging. In light of this news, some analysts have openly speculated about the last quarter being the worst of the recession, suggesting a corner may have been turned.
The Bank is also set to implement quantitative easy as way to revive the economy after the Treasury backed their request to print money. The new money will be invested in banks to stimulate lending.
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Things worsened for the Government today as figures revealed the number of approved mortgages fell by 60% for November. The latest report puts the amount of mortgages granted at an all time low.
Newly provided mortgages fell by 17% from October with only 33,000 issued to first time buyers or current homeowners. The severity of the problem is increasingly apparent when October’s figures are compared with those from 2007, a period which saw a 59% downturn in new mortgages.
The Council of Mortgage Lenders have said that November’s 60% fall is the lowest on record since analysis began in 2002.
Remortgaging has also taken a tumble, dropping to 52,000 in November, a downturn of 25% from October and 36% compared with the previous year, said the CML.
Analysts insist that more is needed from the Government if mortgage conditions are to improve. This comes despite the multi billion pound bailout that has been funneled into the major lending institutions.
The Bank of England this month reduced the interest rates to 1.5% from 5% in October – a move seen by some as not far reaching enough. Criticism has also been aimed at lenders, many of which have not passed on the benefits of borrowing to customers. Those banks have remained resolute in the fact that they will not relax lending criteria but still insist the borrower has a significant deposit.
Last year’s Government bank bailout was intended to prevent the banks from going bust and at the same time stabilise the economy. The result of the £37 billion hand out to lenders was part privatisation of RBS and HBOS, two of the countries largest financial institutions
The Bank of England has also increased funding into the wholesale, or credit markets to promote inter bank lending. So far this initiative has proven fruitless through no confidence and a lack of trust in other lenders and the housing market.
Now is a great time to buy a bargain property as lack of mortgages is forcing sellers to drop prices to entice buyers. Property prices fell 16% last year, figures from Halifax reveal.
For a guide to mortgages, please click here.
Payday loans are back in the spotlight after the Bank of England’s historic rate cut last week. The lowest base rate for over 300 years at 1.5% is intended to increase lending and free up stagnant credit markets by making the cost of borrowing cheaper.
The rate cut has served to highlight the contrast between high street lending and cash advance or payday loans. Interest on payday loans can range from 10,000% to 21,000% APR in an industry that’s worth £3 billion a year.
What adds to the controversy surrounds payday loans is the demographic at which they are aggressively marketed. It is the most vulnerable who make up the largest proportion of payday loan borrowers. People on low income, in irregular employment and in deep debt, evidence suggests are targeted by payday loan firms through newspapers, magazines and daytime television.
Shadow Housing Minister, Grant Shapps, is calling for a review of payday loans in a bid to protect people in desperate financial trouble. Mr Shapps claims to have numerous reports of people forced to repay £300 on a £200 loan within the space of one month with an APR ranging from 1,284% to 2,100%.
Responding to unfair conduct accusations, payday loan companies have said that the nature of these loans – being short-term – means they cannot be compared with regular personal loans. The APR rate for example is a misnomer in itself. Payday loans are geared towards being paid at the end of the month and not over a 12 month term.
For more information on payday loans, click here.
Cash incentives to transfer your current account to another bank is nothing new and many times the bank’s use instant money as a hook to get you on board.
What usually happens is that various charges and overdraft fees soon recoup the money you received, leaving you no better off than you were at your previous bank.
Debts is familiar with such tricks, which is why we include only the best current account deals currently on offer. Genuine enticements that may well be worth considering if you are looking for some free cash. Or is free money not your bag?
It seems it isn’t just the retail sector that has pushed the boat out this January. Banks are also keen to draw customers and since they can’t do it with high interest on their savings, or even a decent interest rate on current accounts, some are prepared to part with hard cash.
If you are prepared to transfer your direct debits and standing orders and have your wages paid into your new account, you could start the year that bit wealthier.
Possibly the best current account deal on offer is the Alliance & Leicester’s Premier Account. The A&L promise to take care of direct debits and standing orders transfers, give you £100 and even throw in some free travel insurance. If you earn over £6,000 per year and have not been an A&L customer in the previous three years, chances are you are eligible for a hundred pounds of free money.
Interest rates are not the pull here – there is only 1% interest on balances up to £2,500. However, an overdraft is interest free for the first year. By referring a friend to the Alliance & Leicester, you can earn yourself £25.
Opening a First Account with First Direct will not only earn you £100 but if you choose to leave them for another bank after six months, they will give you another £100 as a parting gesture. Of course, unless you are particularly disappointed with First Direct you are unlikely to move your current account twice within the space of a year.
First direct require you to pay your salary into your new current account and transfer direct debits and standing orders.
If you need an overdraft of just £250 to cover any unexpected bills you may have, or just to provide a little bit of breathing space, First Direct will not charge you any interest. Watch out, however, because an overdraft above £250 incurs a staggering 15.9% interest.
The First Account pays no interest on credit balances, and insists that you pay £1,500 or more into it monthly – not doing so will forfeit a £10 charge.
The HSBC is currently offering a half-price packaged current account called HSBC Plus. The HSBC Plus account has benefits including travel insurance, breakdown cover and £3,000 life insurance. The account should only be considered if you intend to take advantage of the entire package, as you could get a better deal elsewhere for travel insurance or breakdown cover etc.
In keeping with January sales they also promise to slash monthly fees to £6.47 from £12.95.
Furthermore, if you decide to switch to the HSBC current account, you will also qualify for another HSBC offer – an ISA. Plus customers can cash in on 0.25% bonus on its existing ISA rates.
It may sound like a good deal but compared to best buy tables it offers poor value. The HSBC Plus ISA incentive only pays 2.47% interest including the bonus, compared to the Manchester Building Society that is currently offering 4% on cash ISAs.
Another who is taking part in the big January giver away is the Leeds Building Society, which has reduced prices across its mortgage range for the month. Deals include a three-year fixed rate at 4.75% up to 75% loan-to-value (LTV) with a £999 fee. Plus a three-year fixed rate of 5.45%, also at 75pc LTV, fee free.
The offer does not extend to tracker mortgages.
For a guide to mortgages, click here.
Small businesses – companies with 50 staff or less – have been crying out for credit with very few lenders willing to take the gamble. The Bank of England’s interest rate cut of last week has proved that intervention of this kind is no longer the force it once was and to get the credit markets flowing again we must revisit the drawing board.
Small businesses are getting set for some good news. The Government are preparing an initiative that will guarantee up to £20 billion of loans to small businesses. It is hoped that by guaranteeing small business loans, banks will start lending again and free up the credit market. If small business goes bust the taxpayer will foot the bill.
While largely supporting the Government’s plan, the Conservatives are urging Gordon Brown to up the ante to £50 billion.
The Conservatives have also expressed concern that further delay in the Government’s plan to act as guarantor of small business loans could cost more jobs.
Under the scheme, the Government is expected to guarantee up to 95% of a small business loan. Currently under a similar scheme, the Government pledges to guratantee 75% of any loan worth up to £250,000. The new plan, however, to be launched by Business Secretary, Lord Mandelson would back loans up to £1m.
Successes stories of the small business guarantee program have included Waterstones, Coffee Republic and The Body Shop.
Small businesses are going under at an alarming rate in a recession that has already claimed some big names, including Zavvi, Woolworths and Vyella. More scalps are expected to be taken by Spring but small businesses do not make the headlines. Small businesses have been cut off from credit by their banks, which have curtailed any further investment in order to protect their interests.
Major banks had pledged to increase lending to businesses and homeowners after a multibillion-pound cash injection last year, however, mortgages and business loans remain scarce.
Alistair Darling, Chancellor, is expected to make another announcement next week that will unveil the Government’s next phase of promoting lending to business and mortgage holders.
Of real concern to the Federation of Small Businesses is monitoring of the guarantee scheme. Stephen Alambritis, of the Federation of Small Businesses, said; “procedures must be in place to ensure that banks are using their funds appropriately”. Adding; “The small-firm loan guarantee scheme took between five and 10 years to get underway. Banks are notoriously slow art implementing Government schemes.”
For more on business loans, click here.
Student loans are big business since grants became old school. The good news is that last week’s interest rate cut by the Bank of England to 1.5% has been passed down to borrowers by the Student Loads Company. Student loan interest rates have been cut to 2.5%.
In December, interest rates on student loans had fallen from 3.8% to 3%. Having now fallen by a further 0.5%, students are reaping the rewards. While their monthly instalments will not be reduced because they are set based on income, students will pay less on the outstanding amount.
The Student Loans Company is intending to inform students of the interest rate reduction through media advertising this week. This will come at a time when the Student Loans Company has been criticised for not producing adequate information on loans and interest rates.
Students with loans have complained of receiving little guidance. One concerned parent called both the Student Loans Company and the Department for Education and Learning about his daughters’ loan. The Student Loan Company informed him they were unable to offer guidance and were waiting on the Government department to take the lead.
On calling the Department for Education and Learning, the concerned parent was told they were waiting on high street banks to take action before they would make any official decision.
That decision has now been made and the 0.5% interest rated reduction will help graduates get out of debt a little quicker. The cut brings interest rates on student loans down far lower than the 3.8% figure set last March. Student loans interest rates are set at the Retail Price Inflation figure for March and applied from September.
How has this happened? A clause in student loan agreements states that as a low interest loan, ‘income contingent’ student loans - taken out by those who started university post September 1998 - are guaranteed not to rise more than 1% above the base rate of nominated banks.
The Bank of England is one such nominated bank. Their 0.5% interest rate cut to 1.5% last week meant The Student Loan Company had to reduce the interest rates on their loans accordingly.
December’s rate cuts marked a first in income contingent loans’ history when the Bank of England base rate fell to more than 1% below the March RPI amount. If, as expected, the bank rate is reduced further, the student loan interest rate will fall again. That being said, if March 2009’s RPI figure falls below the bank rate plus 1% tie-in, the student loan interest rate will revert to this from September this year.
Students who had been paying 3.8% since September will be cheered by the news of the interest rate cuts on their loans. The rate has been cut by almost 50% from the 4.8% seen in 2007.
For information on Student Loans, the good the bad and the ugly, click here.
Printing money may be most peoples dream but for the Alistair Darling the Chancellor, it is a nightmarish proposition. With the Bank having failed to rescue the ailing economy with interest rate cuts, the Chancellor is now looking towards more radical measures and printing money is one such measure.
Increasing the money supply would allow the Government to buy assets such as government or company debt.
Analysts are of one voice in their assessment of last week’s interest rate cut in calling the move ineffectual. Reducing the interest rate to 1.5% has not rebooted the economy and reenergized the credit markets. The problem remains for the Government that credit markets remain frozen and banks are still not lending to each other or to consumers. The rate cuts were intended to make loans cheaper, however, loans have remained unavailable.
Printing money – ‘quantitative easing’ to give it its proper name – would be used to resuscitate the economy at a time when the Chancellor has been criticised for not taking adequate measures. It is also understood that Mr Darling is working on plans to effectively underwrite bank lending to homeowners and businesses.
Quatitative easing ecourages banks to start lending. The idea is the Bank of England would buy government bonds or commercial paper owned by the banks which would allow banks to feel more confident about lending. Simply put, their accounts at the Bank of England are credited and money is able to flow from creditor to borrower.
Would printing money work? Only if the banks were happy to lend and consumers were confident enough to borrow.
Printing money is widely considered the last resort of a government swamped by desperate circumstances. By increasing the flow of cash, the Government runs the risk of losing control of inflation. However, some analysts are coming out in support of the proposition. Tim Congdon of Lombard Street Research said the Bank must now accompany last week’s interest rate cut by the Bank of England with additional measures aimed at getting more money into the economy. “The problem is too little cash in the economy,” said Mr Congdon.
Mr Darling confirmed that the Government was considering further steps more radical to anything previously seen, which is understood to include quantitative easing. He did say, however, that this type of intervention would only occur once interest rates had hit 0%.
The Prime Minister Gordon Brown has confirmed that the Government is looking into ways to help savers. Banks have already started reducing interest rates on savings accounts to zero. Click savings account news article. Many savers are now receiving no return for their money and may even face the prospect of paying for their account. Figures released by Moneyfacts revealed that out of 90 banks and building societies offering mortgages, 70 cut their Standard Variable Rate for borrowers in December 08 and only 19 cut rates in line with the Bank of England.
After a rapid reduction in savings accounts interest rates over the last few months, banks are finally doing the inevitable – scrapping interest rates on savings.
Last week, when the Bank of England prepared to announce its rate cut, banks were slashing interest rates from a weak 1 or 2%, right down to zero.
It may not be surprising – because the time for surprises is long gone quite frankly – but it is another sobering headline that makes the economic picture that bit bleaker. Nobody is finding this latest move quite as troublesome as many of the nation’s pensioners. Instead of living off of the interest accrued on savings, which had been possible in better times, pensioners now have to dip into their savings to meet the cost of living.
Of course it is not just pensioners who are worse off but droves of prudent savers who have been making sacrifices in order to put a little away for a rainy day. The rainy day has arrived, but perhaps not in the way anyone could have anticipated.
There has been some pressure on put the Government from sections of the media to offer pensioners tax breaks, but as yet there us no talk of this happening coming from Number 10.
Banks and building societies alike have been taking the sword to savings. West Bromwich has cut their Bonus Saver rate to 0%. Savers can still qualify for 2% interest if they make just six withdrawals or fewer per annum.
Welsh bank Julian Hodge is also paying 0% on its easy-access savings account, while the Bank of Ireland pays just 0.001% – which is 0% let’s face it – on its Card Saver account. Customers should note that each withdrawal from the Bank of Ireland’s Card Saver account would incur a charge of £2.
The number of banks and building societies to slash interest rates to 0% is expected to rise sharply. Aside from those mentioned above, more than a quarter of all savings accounts pay less than 0.5%.
Around 40% of all savings accounts currently pay 1% or less.
The average savings rate on a no-notice account containing a balance of £5,000 now stands at around 1.5% when this time last year it stood at over 4%.
Furthermore, this move on saving accounts comes after it emerged that cuts in interest rates have practically halved the Premium Bonds returns. This leaves literally millions of investors worse off after many years of heavy investment.
If the Bank go the whole hog and reduce rates to 0% – as they are expected to do around spring – analysts believe savers may be charged a fee for keeping their money in a bank account. Making the term ‘savings account’ as we currently understand it, redundant. Alternatively, many believe that if banks do not charge customers for using a savings account they will introduce charges elsewhere.
If you have been sold a Payment Protection Insurance policy (PPI) from your bank, there is a high chance you are not covered by the policy and are entitled to a complete refund. To find out more please click here.
The Bank of England lowered interest rates yesterday for the third time since November, bringing the rate down by 0.5% to 1.5%. If you were expecting the Bank to slash the interest rate by a full percentage point you weren’t alone as many pundits and analysts predicted greater boldness.
Whether the Bank lowered the interest rate to 1% or 1.5% seems inconsequential, after all if we have discovered something over the last 6 months it is that interest rates are no longer the powerful tool they once were and toying around with it has made very little difference. Interest rates have gone from being a Black & Decker to a Tonka in the hands of the Old Lady at Threadneedle Street.
The Bank has tried to tempt, coerce and manipulate banks and building societies into lending by lowering the cost of borrowing. The problem, however, is that no matter how much they lower the rate – and by Spring it may well be as low as 1% – banks and building societies are just not prepared to lend.
This isn’t to say that the Bank has completely wasted its efforts, as base rate reductions have shown. As a result of that little tweak thousands of consumers on tracker mortgages have been making considerable savings, a little extra the Government is hoping will be used on the high street. One thing is for certain, there is very little incentive to invest it in savings accounts.
Consumers aren’t the only ones to benefit from the base rate cut, small businesses will also welcome the extra savings on tracker loans and overdrafts. (If you have a small business and are looking for ways to reduce your overheads, click here.)
If fiddling with the interest rate isn’t producing the goods, then what is the solution? To find the answer we must look at previous economic emergencies and see if experience can tell us anything. In many ways we haven’t seen this kind of trouble since 1946 and the Government has already injected around £50 billion into the banks. Up until now, however, the sum invested is only equivalent to 2.5% of economic output. Historically, governments have had to bolster the economy by four times as much.
The Prime Minister is considering tax cuts as a way to increase spending. One thing for sure, if tax cuts are the answer over the short term, then people will be asking who is paying for it over the long term? The same people who bailed the country out of previous disasters – the taxpayer.
Would like to express an opinion on the economic situation? Please visit our Forum.
House prices were at a peak back in September 2007 when an Englishman’s house was his castle. Fast forward two short years to 2009 and house prices are expected to tumble 25% from the highpoint of 2007, leaving exasperated homeowners wondering; ‘how much is my house worth?’
The Royal Institution of Chartered Surveyors (RICS) has warned that the next 12 months will continue to see house values slide by a further 10%, bringing house values down 25% from where they stood less than two years ago.
The good news, however, is that ‘buyer enquiries’ – which the RICS uses to predict market changes – have increased since summer 2008. As a result, the RICS anticipates a 10% rise in property deals.
Interest rate cuts have been attributed to the increase in buyer enquiries, as have the drop in house values. The combination of both low interest rates and cheap properties has attracted investors – especially those looking to buy to let – who hope to bag a bargain.
The property market still has some way to go before it shows signs of a complete recovery and that won’t happen until mortgage providers start offering mortgages to Britain’s mainstream, especially first time buyers. Figures released by the British Bankers’ Association revealed approved mortgages were as low as 17,773 for last November.
In light of the sub-prime mortgage crisis property construction ground to a halt, meaning the Government targets for new builds has almost no chance of being met. The Government wishes to build 2 million new properties by 2016. The number of new homes for 2008 was a little over 100,000 – lower than the recession of the early 90s. The number of new homes to be built this year is below 80,000, according to RICS.
There are also some very real fears among analysts and consumers who foresee another crisis waiting in the wings due to a housing shortage. A drastic shortfall in new builds would indeed damage the Government’s hopes of creating a sustainable housing market.
For a complete guide to mortgages, click here.
Have an opinion on the housing market? Please visit our Forum.
Action taken by the Bank today in cutting the interest rate below 2% is a first in its 314-year history. Tough measures for tough times and even record breaking action may not be enough to dispel some fear that not enough has been done. Businesses, consumers and homebuyers may feel that 0.5% is not enough and the Bank should have reduced interest rates all the way down to 1%.
That said, the Bank’s determination to breathe life into the ailing economy should not be doubted and a further reduction could happen by Spring.
Analysts have raised fears in unison that the recession is going to take more jobs that it’s predecessor of the early 1990s. Furthermore there is very real concern that the economy will shrink by more than 2.5% in the coming 12 months – marking the worst year since 1946. As the Bank put it “output is likely to continue to fall sharply during the first part of the year”.
Consumer spending has also been a factor in the Bank’s decision making process, high streets are losing some of their oldest and most recognised shop fronts, such as Woolworths and Viyella with more expected to follow. Construction and business investment is also facing tough times. The former has ground to a halt due to a famine of homebuyers while the latter has been made impossible due to rising overheads and a faltering pound.
Add to that the stalemate in the credit markets, with banks unwilling to lend to each other and to consumers and the year ahead looks all the uglier. “This year is going to difficult. There are going to be some tough calls,” the Chancellor said.
The Treasury and Bank of England have been forced to conjure ways in which we can rekindle growth.
Under consideration is a US style plan to buy debt from banks in a bid to ease the commercial lending restraints and to ultimately reduce costs. More consideration has also been given to the part nationalisation of the banks, which were given billons in the latter part of 2008 in exchange for shares. Further recapitalisation of the banking system could see billions more injected into the veins of the economy through high street banks.
Such considerations have become all the more urgent due to a growing concern that the Bank is losing firepower and that when it eventually makes further rate cuts, it will have emptied it’s locker of solutions.
That concern may have been the reason why the Bank’s nine-member Monetary Policy Committee decided to make a tentative 0.5% rate reduction in a bid to reserve ammunition for the months ahead.
The noon verdict from the MPC that rates should be reduced by a half-point came after a fresh spate of job losses and company collapses across the nation.
Have an opinion on the Bank’s rate cut? Visit our Forum by clicking here.
The Bank of England is expected to cut the interest rate from where it stands currently at 2% to around 1.5% in January. Anything lower than 2% will be a milestone for the Old Lady who has never reduced interest rates below the current level in her 300-year history.
The latter part of 2008 saw a series of cuts, with November and December marking a reduction of 2.5%. A drastic reduction that seemed unthinkable a year ago is set to get even lower as the country bears down on the recession.
Chancellor Alistair Darling has warned that Britain is a long way from being home and dry as far as the recession is concerned. Never the less, the Bank may make a modest reduction of 0.5% this month in order to gauge the effect before tampering with it any further. Interest rate cuts do not generate instant effects on the economy and will take some time to work their way through the banks to consumers.
Of concern to the Chancellor is the widely held belief of many analysts who claim his prediction of the economy shrinking by no more than 1.25% this year is fanciful. Some economists have gone further to say we are facing the worst economic conditions since 1946, when the country was in a post-war slump.
Worrying still is the rate at which people are losing jobs. The job losses during the recession of the early 1990s are paling in comparison to current redundancy levels. The latter part of this recession is expected to outstrip the redundancies of the early 1990s. This does present an argument for a larger rate cut but it would be at the expense of further devaluing the pound.
A weaker pound – on a lower parity than the euro – would have a detrimental impact for firms importing and exporting. (If you have a business and would like to know how to reduce business overheads click here.)
To summarise, it is expected that the Bank will go with a rate reduction of 0.5% this month and wait until the summer, or perhaps a little earlier before making a further cut of 0.5%. An interest rate of 1% would be a desperate measure for a desperate times.
Have an opinion on the rate cut? Visit our Forum by clicking here.
It is expected that 2009 will see bankruptcies soar to the highest rates since records began in 1960. The industry believes the amount of people filing for bankruptcy will exceed 150,000 as Britons fail to cope with rising costs and redundancy.
The Insolvency Service records cases of bankruptcy and Individual Voluntary Arrangements – a program that gives debtors a chance to agree a repayment plan with their creditors.
Figures for the previous year show that a typical IVA participant owed £47,000 and planned to pay just 38% of the debt, equating to around £18,000 per borrower. While the average IVA participant owed £47,800, it has been estimated that more than 2,500 people in 2008 undertook IVAs with debts exceeding £100,000.
Mark Sands, director of personal insolvency at KPMG, said: “This high average level of debt clearly indicates that too many people have borrowings that they have no realistic hope of repaying.
“Any excessive spending over Christmas and at the New Year sales, especially where goods are paid for on credit, risks tipping even more consumers over the edge.”
The Insolvency Service forecast also includes Debt Relief Orders. After their introduction in April 2009, Debt Relief Orders will give consumers with less than £15,000 debt and minimal assets, the opportunity to clear the debt and avoid bankruptcy.
Cast your mind back to last summer and you’ll probably think of the Olympics, disappointing weather and school holidays. It doesn’t seem that long ago. If you were told most banks would be nationalised – even partly – by Christmas you would be forgiven had you laughed the notion off as an exaggeration. Northern Rock sure, but talk of any more would be hard to swallow.
We all know a lot better now of course and it’s not a pretty picture. When the bells ring to herald in the new year next week, we will be watching the clock through the cracks in our fingers wondering what 2009 has in store for the economy. Next year will take care of itself, however, so let’s have a look at 2008 and some of the statistics that make it a unique and somewhat painful year.
Paul Krugman the Nobel Prize winner for economics hailed Gordon Brown’s bank bailout as a stroke of genius but it comes at a cost – £500bn to be precise, or as precise as you can be when talking about this much money.
That bamboozling sum works out to about £8,000 per taxpayer. We will all be reaching into our pockets to pay for the part-nationalisation of Lloyds TSB, RBS and HSBOS so the next time you go into any of these banks you should expect better service, after all you do kind of own them.
What else could £500bn buy if it wasn’t being flung at bank debt? Well at the going rate you could purchase around 4,000 new hospitals or upwards of 15 high-speed rail links across the UK.
A lot of taxpayer money has been swallowed up by the once great Royal Bank of Scotland – £20,000,000,000 to be exact. After a quick calculation that works out at around £300 per taxpayer – quite a pretty penny and it’s a shame the RBS weren’t more careful with theirs.
To make this kind of statistic even more nauseating, the RBS netted profits of £7.5bn in 2007.
Billions is one thing but trillions is quite another matter. The global economy is reeling from a recession that has only just begun and is already costing somewhere in the region of £1.8 trillion.
To try and give this amount of money some perspective it may help to know that the Bank of England valued the UK economy at £7 trillion.
It doesn’t sound like a great deal but a 0.4% drop in retail sales last month compared to 2007 is bad news for the nation’s retailers. It means that if next year’s sales do fall by the predicted 4%, the high street will suffer the worst economic conditions since 1965, say the retail consultancy Verdict.
Woolworths, Pier and MFI are just the first of many retailers expected to shut up shop when 2009 gets into its stride. As the high street loses a lot of its familiar shops, many of the 3.2million employees in the retail sector will be out of a job.
The Centre for Economics and Business Research (CEBR) estimates that house values will drop £50,000 by the end of 2009. This chunk of cash represents about 25% of the average house price and the situation is not expected to improve until 2013 when prices should return to peak value.
The five super banks awarded their chief executives over £50 million between 2003-2007, according to the Labour Research Departments. Sir Fred Goodwin of the Royal Bank of Scotland was paid a basic £3.5m in 2007. Goodwin also got £15.5m in basic pay and cash bonuses. Eric Daniels of Lloyds TSB wasn’t far behind him with £10.2m while HBOS chief executive Andy Hornby earned £6.9m, according to annual reports.
Britons owe £1.5 trillion in mortgages, credit cards, personal loans and store cards. If you find it hard to think in trillions, then picture five billion washing machines or seven million three-bedroom houses.
The average British household with unsecured debt like personal loans or credit cards owes £22,190. If you take mortgages into consideration that amount of debt rises to £59,715.
Unfortunately for most people this level of debt is beyond their ability to repay. In November 07, roughly 130 homes were repossessed on a daily basis in the UK and that figure is expected to grow into 2009. The Council of Mortgage Lenders says 200,000 homeowners will have missed at least three mortgage repayments by the end of 2008.
Furthermore, negative equity is a problem up to 2 million homeowners will be facing by 2010.
If you need help avoiding home repossession, click here.
Every minute that passes, General Motors is losing $52,000 thanks to the economic downturn affecting the USA. The situation has left GM with no choice but to go knocking on the government’s door for a hand out. They won’t be alone as Ford and Chrysler will also be joining them with caps in hand. All three carmakers combined are set to ask for £23 billion in taxpayers’ cash – so the caps must be pretty large. By the time you read this, GM probably just lost another $52,000.
Since the credit crunch took affect around August 08, we have seen business after business go to the wall. At time of writing it isn’t even Christmas yet it is curtains not just for estate agents and financial firms but even high street retailers. In fact it has been such a tough year that Iceland’s economy went into deep freeze.
Economic losers – and there has been no shortage of them – must be wondering just who is making a profit out this of sorry situation. We give you ten people who have profited when all around them are making a loss.
California based hedge-fund manager Andew Lahde made roughly 1000% profits last year when his company Lahde Capital bet against US sub-prime mortgage assets. In September this year Mr Lahde decided he had accumulated enough wealth and promptly closed his funds and retired.
His very public goodbye letter became quite an online sensation, he said; “the low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking.” Lahde made a parting shot at the rich and dismissed capitalism as an archaic system that not longer works due to “corruption.” Bizarrely, he also criticised the government for not legalising marijuana.
Last year New York-based hedge fund manager, John Paulson, outfoxed Wall Street and earned around $2 billion by betting against mortgage-backed securities. Making $2bn at a time when people are losing their homes, jobs and businesses is never likely to make you friends so it is unsurprising he has been heavily criticised for cashing in on others misery.
Paulson told the Wall Street Journal: “I’ve never been involved in a trade that had such unlimited upside with a very limited downside.” You could say he isn’t losing any sleep over it.
If a Democrat couldn’t cash in on the financial failings of the Republicans when the presidential campaign happened to coincide with the crashing economy – then events really would be depressing.
As it was, Barack Obama scored the open goal afforded him by the credit crunch and a previous administration that had nothing new to offer. Barack assures America he is the man to clean up the economy. Watch this space.
Up until recently Labour were looking battered and bruised and it seemed the last person to pull them out of the funk would be the Prime Minister himself, Gordon Brown.
That is until he pulled out his calculator and reminded us that he is more than a dab hand at economics. When all was thought lost, Brown produced a package that would save banks and hopefully prevent the British economy from imploding. While things are bad and a recession has undeniably arrived, there is a sense that Brown’s bank rescue has prevented a bad situation from becoming absolutely nightmarish.
Don’t take our word for it, the Nobel Prize winner for economics Paul Krugman, said: “Luckily for the world economy, Gordon Brown and his officials are making sense… they may have shown us the way through this crisis.”
The credit crunch has heralded something of a fast food revival. Restaurateurs have suffered a huge loss this year with people choosing to stay at home and companies cutting business lunch accounts.
Still figures show that McDonalds has seen two million extra customers a month compared with 2007, so it’s fair to say that eating out is still on the menu for many, even if it’s just for a hamburger. McDonald’s have to create 4000 jobs to deal with the hoards going through their doors in search of a quick fix Happy Meal.
Marxism is no longer considered the expletive it once was but is an ideology enjoying a rebirth outside of student bar and local union office. German bookstores have been experiencing a 300% increase in sales of Das Kapital since the economy took a wobble. Not only that but visitors are flocking to Marx’s birthplace in Trier – 40,000 so far this year.
Jörn Schütrumpf, head of the Berlin publishing house Dietz, which brings out the works of Marx said: “We have a new generation of readers who are rattled by the financial crisis and have to recognise that neo-liberalism has turned out to be a false dream.”
When Jamie Dimon dreams at night he probably pictures himself sat atop a mountain of dollar bills. As America’s largest savings bank JP Morgan Chase has more than $900 billion in deposits.
All of this has been great news for employees who have been on the receiving end of $700m in bonuses. Dimon is expected to replace Hank Paulson as Treasury Secretary for Barack Obama’s administration.
Lawyers at Magic Circle firms such as Clifford Chance, Linklaters and Allen&Overy have reason to be cheerful this Christmas in the aftermath of the Lehman Brothers collapse. Top lawyers in the City are demanding up to £900 an hour consultancy fees on insolvency and restructuring.
Similarly fraud litigators are also feeling merry this year because nothing shows up fraudsters better than an economic downturn.
Spanish giant Santander has been gobbling up high street banks like chorizo. With Abbey on its books and now Alliance & Leicester and Bradford & Bingley, Botin oversees 25million UK mortgages. Profits are going through the roof thanks to a policy that determined to stay away from exotic investments.
It may be a sign of a nervous disposition sweeping the nation but it seems we have thrown ourselves into house cleaning. How else can you explain the makers of Cillit bang’s £373m kitty for the last quarter – a record profit that thumbs its nose to the economic downturn.
Credit card companies have agreed to adopt a new set of “fair principles” after coming under pressure from the government.
Fairer principles will give struggling credit card customers some much needed breathing space with card providers pledging to abstain from raising interest rates when customers fall into arrears on payments.
The government had warned at a meeting with credit card companies in November that if improvements were not made to the way they treat customers, the OFT would begin an investigation into the way the firms conduct their businesses.
As yesterday’s (11/12/08) deadline was reached, credit card issuers agreed to allow customers to transfer deals, or freeze the account and pay off debts at the existing interest rate if the company intends to raise its Annual Percentage Rate (APR).
The government’s main objective was to stop risk-based pricing, a method adopted by card companies when they raise the interest rates overnight for people at risk of defaulting on their borrowing.
The companies have also agreed not to raise interest rates if a customer:
The fair principles plan will come into effect as of 1 January and will help not just customers struggling with credit cards but also store cards. Issuers of both credit and store cards have agreed not to increase interest rates in the first 12 months, and no more frequently than every six months thereafter. Furthermore if they do decide to raise the APR, customers will be given 30 days notice of the change.
There is no mention in the principles, however, that instructs credit card companies to pass on any cuts in the Bank of England’s Bank rate to credit card borrowers.
So borrowers could still face interest rate increases, but will be given more notice of them.
“I recognise that these changes will not be without financial pain for credit card companies, but it was vital that we nipped in the bud the bad practices that were causing real hardship for borrowers,” said Consumer Minister Gareth Thomas.
Debts urged anyone who feels their previous interest rate rise was unfair to contact the Financial Services Ombudsman Service. In light of the media coverage surrounding this latest agreement, you stand a good chance of receiving compensation if the Ombudsman believes the increase was unmerited.
“There is much good news here,” said Malcolm Hurlston, chairman of the Consumer Credit Counselling Service.
“By agreeing not to raise interest rates for people struggling to make repayments, credit card companies have taken a significant step and will help ensure bad personal situations are not made worse.
“However more still needs be done. It is essential that all credit card companies follow the example of the best and freeze charges, fines and interest on the debts of clients who are on a debt management plan.”
Credit card companies could be subject to investigation from the Office of Fair Trading if they do not revise their lending practices as ordered by the Government.
Lord Mandelson, Business Secretary, met with credit card representatives at a meeting in November to sound a warning over unfair practices. Card issuers were given until 11th December to propose improvements in the way they handle consumer lending.
This meeting came against a backdrop of increasing interest rates over the past three months despite three cuts to the Bank of England base rate. Credit card users are now paying an average interest rate of 17.7% up from 16.6% 12 months ago.
If credit card companies fail to help customers with debt, the OFT will step in, a prospect that so far seems to have left card issuers untroubled. Expensive lending rates that so often plunge debtors into further financial hardships have continued unabated.
A government insider said: “We are not backing off. If the companies don’t move, if necessary, we will go down the OFT route.”
Since Lord Mandelson’s show down with credit card companies, just two cards have reduced interest rates – both of which were designed to track the base rate. The Yorkshire Bank and Clydesdale Bank have pressed on undeterred with interest hikes to their Gold Mastercard customers. Meanwhile, Halifax and the Bank of Scotland have also increased balance transfer fees.
Despite cheaper borrowing as a result of Bank’s interest cut, store card debtors are set for more misery with even higher interest rates. The average cost of borrowing is now 25% per year, up from 23.9 % in December 07. Worryingly for store card holders, there is no sign of a cut in rates despite the base rate dropping from 5.25% to 2% over the same period.
There is still hope that some cardholders will see a reduction in their bills when Lord Mandelson and the Consumer Affairs minister, Gareth Thomas, announce their upcoming rescue strategy.
A spokeswoman for the Department for Business, Enterprise and Regulatory Reform said: “We’ve asked lenders to report back by the end of this week and have been in continuing talks with industry following our summit [on 26 November]. We have every expectation that industry will come back with proposals to stop the pockets of bad behaviour that we have identified in risk-based repricing and will continue to work with them to ensure borrowers are treated fairly, responsibly and consistently.”
Debts echoes the sentiments voiced by Vince Cable, the Liberal Democrats’ Treasury spokesman, he said: “The Government has got to get tough with credit card companies determined to make a quick buck out the millions of people struggling to make ends meet. Tough words are worthless unless they are backed up with real action.”
Industry leaders have been summoned to another meeting with Mr Thomas on Thursday.
GDP: 5.23%
Inflation: 5.74%
Unemployment: 7.7%
Markets: -44.16%
Gas per gallon: $5.83
Interest Rates: 13.75%
Brazil’s economy depends on its oil industry, whose main player is Petrobras. When Pertrobras suffer, so too does the stock market which has taken something of a nose dive in recent months. Currency wise, at time of writing Brazil’s real is down 35% against the dollar.
GDP: 9.74%
Inflation: 6.43%
Unemployment: 4%
Markets: -64.92%
Gas per gas: $3.48
Interest Rates: 6.66%
China has acquired a new name which describes its global standing rather well, that being “the world’s factory”. Almost everything you can lay hands on has come from our oriental friends. However, when the rest of the world started shaping up for a recession, demand on China’s manufacturing dropped. As a result her GDP fell to a five-year low and huge layoffs followed. You can also be sure the unemployment figures are someway above the official 4%.
It’s not all gloomy, however, because the government in China has pumped $586 billion into health, housing, and infrastructure. Tax breaks are also on hand for export businesses.
GDP: 1.85%
Inflation: 2.94%
Unemployment: 7.43%
Markets: -41.12%
Gas per gallon: $8.58
Interest Rates: 3.25%
Germany officially declared itself in a recession in November, which was unsurprising yet still something of a shock for Europe’s largest economy. Figures showed GDP had contracted by 0.5%. But ‘bailouts’ are this year’s buzzwords so the German government has boosted its ailing bank industry to the tune of $642 billion. Recovery isn’t expected until 2010 say economists.
GDP: 0.3%
Inflation: 7.93%
Unemployment: 2.2%
Markets: -45.81%
Gas per gallon: $7.54
Interest Rates: 18%
Iceland made some of the biggest headlines for a small country. Icelanders have taken to the streets insisting that the government steps down, and that banks are forced to operate with greater transparency.
October saw Iceland’s stock market collapse when its central bank went bankrupt. Currency wise, at time of writing, the Krona has spiraled 50% against dollar in the space of 6 months. The International Monetary Fund has already granted Iceland $2.1 billion but this is small chips compared to the additional $4 billion which the government claims they need.
GDP: 7.93%
Inflation: 7.93%
Unemployment: 7.8%
Markets: -51.48%
Gas per gallon: $4.95
Interest Rates: 7.5%
Indian jewelers can be excused for getting a little excited ahead of the annual wedding festival – the Diwali – because brides like to wear gold and lots of it. For jewelers this year, however, business was poor after sales fell by as much as 20%.
India’s debt swelled to 3.6% of its GDP and her central bank loaned over $35 billion to financial institutions in an attempt to inject life into the credit market.
GDP: 0.69%
Inflation: 1.57%
Unemployment: 4.05%
Markets: -42.45%
Gas per gallon: $5.78
Interest Rates: 0.3%
The government of Japan boosted it’s economy by $275 billion this year and gave some special loan incentives to small and medium sized firms in a bid to resuscitate a failing economy. It’s stock market also crashed to a low unparalleled at any time since the early 80s.
GDP: 7%
Inflation: 14.03%
Unemployment: 5.9%
Markets: -65.53%
Gas per gallon: $3.93
Interest Rates: 11%
Exports took a hammering as gas and oil prices took a dive making many investors nervous, especially in light of the war with Georgia which only heightened economic uncertainty. Russia’s considerable foreign debt meant the global crisis affected her particularly hard without any real national assets to rely on. The Russian central bank invested $50 billion into banks and other financial operatives in a bid to bolster the credit market.
Gold is greatest in the lean years. This precious metal is traditionally seen as a ‘safe haven’ during economic downturns and 2008 has seen gold soar by more than a quarter to about £395 an ounce.
You should expect gold to receive heavy investment until we see the back of the credit crunch. HSBC analyst James Steel said: ‘We expect gold prices to be supported for essentially as long as this sentiment holds sway in the financial markets.’
Top restaurants that are usually fully booked through to Christmas have reported a decline in reservations as well as spend per table. They aren’t alone, the more moderately priced eateries are also acknowledging a dip in profits as people stay away from eating out in favour of a meal at home in front of the television. Average spend per head is down about 10% to 15%.
In the City where bankers have routinely spent big over the last ten years, the same can be said of restaurants there.. Less expensive wine is the tipple of choice and then it’s usually two bottles rather than three. Cheaper wine and less of it, is accompanied by meals from the cheaper end of the menu.
If you are finding that hailing a cab is a lot easier than it used to be you can rest assured it is a sign of the times rather than an influx of new taxis on the road. Firms are cutting taxi accounts and elsewhere shoppers are choosing the bus instead of the cab....oh, that’s right, there aren’t any shoppers.
Jewellery has a habit of sliding down the priority list when a recession looms. High end jewellers such as Boodles, however, has reported that while the more moderately priced bling, priced between £5,000 to £20,000, is on the decline, the £50,000 plus end of the business is still thriving. A fact which reminds us not everyone is affected by the credit crunch. Upmarket jewellery shops may be breathing a sigh of relief every time they sell a £40,000 broach, but the high street jewellers are feeling the pinch.
American economist George Taylor coined a theory in the 1920s. He suggested that when times were good skirts got shorter because women wanted to show off expensive silk stockings and when times get harder skirts adopted a longer style. If you have your pulse on the fashion shows this autumn you’ll know that hemlines are falling in line with the stock markets.
Sir Philip Green, owner of shops such as Burton, Dorothy Perkins, Evans, Miss Selfridge, Outfit, Topshop/Topman and Wallis commente All the official data and anecdotal evidence screams out that consumers are pulling back in a big way. Many big-name chains including Urban Outfitters, Borders, Oasis and Warehouse have been sending out e-vouchers to ‘friends and family’ offering discounts of up to 30% in the run-up to Christmas. Even Sir Philip Green says ‘business is very, very tough’. Tim Danaher, editor of Retail Week, says lots of shoppers are looking but not necessarily buying much.
Housing Market
After a two-year boom, the party is definitely over for London property. Prices fell 0.6% in October and further falls followed in November. Buyers have dried up and agents say that outside the prime centre falls of five to 10% from the summer peak are typical.
There are few signs of a slowdown in cosmetic surgery - with one exception, in the City. Liz Dale, director of The Harley Medical Group, said: ‘Our clinics are up 31% year on year, with our Harley Street, Bristol and Cardiff clinics running 49% ahead of expectation. Our City clinic near Blackfriars is having a quieter month, up 10% year on year.’
The number of cranes dotting London’s skyline is often seen as a good barometer of economic health. Lots of major construction work suggests confidence in the future is high. The latest ‘crane survey’ from commercial property firm Drivers Jonas suggests building activity in both the West End and the City is still very strong. However, if a downturn comes next year, the London skyscape could quickly empty of cranes as projects are completed.
Feeling the squeeze: Wine retailer Majestic set to face increased costs
No sign yet that the boom in expensive wine has run its course. Simon Staples, sales director at Berry Bros & Rudd, said: ‘In the last two weeks we have sold four cases of 2005 Le Pin for £24,000 per case. We have also sold a case of 1945 Mouton Rothschild for £145,000
‘This week we have sold 45 cases of the finest wine I’ve ever tasted - 2001 Chateau d’Yquem at £4,000 per case, which is hardly frugal.’
Divorce ratesIt might appear to be a cynical view, but the desertion rate of wives is being seen as a reaction to the economic uncertainty in the City.
Sandra Davis, head of the legal firm Mishcon de Reya’s family practice, said: ‘The trophy wives who married for money are starting to cash in their chips,’ she told Financial Mail. ‘When money looks like flying out of the window, love walks out the door.’
While the success of the Government’s £50bn rescue bid over the long term remains uncertain, one thing is for sure, the stock market will soon decide for itself. Yesterday, the day after the Government announced the emergency cash fund, stock continued to fall and markets refused to be jolted from the their catatonic condition.
It seems much of the developed world has agreed on a plan of action. Interest rates cuts of 0.5% have been announcement by the Bank of England, the US Federal Reserve, the European Central Bank (ECB) and the central banks of Canada, Sweden and Switzerland. Even China was on board with a 0.27 percentage point cut in rates.
Despite these powerhouses rallying around banks and financial firms, the US suffered a sixth day of spiraling share prices, while there was almost no discernible improvement in banks’ willingness to lend to one another or to companies and individuals, the problem at the heart of the crisis.
The FTSE 100 dropped more than 5% and most European markets joined them in the doldrums.
The Government’s double prong action of a £50bn payout and an interest rate cut was considered extreme by some economists but most agreed the biggest bail out in British history was fitting for such perilous times as these.
While good on paper, there was no immediate respite in the inter-bank loan market yesterday. The British Bankers’ Association said Libor, the rate at which banks lend to each other, had actually risen in the hours after the Government announcement, with the cost of loans for some terms hitting new records.
The fly in the ointment is the limited influence British banks wield in the larger European market. Making up only half the banks that agree inter-bank lending rates, Britain can only push the envelope so far. However, Prime Minister Gordon Brown has urged other European countries to adopt a similar strategy as Britain in order to free up the credit markets.
Cautiously optimistic economists believe that the sheer scale of the rescue packages awarded to banks in the UK ($50bn) and in the US ($500bn) is bound to have a positive affect. For now it is a matter of waiting for confidence to be restored and for some key players to lead from the front by making some bold, if risky, moves.
Marcus Doherty
While some banks are playing it coy about their agreement to give the government vast amounts of shares in exchange for a pay out worth billions, others such as Barclays, Lloyds TSB and HSBOs have been more transparent.
Their pact with the government had the kind of effect the trading floor in London’s square mile was anticipating – wide spread panic. As the Chancellor announced a generous £50bn bail out, starting with £25bn for the aforementioned most needy, investors sold shares in what was for some traders the busiest hour of their careers.
Shares in RBS plunged more than 39% in early trading - wiping more than £10billion off the value. Which is crippling before you even consider the 20% it dropped on Monday.
Meanwhile shares in HBOS dropped by as much as 13%, Barclays fell by up to 15% and Lloyds TSB by 21%.
If banks accept the lifeline offered them by the government and most appear set to do just that – with the apparent exception of Barclays and HSBC – it will mean the government can cherry pick preference shares. Part nationalization however is a bitter pill to swallow but banks are left with little choice.
The consolation banks are determined to keep in mind is the hope that if the government helps to bolster their capital it might provide a much-needed boost of confidence to investors. While true, nationalization even in part means less control for banks and fewer incentives for investors.
Last night’s meeting between the Chancellor, bank executives, BoE governor Mervyn King and senior figures from the Financial Services Authority came as banks around the world careered from one day of turmoil into another.
Marcus Doherty
As the US Treasury gets $700billion to stabilise the economy, the British government get set to follow suit with a potential £50bn bail out package.
Alistair Darling, the Chancellor, has announced that, “the government stands ready to provide an incremental minimum of £25bn of further support for all eligible institutions”. The £25bn will mark just the first shot in the arm for an economy that the International Monetary Fund this week said was heading into a recession similar to that of the early 90s.
The government has been widely criticized for it’s sluggish approach to the global crisis. This bail out package, made in conjunction with the FSA and the BoE, is intended to restore confidence within the financial market and increase liquidity between banks.
‘Preference shares capital’ will go where it is needed most and it is expected that RBS, Abbey, Lloyds TSB and HBOS will be vying for the lions share.
The rescue package also includes a guarantee of short and medium-term debt obligations to enable banks to meet their refinancing commitments. The take-up of this guarantee could amount to about £25bn, the Government said.
Treasury welcomed the move while the news was met with mixed reaction in the City.
Marcus Doherty
Read how the stock exchange faired in light of the Chancellors annoucement by clicking here.
