Mortgage lending for UK properties 'rises'

Posted: 24 Jun 2010 10:55:30 GMT

The amount of money provided in the form of mortgages for UK house purchases has risen, it has been claimed.

According to the British Bankers' Association (BBA), the annual growth in net lending was 4.3 per cent in May.

This was higher than the 0.9 per cent annual growth recorded in April, the organisation pointed out.

Commenting on the figures, BBA statistics director David Dooks said: "High street banks are the main providers in the mortgage market, supplying 75 per cent of all new lending and approving more than 35,000 loans for house purchase each month."

He added that the low interest rate environment is resulting in consumers opting to reduce or pay off their borrowing, rather than saving money.

This month, the Bank of England's Monetary Policy Committee voted to keep the country's base rate of interest at its historical low of 0.5 per cent, although minutes from the meeting revealed that opinion on the subject was split.

Did the Bank of England deliberately hurt the middle classes?

By Charlie Parker | 09:39:37 | 02 February 2010

Pawns in rich man's game

As far as the Cadbury board is concerned, they have what they wanted - an increase in the share bid, which benefits shareholders and leaves 7,000 workers in fear of their future.

The higher price that Kraft has been forced to fork out may well be a necessary sweetener for Cadbury's corporate shareholders, but it will also provide a stimulus to the new owners to cut back on labour costs as a means of trimming its existing massive debts.

As with, most recently, the abandonment of Corus steelworkers on Teesside and Bosch car components workers in Miskin near Cardiff, workers are treated as numbers on a balance sheet.

Bosch was bribed with £21 million of Welsh Development Agency money to site its factory in the Vale of Glamorgan.

And it won't have to return a penny of this after blaming mythical "market forces," in the shape of lower orders for the alternators that its Miskin factory produces. But there doesn't seem to be such an orders problem for its plant in Hungary, to which the work of the 900 Miskin employees will be transferred, no doubt because wages there are about two-thirds of those in Wales.

In short, the workers in Wales have been sacrificed on the altar of Bosch corporate profits.

Tata, the India-based conglomerate that owns Corus, is in an even more fortunate situation with regard to its closure of Teesside.

It stands to gain about £160 million in the financial charade that is the market in carbon emissions trading by dint of closing Teesside and eradicating the plant's output of greenhouse gases. And it could then double this sum by investing in a new facility in India, replacing an existing heavy-polluting steelworks with a state-of-the art "green" plant.

The beauty of this wealth-creation scheme is its simplicity. Public finance from European Union governments is transformed into megaprofits for a major transnational corporation and the only losers are the 1,700 workers on Teesside.

In what way will Kraft's takeover of Cadbury be any different from Corus and Bosch?

Once again, the entire deal has been done with no involvement of the 7,000 Cadbury workers or their union Unite and, once again, the workers know that neither the company nor the British government gives a toss about their predicament.

They must also be aware that Gordon Brown's suggestion that the government is "determined" that investment levels in Cadbury will be maintained and that jobs there will be secure is nothing more than an outburst of hot air.

He cannot order Kraft to do so because he and his government have been strident in their advocacy of non-interference in the private sector.

Private manufacturers have had carte blanche, just like private bankers, to concentrate entirely on the bottom line and to ignore social factors such as unemployed workers, devastated communities and an increasingly deindustrialised Britain.

As Unite national officer Jennie Formby says, events at Kraft and, in fact, throughout Britain's economy, are dictated by "short-term City interests and institutional shareholders."

Until that is changed and government adopts an interventionist manufacturing strategy, including increased public ownership, workers in Britain will continue to be pawns in a rich men's game.

China's economy

Not just another fake

Jan 14th 2010 | BEIJING
From The Economist print edition

The similarities between China today and Japan in the 1980s may look ominous. But China’s boom is unlikely to give way to prolonged slump

 CHINA rebounded more swiftly from the global downturn than any other big economy, thanks largely to its enormous monetary and fiscal stimulus. In the year to the fourth quarter of 2009, its real GDP is estimated to have grown by more than 10%. But many sceptics claim that its recovery is built on wobbly foundations. Indeed, they say, China now looks ominously like Japan in the late 1980s before its bubble burst and two lost decades of sluggish growth began. Worse, were China to falter now, while the recovery in rich countries is still fragile, it would be a severe blow not just at home but to the whole of the world economy.

On the face of it, the similarities between China today and bubble-era Japan are worrying. Extraordinarily high saving and an undervalued exchange rate have fuelled rapid export-led growth and the world’s biggest current-account surplus. Chronic overinvestment has, it is argued, resulted in vast excess capacity and falling returns on capital. A flood of bank lending threatens a future surge in bad loans, while markets for shares and property look dangerously frothy.

Just as in the late 1980s, when Japan’s economy was tipped to overtake America’s, China’s strong rebound has led many to proclaim that it will become number one sooner than expected. In contrast, a recent flurry of bearish reports warn that China’s economy could soon implode. James Chanos, a hedge-fund investor (and one of the first analysts to spot that Enron’s profits were pure fiction), says that China is “Dubai times 1,000, or worse”. Another hedge fund, Pivot Capital Management, argues that the chances of a hard landing, with a slump in capital spending and a banking crisis, are increasing.

Scary stuff. However, a close inspection of pessimists’ three main concerns—overvalued asset prices, overinvestment and excessive bank lending—suggests that China’s economy is more robust than they think. Start with asset markets. Chinese share prices are nowhere near as giddy as Japan’s were in the late 1980s. In 1989 Tokyo’s stockmarket had a price-earnings ratio of almost 70; today’s figure for Shanghai A shares is 28, well below its long-run average of 37. Granted, prices jumped by 80% last year, but markets in other large emerging economies went up even more: Brazil, India and Russia rose by an average of 120% in dollar terms. And Chinese profits have rebounded faster than those elsewhere. In the three months to November, industrial profits were 70% higher than a year before.

China’s property market is certainly hot. Prices of new apartments in Beijing and Shanghai leapt by 50-60% during 2009. Some lavish projects have much in common with those in Dubai—notably “The World”, a luxury development in Tianjin, 120km (75 miles) from Beijing, in which homes will be arranged as a map of the world, along with the world’s biggest indoor ski slope and a seven-star hotel.

 

Average home prices nationally, however, cannot yet be called a bubble. On January 14th the National Development and Reform Commission reported that average prices in 70 cities had climbed by 8% in the year to December, the fastest pace for 18 months; other measures suggest a bigger rise. But this followed a fall in prices in 2008. By most measures average prices have fallen relative to incomes in the past decade (see chart 1).

The most cited evidence of a bubble—and hence of impending collapse—is the ratio of average home prices to average annual household incomes. This is almost ten in China; in most developed economies it is only four or five. However, Tao Wang, an economist at UBS, argues that this rich-world yardstick is misleading. Chinese homebuyers do not have average incomes but come largely from the richest 20-30% of the urban population. Using this group’s average income, the ratio falls to rich-world levels. In Japan the price-income ratio hit 18 in 1990, obliging some buyers to take out 100-year mortgages.

Furthermore, Chinese homes carry much less debt than Japanese properties did 20 years ago. One-quarter of Chinese buyers pay cash. The average mortgage covers only about half of a property’s value. Owner-occupiers must make a minimum deposit of 20%, investors one of 40%. Chinese households’ total debt stands at only 35% of their disposable income, compared with 130% in Japan in 1990.

China’s property boom is being financed mainly by saving, not bank lending. According to Yan Wang, an economist at BCA Research, a Canadian firm, only about one-fifth of the cost of new construction (commercial and residential) is financed by bank lending. Loans to homebuyers and property developers account for only 17% of Chinese banks’ total, against 56% for American banks. A bubble pumped up by saving is much less dangerous than one fuelled by credit. When the market begins to crack, highly leveraged speculators are forced to sell, pushing prices lower, which causes more borrowers to default.

Even if China does not (yet) have a credit-fuelled housing bubble, the fact that property prices in Beijing and Shanghai are beyond the reach of most ordinary people is a serious social problem. The government has not kept its promise to build more low-cost housing, and it is clearly worried about rising prices. In an attempt to thwart speculators, it has reimposed a sales tax on homes sold within five years, has tightened the stricter rules on mortgages for investment properties and is trying to crack down on illegal flows of foreign capital into the property market. The government does not want to come down too hard, as it did in 2007 by cutting off credit, because it needs a lively property sector to support economic recovery. But if it does not tighten policy soon, a full-blown bubble is likely to inflate.

The world’s capital

China’s second apparent point of similarity to Japan is overinvestment. Total fixed investment jumped to an estimated 47% of GDP last year—ten points more than in Japan at its peak. Chinese investment is certainly high: in most developed countries it accounts for around 20% of GDP. But you cannot infer waste from a high investment ratio alone. It is hard to argue that China has added too much to its capital stock when, per person, it has only about 5% of what America or Japan has. China does have excess capacity in some industries, such as steel and cement. But across the economy as a whole, concerns about overinvestment tend to be exaggerated.

Pivot Capital Management points to China’s incremental capital-output ratio (ICOR), which is calculated as annual investment divided by the annual increase in GDP, as evidence of the collapsing efficiency of investment. Pivot argues that in 2009 China’s ICOR was more than double its average in the 1980s and 1990s, implying that it required much more investment to generate an additional unit of output. However, it is misleading to look at the ICOR for a single year. With slower GDP growth, because of a collapse in global demand, the ICOR rose sharply everywhere. The return to investment in terms of growth over a longer period is more informative. Measuring this way, BCA Research finds no significant increase in China’s ICOR over the past three decades.

Mr Chanos has drawn parallels between China and the huge misallocation of resources in the Soviet Union, arguing that China is heading the same way. The best measure of efficiency is total factor productivity (TFP), the increase in output not directly accounted for by extra inputs of capital and labour. If China were as wasteful as Mr Chanos contends, its TFP growth would be negative, as the Soviet Union’s was. Yet over the past two decades China has enjoyed the fastest growth in TFP of any country in the world.

Even in industries which clearly do have excess capacity, China’s critics overstate their case. A recent report by the European Union Chamber of Commerce in China estimates that in early 2009 the steel industry was operating at only 72% of capacity. That was at the depth of the global downturn. Demand has picked up strongly since then. The report claims that the industry’s overcapacity is illustrated by “a startling figure”: in 2008, China’s output of steel per person was higher than America’s. So what? At China’s stage of industrialisation it should use a lot of steel. A more relevant yardstick is the America of the early 20th century. According to Ms Wang of UBS, China’s steel capacity of almost 0.5kg (about 1lb) per person is slightly lower than America’s output in 1920 (0.6kg) and far below Japan’s peak of 1.1kg in 1973.

 

Many commentators complain that China’s capital-spending spree last year has merely exacerbated its industrial overcapacity. However, the boom was driven mainly by infrastructure investment, whereas investment in manufacturing slowed quite sharply (see chart 2). Given the scale of the spending, some money is sure to have been wasted, but by and large, investment in roads, railways and the electricity grid will help China sustain its growth in the years ahead.

Some analysts disagree. Pivot, for instance, argues that China’s infrastructure has already reached an advanced level. It has six of the world’s ten longest bridges and it boasts the world’s fastest train; there is little room for further productive investment. That is nonsense. A country in which two-fifths of villages lack a paved road to the nearest market town still has plenty of scope for building roads. The same goes for railways. Again, a comparison of China today with the America of a century ago is pertinent. China has roughly the same land area as America, but 13 times more people than the United States did then. Yet on current plans it will have only 110,000km of railway by 2012, compared with more than 400,000km in America in 1916. Unlike Japan, which built “bridges to nowhere” to prop up its economy, China needs better infrastructure.

It is true that in the short term, the revenue from some infrastructure projects may not be enough to service debts, so the government will have to cover losses. But in the long term such projects should lift productivity across the economy. During Britain’s railway mania in the mid-19th century, few railways made a decent financial return, but they brought huge long-term economic benefits.

The biggest cause for worry about China is the third point of similarity to Japan: the recent tidal wave of bank lending. Total credit jumped by more than 30% last year. Even assuming that this slows to less than 20% this year, as the government has hinted, total credit outstanding could hit 135% of GDP by December. The authorities are perturbed. This week they increased banks’ reserve requirement ratio by half a percentage point. They have also raised the yield on central-bank bills.

 

However, too many commentators talk as if Chinese banks have been on a lending binge for years. Instead, the spurt in 2009, which was engineered by the government to revive the economy, followed several years in which credit grew more slowly than GDP (see chart 3). Michael Buchanan, of Goldman Sachs, estimates that since 2004 China’s excess credit (the gap between the growth rates of credit and nominal GDP) has risen by less than in most developed economies.

Even so, recent lending has been excessive; combined with overcapacity in some industries, it is likely to cause an increase in banks’ non-performing loans. Ms Wang calculates that if 20% of all new lending last year and another 10% of this year’s lending turned bad, this would create new bad loans equivalent to 5.5% of GDP by 2012, on top of 2% now. That is far from trivial, but well below the 40% of GDP that bad loans amounted to in the late 1990s.

Much of the past year’s bank lending should really be viewed as a form of fiscal stimulus. Infrastructure projects that have little hope of repaying loans will end up back on the government’s books. It would have been much better if such projects had been financed more transparently through the government’s budget, but the important question is whether the state can afford to cover the losses.

Official gross government debt is less than 20% of GDP, but China bears argue that this is an understatement, because it excludes local-government debt and the bonds issued by the asset-management companies that took over banks’ previous non-performing loans. Total government debt could be 50% of GDP. But that is well below the average ratio in rich countries, of around 90%. Moreover, the Chinese government owns lots of assets, for example shares of listed companies which are worth 35% of GDP.

Ying and yang

Even if, as argued above, concerns about a financial crash in China are premature, the risks of a dangerous bubble and excessive investment will clearly increase if credit continues to expand at its recent pace. The stitching on the Chinese economy could fray and burst. Would that imply the end of China’s era of rapid growth?

Predictions that China is heading for a prolonged Japanese-style slump ignore big differences between China today and Japan in the late 1980s. Japan was already a mature, developed economy, with a GDP per person close to that of America. China is still a poor, developing country, whose GDP per person is less than one-tenth of America’s or Japan’s. It has ample room to play catch-up with rich economies by adding to its capital stock, importing foreign technology and boosting productivity by shifting labour from farms to factories. This would make it easier for China to recover from the bursting of a bubble.

 

Chart 4 examines the relationship between growth rates and income per head for six Asian economies. Each plot shows a country’s growth rate and GDP per person relative to America’s for successive ten-year periods, starting when their rapid growth took off. It illustrates how growth rates slow as economies catch up with America, the technological leader. The fact that China’s GDP per head is much lower than Japan’s in the 1980s suggests that its growth potential over the next decade is much higher. Even though China’s labour force will start shrinking after 2016, rapid productivity gains mean that its trend GDP growth rate is still around 8%, down from 10% in the past decade.

Japan’s stockmarket and land-price bubbles in the early 1960s offer a better (and more cheerful) analogy to China than the 1980s bubble era does. Japan’s economy was poorer then, although relative to America its GDP per person was more than double China’s today, and its trend rate of growth was around 9%. According to HSBC, after the bubble burst in 1962-65, Japan’s annual growth rate dipped to just under 6%, but then quickly rebounded to 10% for much of the next decade.

South Korea and Taiwan, which experienced big stockmarket bubbles in the 1980s, are also worth examining. In the five years to 1990, Taipei’s stockmarket surged by 1,600% (in dollar terms) and Seoul’s by 700%, easily beating Tokyo’s 450% gain in the same period. After share prices slumped, annual growth in both South Korea and Taiwan slowed to around 6%, but soon regained its previous pace of 7-8%.

The higher a country’s potential growth rate, the easier it is for the economy to recover after a bubble bursts, so long as its fiscal and external finances are in reasonable shape. Rapid growth in nominal GDP means that asset prices do not need to fall so far to regain fair value, bad loans are easier to work off and excess capacity can be more quickly absorbed by rising demand. The experience of Japan in the 1960s suggests that if China’s bubble bursts, it will hurt growth temporarily but not lead to prolonged stagnation.

However, it is Japan’s experience after the 1980s that most influences the thinking of policymakers in Beijing. Many blame Japan’s deflation and its lost decades of growth on the fact that its government caved in to American demands for an appreciation of the yen. In 1985 central banks in the big rich economies agreed, in the Plaza Accord, to intervene to push down the dollar. By 1988 the yen had risen by more than 100% against the greenback. One reason why policymakers in Beijing have resisted a big rise in the yuan is that they fear it could send their economy, like Japan’s, into a deflationary slump.

The wrong lesson

Yet Japan’s real mistake was not that it allowed the yen to rise, but that it had previously resisted an appreciation for too long, so that when it did happen the yen soared. A second error was that Japan tried to offset the adverse economic effects of a strong yen with over-lax monetary policy. If policy had been tighter, the financial bubble would have been smaller and its aftermath less painful.

This offers two important lessons to China. First, it is better to let the exchange rate rise sooner and more gradually than to risk a much sharper appreciation later. Second, monetary policy should not be too slack. Raising reserve requirements is a small step in the right direction. Despite the bears’ growling, China’s economic collapse is neither imminent nor inevitable. But if it continues to draw the wrong lesson from the tale of Japan, then one day its economy may look just as tatty.

Will writers come under scrutiny

By Lorna Bourke | 13:01:00 | 12 January 2010

The Law Society has made a move to outlaw rogue or unqualified will writers.  Over half the population hasn’t made a will and of those who have, a significant proportion of their wills are likely to have been written by unqualified will writers – leaving clients with no form of redress if things go wrong.

‘Rarely does a day go by without the Institute of Professional Will Writers receiving a telephone enquiry from a member of the public, trying to trace a will that has been written by a will-writing firm that has disappeared,’ says Paul Sharpe, chairman of the IPW.  

‘The best case scenario is that the enquiry is from the person who made the will - they can make a new will – albeit having to shoulder the unnecessary cost of paying for another will to be made. The worst case scenario is that the enquiry is from a relative of a deceased person who is trying to trace the original will. The expense, hassle and consequences of intestacy await them.’

The Law Society will be proposing that writing wills becomes a regulated activity to put a stop to cowboy operators. 

Craig Jones, spokesman for the Legal Services Board, said: ‘We have indicated that we intend to review the extent of reserved legal activities – meaning those activities which can only be carried out by persons entitled to do so by virtue of being exempt or being authorised by the approved regulators. Will writing is one of the areas that will be included in the review.’

The proposal is not aimed at preventing individuals from writing their own wills – you will still be able to do that – but is an attempt by the Law Society to force the government to introduce regulation of unqualified will writing firms,  some of whom are less than competent.

‘What we would like to see is that will writing and administration of estates become reserved legal activities which means only those qualified and regulated can do it ,’ confirms  Russell Wallman, director of government relations at the Law Society.  ‘It is possible that other groups would seek to do this by becoming regulated.

In an ideal world, everyone would have the benefit of a will written by a qualified solicitor who is up to date with tax law and is properly insured.  But not everyone can afford this and fear of solicitors’ charges is undoubtedly one of the main reasons why unregulated will writers, who often advertise a flat fee service, flourish.  There is definitely a very strong case for regulating will writing firms in the same way that non-solicitor conveyancing firms are licensed.

The Law Society has been campaigning for some time for regulation of unqualified and uninsured will writers.  ‘Solicitors know so many cases of people who have turned to them for help after being left with what can only be described as nightmare wills,’ said Heslett.   ‘What is most worrying is that their victims are often unaware that their will writers are not regulated, nor is there any mechanism for complaint. As the will writer is not insured, there is no means of redress if things go wrong.’

‘There may be rare instances when the solicitor gets it wrong, but the difference between a solicitor and a will writer is that they are legally trained, robustly regulated and are covered by indemnity insurance, which provides recompense to clients.  Most will writers are not insured,’ Heslett warned.

So will commercial will writers become regulated?  Hopefully yes.  But in the meantime make a New Year’s resolution to make a will if you haven’t done so already, or review your will if it was made some years ago.  Divorce, separation and marriage automatically invalidate a will.

Banks expect to lift mortgage supply in 2010

Banks increased the supply of mortgages in the last three months of 2009, as rising house prices and the improving economic outlook boosted lenders' confidence.

 By Rupert Neate
Published: 1:14PM GMT 31 Dec 2009

The Bank of England's latest credit conditions survey, found that lenders expected a further increase in mortgage availability in the first three months of 2010. It said homeowners looking to borrow more than 75pc of the value of their properties had the greatest choice of mortgage.

The news came as the latest house price data from Nationwide showed house prices are now almost 6pc higher than at the start of 2009. British house prices rose by 0.4pc in December, taking the average house price to £162,103. It was the eighth consecutive monthly rise. House prices have risen by 117pc over the past decade, despite the woes of 2008.

 

Howard Archer, chief UK and European economist for IHS Global Insight, said the survey "boosts hopes that quantitative easing and other policy measures undertaken by both the central bank and the government to boost bank lending are increasingly feeding through to have a beneficial impact.

"Consequently, the survey raises hopes that credit conditions will increasingly become less of a constraint on economic activity over the coming months. This is critical to sustainable recovery prospects."

The availability of credit for companies also improved over the final quarter, although by slightly less than expected.

 

Tracker or fixed-rate mortgage? It's all a bit of a gamble

It seems like a no-brainer. Trackers can save you £103 a month on an average mortgage. But, as Laura Howard writes, it's not a safe bet

• Laura Howard

• The Observer, Sunday 20 December 2009

 I f the end of the year also sees the end of your mortgage deal, whether to move on to a fixed or tracker rate, will be a vexing decision for many in the current climate.

Interest rates have stalled at the historic low of 0.5% since March, which makes tracker deals - that are directly pegged to base rate - look appealing. According to figures from financial data provider Moneyfacts, the average two-year tracker is currently at 3.71%. This compares to the 4.93% average cost of a two-year fixed rate.

With the price disparity translating into a monthly saving of £103 on a £150,000 repayment mortgage, the choice may, at first, seem like a no-brainer. But the key question is, how long interest rates will remain this low?

According to most experts, the answer is quite a while. The Centre for Economic and Business Research recently said that borrowing costs are likely to stay put at 0.5% until at least 2011 - and added that rates would probably stay below 2% until 2014.

Roger Bootle, managing director of Capital Economics - a traditionally pessimistic commentator - went one stage further. He said: "A prolonged period of low interest rates will be required to allow the economy to withstand the looming fiscal austerity. My money is on Bank base rate staying at 1% or lower for five years."

Ray Boulger, senior technical manager for broker John Charcol, agrees rate rises are not imminent but adds that there are more factors for existing homeowners to consider. "If you are set to revert on to a very low Standard Variable Rate with your current lender - less than 3% - you should simply do nothing. You will not find a cheaper tracker anywhere else and there will be no early repayment charge to get out of the deal at a later stage."

Lloyds TSB, Cheltenham & Gloucester and Nationwide have SVRs of 2.5% while the Woolwich transfers existing customers to a tracker of base rate plus 0.95% - a pay rate of a minuscule 1.44%.

However, according to Moneyfacts, the average SVR is still at 4.68% with some lenders, such as the Chesham Building Society, charging north of 6%. In this case remortgagers will need rely on a low loan to value (the proportion of the property that is mortgaged) to qualify for the cheapest variable rate deals.

"Although we have recently recorded the average loan to value rising back up to 75%, most of the very best deals are still reserved for borrowers with 40% equity in their homes," says Michelle Slade, spokesperson for Moneyfacts.

In this case, First Direct is offering a lifetime tracker at 2.99% above base which translates into a current pay rate of 3.49%. Crucially, the deal also comes with no early repayment charges, meaning you are free to leave at any time.

If you have just 30% equity in your home, Woolwich is offering a lifetime tracker at a cheaper 2.27% above base (current pay rate of 2.77%). However, borrowers will be tied in for the first two years during which time it will cost 1% of the outstanding debt to leave.

In fact, two years should be the maximum that borrowers tie into a tracker, advises Boulger. "Most people agree that base rate will stay at 0.5% until at least mid-next year, and then only rise slowly. But it's not sensible to tie into a tracker with penalties that last longer than two years in case the outlook changes after that, and you want to switch."

Regardless of interest rates, some people will always want the security of a fixed monthly payment, says Katie Tucker, technical manager at broker, Mortgageforce. "If you would not be able to cope with your monthly payment increasing by another quarter in a year's time - a 1% rise on a current 4% rate - a fixed-rate deal will be the best option." This situation is most likely to apply to first-time buyers - many of whom will also only be able to scrape together the minimum 10% deposit.

But homebuyers can still seek out security while taking advantage of potential long-term low rates, says Boulger. "You can always opt for a short-term fix with a lender offering a cheap reversion rate. While your LTV will make a big difference initially, at the end of the deal everyone reverts on to the same rate."

He points to a two-year fix from Cheltenham & Gloucester available up to 90% LTV. At 7.09% the initial cost is hefty but after two years the deal reverts to an SVR of just 2.5% - that, potentially, looks set to stick around. The fee, at £799, is also cheaper than average.

British banks quizzed by regulators on exposure to Dubai crisis

Large losses feared at HSBC and RBS as City watchdog seeks urgent assurances

 

Financial markets were shrouded in uncertainty yesterday over the crisis in Dubai, above. Photograph: Steve Crisp/Reuters

City regulators are urgently seeking assurances that Britain's major banks are protected from the deepening debt crisis in Dubai amid fears that a possible default by the region's major property developer will cause another major jolt to the already fragile financial system.

The Financial Services Authority is understood to have demanded that the firms it regulates are open about their exposure to the troubled Dubai entities and along with the tripartite authorities – which also include the Bank of England and the Treasury - the FSA is continuing to monitor the situation closely.

It is believed the banks argue that their exposure is exaggerated and the authorities have reached an initial assessment that the situation is manageable.

But analysts said UK banks had greater exposure than their rivals owing to Britain's traditional links to the Middle East, with London-based institutions such as HSBC and Standard Chartered heavily focused on lending to emerging markets during the Dubai property boom.

Bank analysts at JP Morgan said lenders' main exposure is through $14bn of syndicated loans to Dubai World. It pinpointed the state-backed Royal Bank of Scotland as having the biggest potential problem, as it helped arrange $2.3bn of those loans. However, it is unclear how much of that $2.3bn RBS passed on to other lenders and it could have exposure to just 10% of the total sum, $230m. After recoveries any eventual loss would probably be far less.

Stock markets recovered some of their earlier losses, with the London Stock Exchange FTSE 100 finishing up 1%, erasing some of Thursday's 170-point loss. But US stock markets tumbled along with oil and gold. Gordon Brown said the world financial system was stronger than last year and better able to deal with any shocks from unpaid loans. "While it is a setback, I think we will find it is not on the scale of previous problems we have dealt with," the prime minister said.

Reassurances from banks and western governments caught by surprise at the scale of problems hitting Dubai World and developer Nakheel came as a planeload of bankers, accountants and lawyers departed for the troubled city state, one of seven in the United Arab Emirates, to negotiate a settlement over its £37bn of outstanding debts.

Fears linger that Britain's beleagured banks, which are the biggest lenders to the Emirates, are over-exposed and face a further knock to their finances.

Credit ratings agencies said they would monitor Dubai closely in case the situation deteriorated. Royal Bank of Scotland, which has $2.4bn of loans exposed, agreed yesterday to a watered-down deal with the EU that allowed the bank to repay its borrowings to the taxpayer over a longer period.

RBS has already lost tens of billions of pounds over the last two years and further losses from overseas loans will be a blow to the Treasury and the taxpayer, which owns 84% of the bank.

HSBC was the largest lender with $17bn of outstanding borrowings. It has spent many years building up links with oil-rich nations in the region and financing their rapid expansion.

But its chief executive, Michael Geoghegan, was bullish about the region's ability to bounce back. He said he was "completely committed" to the Middle East. "I am confident that the leadership of Dubai and the UAE will overcome any short-term issues they face, which appear to have been somewhat sensationalised, and continue to lay the foundations for sustainable growth," he said.

Before Wednesday's announcement by Dubai caused a new shock wave through the markets, the major banks regulated by the FSA had already been instructed to bolster their capital cushions to enable them to withstand further tailwinds in the financial system. They now have much stronger capital bases than they did two years ago as the credit crunch began.

Bankers noted that fears about the financial health of Dubai had been swirling for many months and that many institutions already had the city state on their watchlists. The City is speculating that Standard Chartered and HSBC could be the banks facing the biggest losses after developing close ties to the Middle East.Goldman Sachs said an initial estimate put HSBC's potential losses at $600m, but only if a deal with Dubai's partners in Abu Dhabi failed to materialise and Dubai was left to fend for itself in negotiations with its creditors.

Fallout from the Dubai debt crisis continued to roll through financial markets for the second day, although the rush for the exits slowed. The Dow Jones opened down 2%, but had pared back losses to 1.4% by the time the London market closed. The US markets had been closed for Thanksgiving the day after the announcement from Dubai and were open for just half a day yesterday ahead of the holiday weekend.

Oil fell more than 3% to $75.48, while the dollar rose against most major currencies as it regained some of its tarnished safe haven status. Traders warned that further advances in the dollar would push down the price of oil. Mike Fitzpatrick, of MF Global in New York, said: "This is a similar reaction to last year's Lehman Brothers debacle, it shakes confidence in financial markets and raises the spectre of contagion which could trigger a second wave in the credit crisis."

Dubai's request for a repayment standstill on its multibillion dollar debts has sparked fears of debt defaults in other parts of the global economy which could derail the nascent recovery.

Some analysts expressed fears that the city state's total debts could be far more than so far assumed. Saud Masud, a real estate analyst with UBS, said Dubai's debt could include huge off-balance sheet liabilities that could "imply a total debt burden well above the $80bn to $90bn markets have estimated so far".

Desert capitalist paradise Dubai sinking fast

The action prompted a run on stock markets around the world, as wealthy investors panicked that their wallets could be emptied by a second wave of global recession.

The London FTSE lost 170 points before clawing them back on Friday.

As markets opened in New York, the Dow Jones was down over 200 points.

Dubai has £48 billion of debt, the majority of it from its investment vehicle Dubai World and subsidiary property company Nakheel.

Dubai World employs over 50,000 workers globally and owns British assets including shipping company P&O, Grand Buildings in Trafalgar Square and Turnberry golf course in Scotland.

Although the glittering city state is now financially ruined, it has been morally and ecologically bankrupt from the start.

Poverty-stricken workers from Bangladesh, Pakistan and the Philippines earn about £3 a day working 12 hours a day, six days a week with no break from the baking heat.

Unions are banned and workers who protest are imprisoned or deported.

"This is a case of chickens coming home to roost for Dubai," said an insider.

"As soon as the first crash came in 2008, it was obvious no-one would be able to afford to buy overpriced property in the middle of a desert.

"And it's all been built on the back of slave labour."

 

Account name	Minimum Age (years)	Minimum deposit (£)	Yearly rate (%)
Darlington BS Emerald	55	2,000	0.40
Earl Shilton BS Heritage	50	1,000	0.45
Hinckley & Rugby BS Panther No Notice	50	2,500	0.25
Mansfield BS Over 50s Bond	50	1	0.25
Northern Bank (NI) Midas Gold	50	1	0.10
Progressive BS Premium Return	50	500	0.05
West Bromwich BS Oak	60	10	0.05
Yorkshire BS Access Saver Pensioners	-	50	0.25

Asian Economic Growth: Mixed Picture

Written by Philip Bowring

Friday, 25 September 2009

After taking out India and China, there's trouble Asia's economic headline news is good, but the Asian Development Bank's latest Economic Outlook has not shied away from the need for real change in the region if the recovery is to be sustained. The half-year review of forecasts and prospects shows average growth in the region at 3.9 percent, better than the 3.4 percent estimated six months ago when the global outlook was dire. India and China in particular show improvement with growth for 2009 now put at 8.2 percent and 6 percent respectively. However, take these two heavyweights out of the calculation and things are not so good. In Southeast Asia, Malaysian gross domestic product has been downgraded from a -0.2 shrinkage to a -3.1 and Thailand from -2.0 to -3.2. Singapore remains stuck at -5.0 for the year as a whole despite its recent pickup, and Philippine growth comes down to 1.6 percent from 2.5 percent despite massive fiscal stimulus and sustained remittance income. Only prospects for Vietnam and Indonesia have improved with growth raised from 4.3 percent and 4.7 percent respectively. In South Asia, Bangladesh can expect a healthy 5.9 percent, barely down on 2008, but Pakistan's is expected to slow to a feeble 2 percent. In the northeast, Korea is bouncing back well and may now only contract 2 percent rather than 3 percent, but negatives for Taiwan and Hong Kong have both been revised upward. Thus excluding China and India the picture is very mixed. And the same looks to be the case for the 2010 forecast now compared with six months ago. Yes, recovery is in prospect with overall Asian growth revised up from 6.0 percent to 6.4 percent but again the improvement expected from China and India account for most of this. Southeast ,Asia's overall is growth is upgraded only marginally to 4.3 percent. Northeast Asia excluding China will struggle to recover the losses of 2009. Pakistan is expected to continue to struggle with a mere 3 percent growth – compared with the 5.2 percent of steady Bangladesh. Asia as a whole can take comfort from the fact that it is still outperforming the rest of the world and should continue to do so. However, instead of the boosterist sentiment that so often accompanies such reports, the ADB is full of warnings about the future. Although central banks needed to prepare "exit strategies" from current easy money policies, fiscal stimulus should not be hastily removed. ADB president Haruhiko Kuroda warned that Asia has become far too dependent on demand from the major industrial countries, which are unlikely to revive rapidly. Asia, he said, "needs to address the geographically unbalanced structure of its trade, capital flows and movement of workers by promoting closer economic linkages within the region." In other words, domestic demand and regional cooperation are the keys to future sustained growth. That may seem an obvious enough statement but it actually says a lot about regional trade barriers (despite numerous free trade agreements), poor financial linkages, lack of cross border investment, and attitudes to foreign workers – who are mostly from within the region. In particular the report notes that although trade with China has been expanding rapidly, this does not mean that China is in itself an engine of growth for the rest of the region. "The production fragmentation-oriented nature of intra-Asian trade casts serious doubts on the validity of the regional trade-as-engine-of-recovery-and-growth-hypothesis." The report also notes that East and Southeast Asia's share of China's trade has slipped slightly as trade with other non-OECD countries has increased especially rapidly. One problem is that China competes with other Asian countries in third markets. However a bigger problem is that if China's size is to be translated into a regional engine of growth, replacing the old OECD countries, it "depends on the extent to which the PRC's own growth is fuelled by domestic demand rather than exports." That issue in turn looks at another raised by the ADB: the size and disposition of international reserves. It notes that almost every country – not just China – now has sufficient dollar reserves for transactional purposes. Additional funds considered as medium to long term investments are also mostly in US dollars despite concerns about the US fiscal position and long-term growth prospects. Although the ADB has been an active promoter of local currency bond issues, the cross border market remains tiny and Asian central banks are reluctant to invest in each other's paper. Some markets, such as China's, cannot readily be accessed and others are as yet too small. Thus a key component of enhanced regional cooperation and trade stimulus is missing. Although the ADB does not specifically comment on it, there is also something clearly amiss when countries such as the Philippines (modestly) and Malaysia (massively) continue to run current account surpluses for successive years even when their economies are slowing or contracting. To a considerable extent these surpluses are reflected not just in a rise in foreign reserves but in private capital outflows. The ADB might address more directly the issue of why investment prospects are so poor in these countries that so much capital is flowing out, whether to China or the stagnant western countries. As it is, the ADB wants better use of remittance inflows to drive investment rather than consumption but quite how this can be achieved is not certain. Others anyway believe that remittances are better used by recipient families than they would be by government or formal intermediaries and in the Philippines at least have been behind the only bright spot in investment – housing. Prospects for improved regional trade based on regional rather than extra-regional demand are also threatened by protectionism. Hopefully these will prove temporary responses to the shocks of the past year but it may be worrying that, according to the ADB, 78 percent of such measures – mostly anti-dumping and countervailing duty investigations – have been by developing countries and 50 percent by Indian and China combined. Asia otherwise seems to have been relatively free of them. Given all these problems it is perhaps not surprising that the ADB's outlook for 2010 has small to medium trade-oriented countries of Asia performing poorly compared with China, India and Indonesia, and remittance-dependent Bangladesh and Philippines continuing to do relatively well.