The Bankwatch

H.M. Treasury

I can confirm that the Government will abolish the tripartite regime, and the Financial Services Authority will cease to exist in its current form.

With that statement George Osborne and the new UK government move rapidly to refocus the responsibilities for regulation of financial services, as promised.  This will not be welcome news the British bankers but it is a good thing for banks because it places the risk assessment banks with bankers (at the Bank of England).

Spanish banks break ECB loan record | ft.com

Spanish banks are borrowing record amounts from the European Central Bank as the country’s financial institutions struggle to gain funding from the international capital markets.

….

“If the suspicion that funding markets are being closed down to Spanish banks and corporations is correct, then you can reasonably expect the share of ECB liquidity accounted for by the country to have risen further this month,” said Nick Matthews, European economist at RBS.

The Walmart plans that caused all the stir 4 years ago is resurfacing in a different form as they increase their ownership in a small bank.

Walmart extends its banking interests | ft.com

Green Dot, which provides support for Walmart’s pre-paid cards, said this month that it had issued more than 2m shares to Walmart, following an agreement in May that extended the existing alliance between the companies until 2015.

Reading about the outcome of the G20 Finance Minister meeting in Seoul it is quite clear that while most politicians are not clear on what financial survival means, there is a sense of reality entering the discussion.

G20 shifts from stimulus to austerity in final communiqué | The Times

The G20’s final communiqué introduced a surprise change of tone from the document produced by G20 finance ministers just six weeks ago — a shift for which Britain’s new Chancellor of the Exchequer, George Osborne, was keen to claim credit as he made his debut on the international summit circuit

Just for ‘fun’ and to illustrate the conundrum facing politicians following the last crisis and the probability of the next, lets look at the current currency safe haven, the US.  The average interest rate paid on their T-bills is 0.241%, half what it was a year earlier.

Now lets look at the governments debt service ratio.

Note that in the period to May 2010 The US Government paid $152 bn compared to $124 bn a year earlier.  The interest paid will include various maturities but if you take the long view you can see where this is headed.

What if the rates the US must pay rose by four fold;  sounds like a large increase but that is only to 1%.  In theory the debt payments could exceed $600 bn.  Now look at the US revenue which must pay the debts.  The US debt repayment in that scenario would approach 50% of revenue.

The deficit of $991bn ( yes 1 trillion) in the 5 months to May must be funded by new Government Debt.  At current rates the new interest on just that trillion is $2.4 bn.  At 1% it is $10 bn more.

Relevance to Bankwatch:

This is far from being an academic discussion.  The implications of currencies and monetary movements caused by the G20 countries as they wrestle with the issues directly impact the issue illustrated above which in turn impact interest rates and inflation or deflation.  That is of interest to us all as consumers, and to banks for the quality, credit and debit of their customers.  This is why I lean on the side of Niall Ferguson, Nouriel Roubini, and John Mauldin forecasts and reality checks.  It is also why it is worthwhile now to take note on the results of G20 meetings which are usually a bit of a yawn.

It also appears Canada is having success in resisting the bank tax for the reason noted on this blog last week.

And the levy could create so-called moral hazard, in that banks would continue the type of risky lending new regulations are suppose to prevent, with the knowledge that authorities have money available to help the financial sector in times of trouble.

(PS … it is nice to see UK getting some decent financial management and leadership back in the form of George Osborne)

How We’re Doing as Debt Fears Rise | Brookings

The policy response to the Great Recession — while reducing some risks to credit markets — has created new problems. The loss of household wealth, income and credit was partially replaced with a substantial increase in government borrowing to mitigate the drop in demand for goods and services. The U.S. debt held by the public has risen to 53 percent of gross domestic product and is projected to reach 67 percent by 2020. Further, the increase in the Federal Reserve’s balance sheet from $0.9 trillion at the end of 2007 to $2.4 trillion has led some analysts to worry about inflationary pressures.

However there is no solution offered, with the obvious answer being something difficult involving taxes and politically hard cutbacks.

Even if the massive policy response to Greece succeeds in stabilizing world financial markets, there are longer-term implications of rising U.S. public indebtedness. The textbook concern is that it eventually leads to higher interest rates, which will lower capital formation and productivity, ultimately reducing economic wealth. But the financial crisis of the past two years provides further lessons. First, the government must be prepared to step in when private demand for goods and services deteriorates, but significant long-term debt will constrain the U.S. government’s ability to respond to an economic crisis if required. Second, in the highly interconnected global economy, markets can respond suddenly and punitively to highly leveraged institutions. Financial markets in 2008 witnessed an abrupt loss in investor confidence, triggering runs on such financial institutions (remember Lehman Brothers?).

The U.S. government provided — and should continue to provide — critical short-term support for the still-recovering domestic economy. But to reduce the chances of future economic crises, we urgently need to show a convincing commitment to longer-term fiscal strength.

When I read this from May 7th and this today it is clear that the fears outlined by Niall Ferguson are valid.

He points out that one of the classic methods of eliminating debt problems is producing an inflationary environment, and make the debt worth less through relative increases in asset valuations and incomes.

He goes on to note that the markets are smarter now, and run by professionals who know this.  The Greek yields on bonds were forced dramatically higher before any central bank action to print money occurred and the result was that the interest costs to Greece became unmanageable overnight.  The risk of default is real.

The result is quite banking 101.  Debt Service Ratio calculations are critical.

Niall uses examples of interest costs as a percentage of tax revenue as a better measurement than debt /GDP.  He rationalises that tax revenue is the first thing to fall in a recession, and more fundamentally tax revenue is the source of debt repayment.  This is a standard calculation for retail and commercial lending so why not for companies.  This ought to be the next focus – each countries ability to repay interest costs.

Fascinating Peterson Institute lecture by Niall Ferguson on the implications of government debt and on what he believes will occur after Greece which he predicts will default.

http://www.piie.com/events/event_detail.cfm?EventID=152&Media

And here is the slide show that accompanies the lecture.  The video is about an hour.  You can skip the first 13 minutes which are introductions.

fiscal crises and imperial collapses