Banks reform toothless and muddled say MPs

The labour Government’s white paper on financial regulation earlier this month was toothless and failed to address the key weaknesses in the Tripartite system, according to MPs on the Treasury Select Committee.

Issuing its final report on the banking crisis yesterday, the committee said it was still a “muddle” which part of the tripartite — made up of the Bank of England, Financial Services Authority (FSA) and Treasury — was in charge of strategic decisions.

The Treasury’s white paper proposed a new Council for Financial Stability, chaired by the Chancellor, which will oversee the Tripartite. This is just a “cosmetic” change, the Treasury Select Committee said.

The new council will be in addition to the Financial Stability Committee, which sits within the Bank.

The White Paper also gave more power to the Bank to monitor overarching stability — so-called macro-prudential regulation — but did not make it clear how that power would be separate from the responsibilities of the FSA.

“Where before no-one had a formal responsibility for financial stability, now many do — the Bank of England, the FSA, the Treasury, the Council for Financial Stability and the Bank's Financial Stability Committee. Where responsibility lies for strategic decisions and executive action was, and remains, a muddle” the report said.

John McFall, the committee’s chairman, also said that the Government should not rule out imposing a split between retail and investment banking.

Such a measure, which would echo the restrictions imposed in the 1930s in the US under the Glass-Steagall Act, has been widely criticised among banks which argue that the law is outdated.

But Mr McFall said that banks have been able to “hold the taxpayer to ransom” by growing so large that they present a serious systemic threat, making it impossible for the Government to do anything but bail them out during the downturn.

In order to prevent banks from becoming so large again, the Government should “not rule out drastic action, such as forcibly shrinking the banks or separating out the riskier functions,” Mr McFall said.

Separately, the House of Commons’ Scottish Affairs committee said yesterday that the FSA failed to provide the “necessary level of supervision” over Dunfermline to prevent the downfall of Scotland’s largest building society.

It was the fault of Dunfermline’s board that the mutual embarked on risky lending on commercial property and buying loan books from other lenders, the committee said, but added that the FSA failed to issue “clear and specific warnings”.

The FSA rejected the charge, saying that it had written to Dunfermline in December 2005 soon after a regulatory “Arrow” visit, identifying the growing size of its commercial lending portfolio as a risk.

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US banks pay out more in bonuses than profits

Some of the banks which were bailed out by the US taxpayer paid bonuses to executives that were in excess of net income in 2008, according to a scathing report by the office of Andrew Cuomo, the New York Attorney General, released this afternoon.

Mr Cuomo, who has been investigating compensation paid by the banks since last October, said that employee pay "has become unmoored from the banks’ financial performance”.

“There is no clear rhyme or reason to the way banks compensate and reward their employees,” said the report, which chimes with remarks by President Obama's spokesman earlier this month.

President Obama does not believe that big pay packages are necessary to keep talented staff, the President's spokesman said.

Mr Cuomo's report recommends that firms should follow “a more principled” bonus system to make them less susceptible to poaching of their employees by other firms offering higher pay.

The report targeted Goldman Sachs, Morgan Stanley and JPMorgan Chase, saying that bonuses were “substantially greater” than the banks’ net income.

Goldman earned $2.3 billion, paid out $4.8 billion in bonuses and received $10 billion in Troubled Asset Relief Program (TARP) funding, while Morgan Stanley earned $1.7 billion, paid $4.475 billion in bonuses and received $10 billion in TARP funding, and JP Morgan Chase earned $5.6 billion, paid $8.69 billion in bonuses and received $25 billion in TARP funding, according to the report

Since nine banks received a total of $125 billion last October in taxpayer money under TARP to help them survive the financial crisis, Mr Cuomo has pressed them for details on billions of dollars paid to executives amid huge losses.

He said that his office studied historical financial filings and found that at many banks compensation increased in the 2003-2006 bull market years, but stayed at those stratospheric levels as the mortgage crisis and recession hit.

“Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well.

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US banks to pay back $68bn in rescue funds

Hopes of a return to stability in the bombed out banking sector were raised by plans for ten banks to repay their loans.

Ten bailed-out US banks have been cleared to pay back a combined $68 billion (£41 billion) of government aid in a move greeted by investors as a sign that stability is returning to the sector.

The Treasury said that it had told ten institutions that they had raised enough new capital to enable them to repay loans made under the Troubled Asset Relief Program (Tarp).

Several banks, including JP Morgan Chase, Capital One Financial, Morgan Stanley and BB&T Corporation, immediately announced that they would take up the offer.

JPMorgan said that it would repay in full a $25 billion investment along with dividends. Jamie Dimon, the group’s chairman and chief executive, said: “Paying back Tarp at this time is the right thing for JPMorgan Chase, and it’s the right thing for our country.”

Morgan Stanley said that it was “pleased” to pay back $10 billion.

Kelly King, the chief executive of BB&T, said that the group would repay $3.134 billion. “Repaying the government’s investment will give us greater flexibility to benefit significantly from future opportunities that will be available as we emerge from this recession,” he said.

The others said to have been cleared were Goldman Sachs, Bank of New York Mellon, Northern Trust, State Street, American Express and US Bancorp. Many of the banks had winced at the restrictions accompanying the bailout funds, such as limits on executive pay.

The Treasury said in a statement that the repayments “follow a period in which many banks have successfully raised equity capital from private investors”. Timothy Geithner, the Treasury Secretary, said: “These repayments are an encouraging sign of financial repair but we still have work to do.”

US shares were flat on the news as investors fear that an oversupply of government debt could push interest rates higher. The Dow Jones industrial average inched up by 1.43 points or 0.02 per cent to 8,763.06.

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UK Taxpayer faces £17.6bn loss on bank investments

The UK taxpayer would make a £17.6bn loss if the labour Government sold out of Lloyds Banking Group and Royal Bank of Scotland at today's prices.

The figures, compiled by analysts at Exane BNP Paribas, make even a partial sale of the Government's stake in either bank before a general election next spring look highly unlikely.

The analysts calculated that the state's holding in Lloyds is £10.9bn underwater and £6.7bn out of the money at RBS.

"We continue to view UKFI [the body managing the investments] as a (very) long-term shareholder," Exane's Ian Gordon said. "We assume that the test likely to be applied by UKFI is one of absolute return to (at least) break-even. That could be a long wait."

UKFI has said it expects to sell the stakes piecemeal back to the market as soon as possible. The taxpayer owns 43.4pc of Lloyds, acquired at an average of 124.55p, and 70.3pc of RBS, bought at 51.21p. The stakes rise to 62pc and 95pc respectively once the "B" shares used to pay for the toxic debt insurance scheme are included.

Lloyds shares yesterday fell 6.09 to 70½p after adjusting to take account of its £4bn placing and open offer. RBS, which announced 700 job losses in IT and property yesterday under plans to cut around 20,000 staff globally, fell 0.7 to 42.4p.

Some of the potential losses in Lloyds could be recovered sooner, though, after the lender warned the Government might renegotiate the terms of the asset protection scheme (APS). In the prospectus, the bank said: "Negotiations are continuing and, although not currently expected by the board, may result in changes to the terms announced on March 7."

The Treasury sought to downplay the warning, saying: "The Government is now undertaking a detailed examination of the assets and will announce final details in the coming months. We have not changed our initial assessment of the overall taxpayer exposure."

The prospectus further revealed that European regulators could force Lloyds to unpick its merger with HBOS. In return for state aid approval, the EU may demand "the cessation or disposal of certain parts of the business [that] ... could require the group to divest or exit core businesses".

Lloyds was outlining potential risks ahead of the placing and open offer to redeem the £4bn of preference shares the Government took as part of last October's bank recapitalisation. It is issuing 10.4bn shares at 38.43p – a 54.6pc discount to the closing price on May 13.

Lloyds is paying the Government an underwriting fee of £60m and covering its legal costs of £30m. The taxpayer will make a further £40m as the terms of the deal are that the preference shares are redeemed at 101pc of the issue price.

The £100m the Government will make on the deal comes on top of the £995m in profit the Bank of England has made from its emergency support packages for the financial system, but will have little impact on the billions of potential losses.

Lloyds said converting the preference shares into stock will remove the annual £480m cost of paying dividends on the stock, and "will thereby improve the group's profitability, cashflow, liquidity and organic capital generation".

It will add 0.8 percentage points to its core tier one capital, taking the ratio to 6.7pc before the effect of the APS, which is expected to lift the ratio to 14.5pc.

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Wise Money sees feelgood factor returns

Overnight the UK government has hinted it may look to sell a portion of the debt it has taken on in the nationalised UK banking sector this has seen sterling surge 2 cents against the US$ to levels not seen since December 2008.

Over in the US the feel good factor continues as the Treasury Secretary Geithner adds to the growing belief that we have turned the corner.

This, added to bullish global economic data and further comments from the US gave the Stock Markets a real boost, pushed the oil price up above $60 per barrel again and caused the Dollar to ease against the majors.

Positive data included a rise in Japanese consumer confidence and better than expected export figures from the EU.

We then got ‘reasonable' numbers from the US including strong trading performance from Lowes, a major company whose business is directly related to the house building industry.

Financial stocks added to the positive sentiment following news that Goldman Sachs, Morgan Stanley and JP Morgan had applied to the Treasury for permission to repay their TARP borrowings.

The Reserve Bank of Australia gave a moderate assessment of their domestic situation and questioned the need for a further cut in their interest rates at the May meeting. AUD strengthened slightly following an earlier dip on the Chinese steel directive.

And in a further sign of a global shift away from the US Dollar as a trading medium, Brazil and China have agreed to work towards using their currencies in trading transactions rather than the greenback.

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Bank of England makes £1bn profit from bailouts after riding to rescue of high street lenders

The Bank of England revealed yesterday that it had racked up record profits of almost £1 billion in the year to February as its fee earning activities burgeoned amid the global financial and economic turmoil.

During a crisis that has brought some of the mightiest forces in global banking to their knees — and some to collapse and oblivion — the Bank emerged as having thrived while famed commercial institutions foundered.

Figures released yesterday in the Bank's annual report showed that in the 12 months to February 28 it raked in profits before tax of £995 million. This marks a more than fivefold rise from £197 million in 2008 and is the biggest figure since its establishment in 1694.

The profits surge for the Old Lady of Threadneedle Street has already paid a big dividend for taxpayers. The Bank made an initial payment to the Treasury of £203 million on April 3 and a further, similar sum is set to follow in October under rules that require the Bank to hand back a quarter of its post-tax profits to the Government on two dates each year.

The Bank's soaring profits have come as a direct result of its massive interventions to shore up Britain's banking system, as it has levied fees and interest on stricken high-street and commercial banks in return for the financial lifelines that have seen them through the financial storm.

“The Bank's profit is a consequence of policy decisions to tackle the financial crisis,” a spokesman said last night after its report was handed to Parliament.

“The Bank has provided substantial liquidity support to the banking system. It is entirely right it charges fees to set the right incentives for financial institutions to use its facilities and protects itself and taxpayers from potential credit risk.”

Yesterday's report showed that included in the year's bumper profits for the Bank were £7 million earned through its support for the collapsed Bradford & Bingley and a further £4 million from its backing for the failed Northern Rock.

The Bank has also earned large amounts from the £185 billion loaned to banking groups in the form of Treasury bills, under its Special Liquidity Scheme (SLS). In the year to February 28, it booked £664 million in profits related to the SLS, according to its accounts.

As security for its loaned funds, the Bank continues to hold £287 billion-worth of hard-to-trade, illiquid assets that it swapped under the scheme.

Mervyn King, the Bank's Governor, joined Sir John Parker, chairman of its Court, in using the annual report to renew calls for extra powers for the Bank to help to prevent future crises.

Mr King said that he welcomed the extra statutory role given to the Bank to ensure financial stability, but added: “I regret that the new responsibility has not been accompanied by any new powers to deal with banks before they fail. Responsibilities and powers need to be aligned.”

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Sterling hits five week high against euro

The Pound hit a five week high against the euro and rose against the dollar on Tuesday as the UK currency was bolstered by renewed demand for London listed equities.

Global risk appetite had been whetted by strong earnings figures from US investment bank Goldman Sachs released on Monday, with sterling benefiting due to the UK economy’s perceived dependence on its banking sector.

The pound, viewed as a riskier currency than the dollar or yen, has tended to gain in tandem with stock markets and analysts at Commerzbank said that sterling should outperform in the currency markets as long as sentiment towards the financial sector continues to improve.

BNP Paribas however said that sterling’s robust performance against the dollar could be challenged if the forthcoming set of first quarter US corporate earnings delivers any shocks.

“Sterling will not be able to avoid the impact of any increase in asset market volatility over the coming week and hence caution with long positions is still required in the near-term,” BNP Paribas said.

“The pace of earnings releases picks up next week and still has the potential to deliver negative shocks. But the pessimism that has been built in to equity markets with many commentators now calling for new lows, is likely to cushion bearish news.”

The pound rose 0.3 per cent against the dollar to $1.4888, and strengthened by 0.8 per cent on the euro to £0.8928. Against the yen the pound was flat at Y148.53.

The dollar meanwhile regained ground against the euro as the wave of post-Goldman enthusiasm was tempered by caution ahead of economic data released later in the week. The euro fell 0.5 per cent against the dollar to $1.3300, but the yen was up 0.3 per cent against the greenback to Y99.76.

“This week’s calendar contains some data releases with the potential to challenge perceptions of improved risk conditions,” said Sean Maloney of Nomura.

“Most notably, US housing starts and permits for March are to be released on Thursday. Big rebounds in these data last time were at the core of some of the ‘green shoot’ arguments that have helped shape recent price action.”

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Equities surge higher on US priniting presses

Markets are on a positive feel following yesterday's outline by Tim Geithner on the Public Private Investment Program in the US.

The plan involves the government buying up toxic assets held by banks which will allow the banks to free up their balance sheets. At the moment the debt sits with the banks and they cannot sell it on or value it, therefore the scheme aims to remove this and hopefully by doing this remove the chains that are preventing lending.

President Obama noted that the plan was a vital step but also reaffirmed that there was a "long way to go". Wall Street experienced a significant rally; the Dow Jones gained nearly 500 points in yesterdays session.

The low yielding currencies such as the USD and the YEN weakened on the news as investors sought higher yielding assets; the AUD and NZD continued to rally.

Interestingly EUR/USD has failed so far in its bid to extend towards 1.40 and the USD is at the moment gaining back towards 1.35 after failing to break 1.3730.

Sterling has moved higher against the dollar buoyed by the increase in the equity markets and GBP/EUR has also gained back to the 1.08 level.

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RIP Prudence, Zimbabwe here we come

The Bank of England opens a new front in its effort to ward off deflation today as it prepares to buy government bonds with newly printed money.

The central bank will purchase as much as £2bn of gilts, its first deployment in a three month plan that may see it waste £75bn. The final results of the operation will be released after 2:45pm. today in London.

The move marks a new departure for British monetary policy after officials cut the interest rate to a record low of 0.5pc on March 5, requiring them to seek new tools to stop the economy’s downward spiral.

While Governor Mervyn King hopes that pumping new money into the financial system will work, he’s relying on banks battered by the crisis to pass it onto lenders.

The Bank of England says it will give details of the auction this morning in London, without being more specific. The bank unveiled the plan last week after delivering a final cut in the key interest rate to a record low of 0.5pc.

Policy makers such as Andrew Sentance are concerned a “prolonged and deep recession” will stoke deflation and the National Institute of Economic and Social Research said today that the slump deepened in the quarter through February.

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Manic Monday on the currency converter forex markets

Yesterday we saw dramatic swings in the foreign exchange markets with the Pound being the protagonist.

GBP/USD retreated from Fridays 1.43 down to a low of 1.3750 yesterday; the pound also lost 4% against the Swiss francs from last week's levels and 2.5% against the euro.

The reason for the sell off was related to the labour government increasing its stake in Lloyds banking group from 43% to 77% and also to rumours that Barclays may be next in line for the communist takeover. Investors fear the nationalisation of banks and the fact that further capital is required, may lead to uncertainty in the rest of the banking sector.

Looking at this mornings trading we have witnessed a slight recovery for the pound against the dollar even against the back drop of further weak data in the housing and manufacturing sectors.

It now seems that the economic slowdown is reaching a truly global perspective as the IMF has confirmed that growth in Sub-Saharan Africa will slow to 3.25% in 2009 which is half of previous estimates.

Although investment exposure is very minimal it is the slowdown in demand for products and in particular commodities which is the biggest contributing factor.

Closer to home a similar pattern can be seen in Germany as exports slumped by a fifth in January, here the problem again is the slowdown in demand coupled with the recent strength of the euro.


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Gordon Brown- the new Robert Mugabe

Interest rates are now as close as they can get to zero without causing malfunctions in the financial system. In this new world, with the Bank of England shorn of its main tool for influencing the economy, the policymakers in Threadneedle Street have to turn to unconventional tools.

How does it work? The bank prints money, piles it inside a helicopter, takes to the skies and scatters the cash across the nation. Suddenly, every family is richer – provided they get to the cash in time and have sharp enough elbows.

This technically amounts to a tax rebate for everyone funded by money creation, and was christened a "helicopter drop" of money by economist Milton Friedman. In his eyes it was the most dramatic way for the central bank to get money out into the streets.

Pros: This instantly gets money into people's hands and, with any luck, gets them spending it in the high street. Those who don't spend can use it to pay off debt, which isn't such a bad thing either.

Cons It is so radical a policy it might scare away international investors from the UK. It displays a disregard for controlling inflation that could also send sterling plunging.

It will summon up even more vivid comparisons with Zimbabwe and Weimar Germany.

Does it work? It has never been properly tried before. The Japanese and Koreans have experimented with issuing vouchers to their citizens in the hope of encouraging them to spend but these were – importantly – not funded with created money. Fed Chairman Ben Bernanke is convinced, however, that in desperandum it would pump up a deflated economy.

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Royal Bank of Scotland announces record corporate loss

Following yesterday's UK GDP data the Pound looked resolute and stable, trading towards the top of the range against the dollar and the euro.

This illusion was shattered by dovish comments from MPC member Blanchflower and the news that RBS announced the biggest loss in corporate history at £24.1 bn; this was attributed by Chairman Philip Hampton to “unprecedented turbulence” in the finance markets.

The Pound shed 4 cents against the dollar and 2 cents against the euro; the situation was not helped with continued weakness in the equity markets which encouraged the safe haven dollar to be bought.

The scale of the loss for RBS was expected by the markets and the fall in Sterling was mainly attributed to comments by MPC member Blanchflower, who stated that unemployment is in line to rise by 60,000 every month.

Bank of England governor Mervyn King is due to discuss the banking crisis before the select committee on Thursday; this could increase calls for quantitative easing to commence in order to increase money supply.

This strategy will be a gamble for the economy as it is considered an unconventional measure, therefore it will be interesting to see how this unfolds and whether this will increase money supply or simply cause the banks to hoard more funds. If introduced there will pressure on the banks to increase lending- this time more conservatively!

In terms of economic data, today we have seen Nationwide UK house prices slump 1.8% in February- a record drop. This equates to a year on year fall of 17.6% and raises the probability that house prices could face further declines throughout 2009.

The continuing fall in house prices obviously has a direct link to mortgage lending, although lending increased in December it was still £5.8bn below the previous year with mortgage approvals in December less than half of the previous year.

The ideal goal for the government will be to increase lending and liquidity with the relevant controls in place so we do not see a repeat of this downturn; a long term goal in all probability.


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US stocks bounce from the lows

Following dreadful US consumer confidence data earlier in the day the Dow posted a 2% rise, this after Bernanke testified to the Senate on the health of the US economy.

He again highlighted that the US economy still faces further contraction, however he intimated that the US government would not move to nationalize US banks as this would lose value already built into banks. On the back of this there was an expected jump in bank stocks and this was the main driver for the gain in the Dow.

President Obama addressed congress for the first time yesterday and again stressed the severity of the economic crisis; he vowed to put a stop to wasteful spending and vowed that banks and bankers taking public funds would be held accountable.

He also reaffirmed his plan to cut the spiraling deficit which is becoming a huge problem for the US economy and will weigh on the dollar if not significantly reduced. Overall his address offered hope and determination for recovery as he vowed “we will build, we will recover”, lets hope so!

Yesterday in Europe we saw the German Ifo survey come more or less in line with expectations, today saw GDP come in exactly as expected at -2.1%. In the UK 4th quarter GDP was actually a touch better than expected showing a contraction of 1.5%, however taken in context this brings the year on year to -1.9% which is an 18 year low and reinforces the sharpness of the slowdown.

Following yesterdays theme on the Yen we have seen further weakness for the Japanese currency. USD/YEN has now reached 97 and GBP/YEN is back over 140 as the retreat from the Yen as a safe haven continues.

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US economic fears hit asia markets

Asian stocks fell heavily on Tuesday following last night's sharp decline in American shares.

Investors responded to fears that the world's largest economy is sinking further into recession and speculation that the US Government may be forced to buy stakes in ailing banks, despite assurances from Washington that lenders would not be nationalised.

Japan's Nikkei Index fell by 1.5 per cent to a four-month low, narrowly avoiding a slide to below 7,000 for the first time in 26 years, closing at 7,268.56. In Hong Kong, the Hang Seng lost 461.46 points, or 3.5 per cent, to end the day at 12,713.64. Last night, the Dow Jones industrial average fell to an 11-year low, losing 250.89 points to 7,114.78.

Japanese shares remained in the red for the day despite hints from Kaoru Yosano, the newly appointed Finance Minister, that the Government may be working on more measures to support the domestic share market.

"The side-effects of falling stock prices are worse than expected,” said Mr Yosano. “We are witnessing many negative wealth effects with impaired assets held by banks and insurance firms.”

Japan's Government is understood to be mulling over plans to buy falling stocks with money from the public purse in an effort to keep prices buoyant.
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Japan’s biggest securities house, Nomura, announced that it planned to raise about $3.1 billion via equity issuance. The capital-boosting scheme – itself seen as a sign of deepening trouble in Japan’s financial sector – is expected to cause massive dilution for existing shareholders, a risk that sent Nomura’s shares down 8.4 per cent.

Concern is growing that the Japanese banks, despite their stable capital position relative to peers in the US, will rein-in their spending even more fiercely, triggering bankruptcies throughout the small and medium-sized industrial heartlands of Japan.

“The view out of the porthole has become rather watery,” said one Mitsubishi Tokyo UFJ broker describing the four-session run of selling in Japan.

The broader investment scene in Japan was no more cheerful. There have been ten bankruptcies among Tokyo-listed companies so far this year and the cost of insuring Japanese corporate debt against default has now near a record high.

On currency markets, the yen fell to a one-month low amid warnings by analysts that the recent strength of the Japanese currency was wildly out of kilter with the country’s economic strength and that the speculative use of the yen as a “safe haven” would now start to decline.

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US Dollar under pressure

Last week although the currency markets were choppy, we did not see a significant break out of the current ranges for the main protagonists- GBP/USD, EUR/USD and GBP/EUR.

What we did see was more negativity in the equity markets as the Dow fell to the 2002 lows below 7300 amid fears that the US government will raise their stake in Citigroup and Bank of America- a step closer to nationalization which has raised concern for investors.

On the back of this the USD is showing the strain and we have seen a move higher on GBP/USD and EUR/USD reversing the dollar strength we saw last week.

Looking to the week ahead the main data to look out for will focus on releases from Europe and the US. Tomorrow we have the German IFO survey and Wednesday we see GDP data from Germany- the IFO survey will give an early indicator of current business expectations and sentiment and Wednesdays GDP will give a statistical measure of German economic activity and health.

The Yen over the last few months has been a dominant force in the fx markets. With risk aversion coming to the fore the yen has strengthened dramatically with a 43% gain on the pound and 14% on the dollar.

However over the last week there has been a shift in sentiment on the Yen with a growing feeling that going forward the Yen may not be the best option as a safe haven currency- with GDP contracting sharply and the resignation of their finance minister Shoichi Nakagawa.

It will be very interesting to see how this scenario plays out as this will re-distribute the flow of funds to other currencies. Other safe haven favourites being the USD and the Swiss Franc, the effects of any redistribution could have a major impact on the currency markets…

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UK nationalised banks to add £1.5 trillion to public debt

Royal Bank of Scotland and Lloyds TSB, the two banks bailed out by the UK's communist Government, are to add between £1 trilion and £1.5 trillion to the public debt, the equivalent of between 70 and 100 per cent of GDP, the Office for National Statistics indicated this morning.

Britain’s public sector net debt is already a record high, hitting 47.8 per cent of GDP in January, official figures show. This is the highest level of debt recorded since the ONS started recording data in 1993.

The ONS said that it had decided to add the banks to the labour Government's books because "the Government has the ability to control the respective banks’ general corporate policy through the conditions associated with the agreements signed relating to recapitalisation."

Howard Archer, of IHS Global Insight, the economic consultancy, said: "Given the rate at which the UK public finances are deteriorating and new measures are having to be introduced to try to support the financial sector and the economy, it is frankly anyone's guess as to how high the public deficits may go over the next couple of years."

The massive debt will cause problems for the labour Government, which has already seen Northern Rock's debts added to its accounts. Analysts said that it would probably have to revise up its borrowing forecasts in April's budget.

Andrew Goodwin, Senior Economic Adviser to the Ernst & Young ITEM Club, said: "We expect the Chancellor to be forced to make significant upward revisions to his borrowing projections when he presents the Budget."

The public sector showed a surplus on current budget of £8.4 billion in January 2009, compared with a surplus of £15.3 billion in January 2008.

Between April 2008 and January 2009, the public sector recorded a deficit of £42.5 billion. At the same stage of the 2007-08 financial year, a deficit of £7.0 billion had been recorded.

Mr Archer said: "The public finances for January are terrible, coming in even worse than feared. January always sees a surplus on the public finances at is a bumper month for tax receipts.

"Unfortunately though, bumper hardly describes the tax receipts for this January as they have been decimated by sharply contracting economic activity, declining profitability, rising unemployment, reduced bonus payments, December's VAT cut and substantially weakened housing market activity and prices.

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UK faces ridicule over review into City bonuses

Alistair Darling the UK's Labour Chancellor was ridiculed last night after it emerged that the Treasury's new review into City bonuses will not be completed until the end of the year – by which stage some banks will have already partially paid out their 2009 rewards.

Sir David will not publish his preliminary conclusions until the autumn and the final report will only arrive at the end of the year. Although the Treasury said his work would "inform" the Budget, by the time the final report is produced some banks will have already started paying out bonuses for this year.

It follows news that Royal Bank of Scotland is planning to pay its executives almost £1bn in bonuses for 2008 performance, despite RBS having been part nationalised.

Although the Financial Services Authority pledged to overhaul pay awards last autumn, this review will be taken as a sign that the Government intends to go one step further and impose strict laws on City remuneration.

But, with newly-elected US President Barack Obama having already imposed a $500,000 cap on Wall Street salaries, the review was last night lambasted as "too little, too late".

"They look completely leaden-footed compared to the US," said senior Treasury select committee member Michael Fallon, the Conservative MP. "Obama has only been there two weeks and has already taken decisive action. We get yet another review."

Mr Darling acknowledged that the scale of bonuses awarded to staff at RBS, now 70pc public-owned, would be higher than he had hoped due to "contractual problems" but said that only staff not involved in "excessive risk taking" would be rewarded.

Lib Dem Treasury spokesman Vince Cable and Tory MP John Redwood said that RBS staff should forgo their 2008 bonuses, even where they are contractually-entitled.

Mr Redwood said: "Bonus payments are inappropriate in a bank which has just lost £28bn and taken £20bn of capital from taxpayers.."

Bonus payments will also infuriate bank shareholders. If paid in shares, they will dilute their stakes by a further 10pc, on top of the dilution after last year's recapitalisation.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Federal Reserve posts no surprises

With a target Fed Funds Rate (the rate at which The US major Banks are able to borrow overnight Dollars) already at a 0 - 0.25% level, further cuts are nigh on impossible.

The headlines in all the major UK papers this morning focus on the IMF report that they see the UK economy suffering the most severe economic contraction during the current recession amongst all the major global countries.

This really just ties in with previous reports / announcements from the institution and has not caused any additional damage to Sterling. It does however focus attention on a speech being delivered later this afternoon in Nottingham by MPC member, Blanchflower.

Wise Money has no details on the proposed content but the arch-dove of the committee has recently been quoted in the press still calling for an immediate shift in UK rates to zero.

This type of headline in tomorrow's papers might affect Sterling's value in the thin Far East trade especially given its recent strengthening.

Other Central Bank action: Reserve Bank of NZ cut their official rates by a further 1.5% down to 3.5% in response to current global pressures on the New Zealand economy and citing the continued abating of inflationary pressures. The market feels that there are more cuts to come with a likely corresponding weakening in the Dollar.

The Swedish Central Bank (Riksbank) Deputy Governor reiterated that they are not at the present time considering any form of quantitative easing but will persist with the policy of continuing to make large cuts in Krone interest rates.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Taxpayers bailout failures

All eyes will be on the FOMC meeting today at 7.15pm this evening GMT.

With the rate already at 0-0.25% the focus will not be on whether they will or won't cut (no change is expected) but the wording of any statement releases. It is likely that the focus will shift to the quantitative easing measures that the Fed could use to stimulate the economy.

Particular reference is likely to be made to the three key tools Mr Bernanke outlined in his speech in London on 13 January: credit easing, lending for financial institutions and buying of longer term assets.

It is thought that the Federal Deposit Insurance Corp. (FDIC) may manage a so-called "bad bank" that the Obama administration is likely to set up in an effort to help ailing US banks. The aim is to buy up poor assets on banks' balance sheets. Plans are expected to be announced early next week. This will, no doubt, place pressure on the UK to come out with a similar package.

France's Consumer Confidence Indicator was released this morning coming out ahead of expectations at -41 (versus -45 expected). This small bounce from the low of -47 seen last July is not significant but a move in the right direction.

On the currency front we have seen GBP continue to rally over the week to current levels of 1.4315. This is a small step up considering the 32% drop we saw from mid last year when GBP was trading at $2 to last week's low of 1.35.

This short term sterling strength has seen GBPEUR remain above 1.07.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK the center of attention

With The Minutes from January's MPC meeting, unemployment numbers and the PSNCR data ensuring that Sterling remained in focus for most of the day.

Indeed it wasn't until 3.00pm, when the witching hour for option expiry arrived, that we saw the market shift its attention away from the Pound.

Data from the UK was again on the weak side of awful. Unemployment was higher, nigh on touching, or just above, 2 million depending upon which basis you want to believe and predictions for future trends were confirmed as still heading the wrong way.

The PSNCR was predicted to be huge (largely due to the £20 billion required for the purchase of RBS shares being included) but the outcome was still £4 billion + higher than the worst estimates.

The debt balloon continues to inflate yet still the DMO maintain that raising the sort of sums required to finance UK plc via Gilts issuance presents no problem. We will see.

Overseas investors were not overly impressed with all this and Sterling had another torrid day falling to a 25-year low of 1.3620 at London's close.

From there however, the currency experienced a bit of a bounce, getting to a high of 1.4020 at the close of New York trading. This sudden appreciation appears to be profit taking following comments that suggested Sterling's current plight would be high up on the agenda at the next G7 Finance Minister's meeting in February.

It appears that the MPC cut rates by 0.5% not because they felt it was necessary or would do any good but because the Market was expecting it and the value of Sterling was too fragile not to appease the Market. Interesting.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK is really getting some bad press

And not only the Teenage Scribblers (remember them) but also from experts who have been around a long time and are deemed to know what they are talking about - for most of the time at least.

Today we have Jim Rogers, who was co-founder with George Soros of their Quantum Hedge Fund, advising investors to get rid of everything Sterling related (including currency) and invest elsewhere.

Now whether it was as a direct result or whether it was just coincidence who knows but cable went through yesterday continuously making 7 ½ year lows and its value against the Euro also dipped sharply.

Gilt futures hit a 1-month low and yields rose again as concern over the UK's ballooning debt continued to grow. Outlook for the UK is cloudy to say the least and it is very apparent that, by their recent actions, the labour Government would love to draw a line under the ongoing disaster that is the UK Banking system.

Sterling is suffering on the delay.

The MPC minutes release will be studied for confirmation that rates are still heading lower and imminently. this won't do Sterling any favours. Neither will the UK unemployment numbers or borrowing figures. Yesterday's UK CPI figures, although reporting a less sharp fall than expectations, will not cause any concern with policy makers.

Yesterday the Canadian Central Bank cut their interest rates by 50 basis points to a historic low of 1% (still a differential over US Dollar rates but diminishing). They added that the country was in recession and warned that the economy would shrink by 1.2% this year.

The CAD dipped on the news even though the cut had been expected following last week's trade data.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Well the Good News is that there is no news.

Because of the Martin Luther King Day holiday yesterday, there was no US data out and Wall street was not open. Other than that we are struggling for positives.

The UK Government's bail-out plan for Banks - Part II, despite initially being greeted with optimism, soon adopted the role of the mill-stone, dragging equities and Sterling lower plus pushing Gilt yields up. This despite the feeling that the MPC will cut rates at their February meeting and/or the March one as well.

Expect yields on Gilts to drop through the 3% barrier soon and Sterling to slip further as the market realises that the UK economy is still slipping fast and the minutes to be released tomorrow from the MPC promise further rate cuts to come.

Other than Obama at 5.00pm GMT today the major influence should be the release of the German ZEW survey of economic sentiment and current conditions, neither figure expected to be particularly inspiring.

This might be a reason to take profits on recent Euro/Sterling gains.

We also have Mervyn King making a speech at a CBI event during which it will be anticipated that he make reference to recent events in the economy.

Again, there are no major data releases from the US

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money starts with the positive news

Tomorrow sees the inauguration of Barack Obama as US president which the entire planet hopes will be the first step towards global recovery.

The signs initially look good with a determination to do the right thing and do it early. A feel good factor might easily spread very quickly through the country and filter to a stronger Dollar over the coming months.

The assistance to both Banks and economies being pledged by Governments worldwide is also being viewed as positive with expectations that it will directly enhance Corporate earnings which in turn will boost equity markets.

On the downside, the situation in the world's largest financial institutions is still very unclear. Further assistance for Bank of America and a restructuring at Citibank at the end of last week plus the release of the details for the next UK bank bail-out plan, this morning have done little to alleviate concerns in Financial Markets.

One interesting result of the economic downturn is the widening disparity between the price of Brent crude and West Texas Intermediate oil prices given that the product is essentially the same.

As the historic global benchmark for crude, WTI always enjoyed a bit of a premium over Brent but with recent massive oversupply in the commodity, this has dissipated and reversed. Recently oil traders have been pricing some of their deals against contracts other than the WTI as they claim that the price is being adversely distorted by record inventories at its landlocked delivery point.

Until economic activity begins to pick up again, this differential looks likely to remain.

Focusing on currencies, today we have seen some of the recent Sterling sheen being worn away. Given that the Euro is as weak as last week then this can viewed as a shift away from sterling short term investments and can likely be directly attributed to a knee-jerk reaction to the Government's latest Bank bail out plan. Sterling will probably reverse this move during the week. All else quiet given the shortened trading day.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Little new data out over the weekend

Thus there is very little new news to direct wise money and the markets.

The automotive and aviation industries obtained most coverage with expectations that the bail-out of the Big 3 US car manufacturers will be looked at again early in the week and re-presented for approval whilst there is a lot of talk afoot that funds will be made available for the UK car industry from Government.

The large aircraft manufacturers appear to be heading down a different route with anticipation rife that they will offer billions of dollars of loans to €˜buyers' in order that the sector remains active.

This week looks as though it could be lively given both the illiquidity of the markets as we approach Christmas added to Tuesday's FOMC meeting in the US plus the release of this month's MPC meeting minutes on Thursday.

Expectations are that the Fed will cut rates by at least 50bp but interest will centre on additional measures and/or comments that might accompany the decision. A new dimension will be added to the Sterling saga if, as the Sunday Times pontificates, the strength of the Pound is beginning to carry weight with regards to cutting rates.

This argues that given the current level of GBP/EUR, cuts in the 1st Qtr 09 might not be quite as frequent or of the same magnitude as over the last 3 months.

Predictably hawkish comments from 2 ECB members, Stark and Trichet will not help the outlook for Sterling/Euro.

Today we have only US industrial production and capacity utilisation scheduled for release and you wouldn't get a Nobel Prize for predicting that the numbers might not be so good. Otherwise we await developments on the car company bail-out.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Central banks unite to save the markets

Friday capped a week of losses on global equity markets with the FTSE shedding nearly 9% while the Dow Jones fell 128 points.

This morning news is emerging of the outcome of talks over the weekend between world leaders to restore health in financial markets.

In the UK it has been announced the government will inject up to £37bn into banks in a move that will leave the government with sizeable stakes in some banks. The action raises levels of tier 1 capital in the latest attempt to restore confidence.

It has emerged from the weekend's meeting of Eurozone leaders in Paris that interbank lending will be guaranteed until the end of 2009 with UK Prime Minister Gordon Brown stressing the importance of "co-ordinated intervention" to restore confidence.

Brother Brown has urged European neighbours to follow the UK model of intervention whereby the government will take stakes in banks. The G7 finance ministers also unveiled a five point plan to revive markets while Australia, New Zealand and UAE have guaranteed all bank deposits and Norway and Portugal announced plans to aid bank financing.

Markets have reacted positively to the news with Australian markets rising 5.6% and the Hang Seng up 3.2% overnight. The FTSE, German and French markets all opened in positive territory this morning though Japanese and American markets are closed for public holidays.

It is likely today that individual EU nations will announce their plans within the framework agreed over the weekend while in the UK Producer Price Index data will be released, with an expected 0.4% month on month fall and 8.8% reduction year on year.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Labour nationalises UK banks

Gordon Brown took the momentous decision to invest about £50bn into the financial system to nationalise the majority of the UK banking system in the largest state theft in British history.

The details of the part nationalisation of UK banks are still unfolding but so far we know that the labour government will buy preference shares, the BoE will make at least £200bn available for banks to borrow under the special liquidity scheme and the government will provided a guarantee in the region of £250bn to help refinance debt.

As stated by Alistair Darling €˜these steps are the necessary building blocks to allow banks to return to their basic function of providing cash and investment for families and business.

In the US the fed announced that they will purchase US Commercial Paper in an attempt to support the financing needs of corporations. The Fed will lend against a special purpose vehicle and the issuer will pay an upfront fee based on the commercial paper initially sold to the vehicle.

This will be in place until the 30 April unless the Board of Governors agree on an extension. Following this announcement global stock's regained some poise, however this was short lived with the S&P 500 down 5.74%, Dow Jones down 5.11% and the FTSE 100 by 0.3%.

Bernanke comments during his press conference to the National Association for Business Economists highlighted that the outlook for economic growth had worsened and the downside risks to growth had increased, this leads to a greater probability that the Fed will cut rates at their next meeting on 28-29 Oct if not before.

Furthermore the markets are predicting an even greater chance that the central banks will group together to announce a coordinated global interest rate cut. It seems that the longer this decision takes the greater the lack of confidence in the markets becomes.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Stocks plummet as global turmoil continues

There was further turmoil in the global stock markets yesterday, as stocks plummeted to their lowest levels as the credit crisis deepens in Europe.

UK stocks suffered their worst falls since Black Monday in 1987 with the FTSE 100 falling by 7.8%, In the US the Dow Jones fell below 10,000 for the first time since Oct 2004 and the S&P 500 fell by 2.3% to 1,073.81, its lowest level since Aug 2004.

There is now increased speculation that Central Banks around the world will reduce interest rates in order to cushion their economies from the credit freeze. The market now deems there to be a greater probability that the BoE will cut rates this Thursday by up to 50bps.

Overnight Australia's Central Bank cut its benchmark rate by 1%, twice the amount that was predicted, to 6%.

The unwinding of carry trades saw the yen strengthen against a range of higher yielding currencies. As volatility increased yesterday funds were converted into yen, the currency in which funds are initially borrowed to transact the trade.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.