Is the worst of the worldwide crisis in banking now over ?
Governments have committed a total of $2 trillion to be injected into the banking system. Here in the UK, for example, the Government is pumping £39bn into three of the our biggest banks – Royal Bank of Scotland, Lloyds TSB and HBOS – by buying shares in them to provide new capital. The aim is to strengthen the banks' balance sheets so that they can start lending to each other again, and to their customers. But the most important objective is restoring confidence in the financial markets. It's too early to tell whether this has been achieved. But the way the world's leaders took such committed action last weekend to put together this co-ordinated action appears to have gone far to prevent a systemic collapse. Don't take too much notice of the volatile reaction of the stock markets last week after the news was announced. The markets are now looking forward to the next crises – the unwinding of the derivatives market and recession.
Who isto blame?
We all are, to some extent. Over the past decade the US and UK governments allowed people and companies to borrow too much and too cheaply. In the US, mortgage companies were offering "teaser" mortgages at only 1 per cent, so when interest rates were raised, many could not afford to meet the new mortgage payments – leading to the so-called sub-prime market. In the UK, banks were lending money to people to buy mortgages at 100 per cent. They were also encouraged to take on more credit. With house prices rising, everyone felt wealthy and so they replaced equity in their house for debt to fund the next holiday. Savings ratios crashed. But then last year Northern Rock collapsed, sending shivers through the financial system because it could not raise enough money to meet the demands of its depositors. So you could say governments were to blame for allowing the debt mountain to grow, the financial regulators for not keeping a tighter control over the banks who lent beyond their means too, and the public for indulging in their debt addiction.
Why won't the banks lend to each other?
They have been too scared. They have been nervous about lending because none of them had confidence in each other. This was because none of them knew exactly what sort of exposures they had to the US sub-prime market and other securitised loans.
Who controls the half-nationalised banks? Their shareholders or taxpayers?
Details of the UK bailout are still being worked on. At the moment it looks as though the Government may end up owning some 60 per cent of the shares in Royal Bank of Scotland because it is investing about £20bn in the bank. The Government will put directors on the board and will take part in the bank's everyday decision-making; just as it is doing with Northern Rock and Bradford & Bingley. But in reality this means the taxpayer indirectly owns those shares because the Government is raising the money going into the banks by raising new gilt-edged bonds – in other words, the public debt which we all own as citizens. The case of Lloyds and HBOS, which are merging, is different because the Government will be a minority shareholder. But it will still put a representative on the board. The rest of the shares in the banks are owned by the City's big investors, the pension funds, and insurance companies. They are angry at the Treasury's decision not to pay out dividends for at least a year until the Government's preference shares are paid. But the Government's plan is to return the banks to the private sector as soon as it can.
What is moving the markets up and down at the moment?
Stock markets move with events, but they also try to take account and predict the future. So the equity markets are volatile and fragile at the moment because now that they have been assured that the banking system is not going to collapse, they are looking ahead to what will happen to companies' profits as we head into recession. That's why the UK FTSE 100 index and the US Dow Jones index saw hairy trading last week: the big institutional investors, the hedge funds and retail investors were busy selling shares in companies which they think will suffer from the economic downturn. On the commodity markets investors were also selling natural resources such as metals and oil, because if the world goes into recession there will be less demand for these products. Only gold shot up again last week because it is seen as the safest commodity of all.
If the markets are going down, what has that got to do with me?
Everything. The markets work together like a great big machine and we are all connected. If you have a pension, then this is invested in the companies that are listed on the market and your pension comes from the dividends earned by those companies. For example, the big pension funds and insurance companies such as the Prudential or Standard Life are some of the biggest investors in the UK stock market as well as in those overseas. They also own government bonds. So if those prices fall, the value of your pension falls along with them. Those people who are retiring this year or next will have been severely hit by this bear market.
Why are some people predicting the FTSE will be at record levels in 18 months ?
Some economists reckon that's when we will be coming out of recession. It's based on forecasts that the world's big economies – the US, China, India, Russia and the growing markets of the Middle East – will by then be recovering and trade gets going again. That means British companies, particularly those with big overseas exposure, will do well and so will their share prices.
How will we know when the worst of this banking crisis is over?
If only we knew. If the banks can recapitalise smoothly and start lending again, then this will be an enormous boost of confidence to the "real economy". It means they will start lending money for mortgages again and to the corporate sector. When we hear that companies are having no problems in raising money for new investment, that will be a good sign.
How bad is the global economy looking ?
Touch and go. China, the powerhouse of the world, is slowing down, but it's economy is still expect to grow at 9 per cent next year. But it won't prevent us from tipping into recession. Other trouble spots in the world are Ukraine, Hungary, the Baltic states and Turkey – even Switzerland had to save its banks last week. Then, of course, there are fears over the $513bn ticking time bomb of the derivatives market, which may go off at any time.
How much worse is it going to get?
Next year will be tough. Economists reckon we have now officially hit recession in the UK. Unemployment will exceed two million by the end of this year; house repossessions are rising, and investment in business is falling. Retailers are getting ready for the worst Christmas since the late 1980s. But interest rates will be slashed and inflation will come down as oil and food prices drop. And the recession will last only a year.
The downturn in numbers4.8%
Annual sales fall announced by the John Lewis Group last week
2m
Projected unemployment figure for December. About 1.79 million out of work now
11.5
Average number of sales per estate agent last quarter – a 30-year low
£467
No comments:
Post a Comment