WISE MONEY

The Conservatives and Liberal Democrats have formed the first coalition Government since the Second World War.

After negotations last night that went to midnight, here’s an initial take on what’s been agreed:

ECONOMY
- A significantly accelerated reduction in the structural budget deficit over the course of a parliament, the main burden to be borne by reduced spending rather than increased taxes
- Six billion pounds in cuts to non-frontline services this financial year subject to advice from the Treasury and Bank of England
- Partially reverse Labour’s planned increase in payroll tax
- Create independent Office for Budget Responsibility

Nick Clegg becomes deputy prime minister. Some junior ministerial posts will also go to Lib Dems.

TAX
- The Conservatives agreed to scrap their commitment to raise the death tax threshold to £1 million over the next parliament.
- Instead the two parties have agreed to adopt the Lib Dem policy of raising the personal tax allowance to £10,000 as a long-term goal, with a promise to take “real terms steps each year towards this objective”.
- The parties did not agree to a Lib Dem call for a “mansion tax” on high-value properties or to stop tax relief for higher rate pensioners.
-The parties agreed to a substantial increase in the personal income tax allowance from April 2011, with the benefits focused on the lower and middle classes.
- This will be funded by dropping plans to increase the employee threshold for the national insurance payroll tax and by raising capital gains tax for non-business assets so it is closer to the level of income tax.

Sky News is reporting that Vince Cable will be put in charge of policy for banks and businesses. This is the same man who in the Chancellor’s debate said that the Tories were just waiting to “get their noses in the trough and reward their rich backers.”

The political change should remove a substantial part of the uncertainty that has been weighing on Sterling of late.

Evidence of further recovery in the UK labour market today as well as market speculation about changes in the monetary policy outlook following the release of the Bank of England’s Quarterly Inflation Report should be supportive for the Pound.

The Liberal Democrats are holding the country to ransom while an unelected leader of the Labour Party remains Prime Minister.

It is a measure of Gordon Brown’s loose grip on reality that he sought to depict his decision to stand down later this year as a noble act of self-sacrifice made in the national interest. The truth is that this was an act of quite staggering cynicism based on naked party advantage.

With the incomprehensible connivance of Nick Clegg – whose reputation will surely never recover – Mr Brown is effectively seeking to nullify the result of last week’s general election. Blinded by his tribal loathing of the Conservatives, he is ready to risk everything – and the Daily Telegraph used that term advisedly – to keep David Cameron out of Downing Street.

This unelected leader of the Labour Party will remain Prime Minister, even though his party secured two million fewer votes and 48 fewer seats than the Tories.

He will then hand over at a time of his choosing to a new Labour leader. At that point, the United Kingdom will find itself governed by a Labour prime minister the country has not elected, succeeding a Labour prime minister neither the country nor his party elected. Even by Labour’s standards, this is self-serving and unscrupulous.

Mr Brown talked yesterday about the importance of a strong and stable government at a time of grave economic crisis. Yet he is seeking to concoct with the Liberal Democrats a governing coalition that will be inherently unstable and weak. A Lib-Lab pact cannot deliver a majority in the new House of Commons.

It will be reliant on the smaller parties – the Scottish and Welsh Nationalists, perhaps the DUP – to secure its business. What will that mean? That the English taxpayer will be expected to keep those parts of the UK in the heavily-subsidised style to which they have become accustomed.

This at a time of economic distress when deep cuts in the public services in England are inevitable. Just as pertinent, England voted decisively for the Tories last Thursday (297 seats to Labour’s 191), yet is to be effectively disenfranchised by the Brown/Clegg stitch-up.

Does Mr Brown realise how dangerous a game he is playing? He has made much over the past couple of years of his devotion to the Union, yet his political scheming will place it under immense strain.

And how exactly is a Labour leadership contest supposed to encourage stability? Campaigns were already gearing up last night. The notion that the challengers to succeed Mr Brown will be devoting their full energy to their ministerial jobs in the weeks and months ahead is, frankly, laughable.

The markets responded to Mr Brown’s pieties about stable government by plummeting. They assessed very quickly just how ramshackle such a cobbled-together coalition will be.

The prospect of swift and decisive action to tackle the deficit evaporated at precisely one minute to five yesterday, when Mr Brown made his surprise statement in Downing Street.

Why is this happening at all? This brings us to Mr Clegg and the Liberal Democrats. They are, in effect, holding the country to ransom in pursuit of a new voting system. An issue that featured nowhere on the list of voter priorities in the general election now dominates the political debate.

And the tail is wagging the dog. Last Thursday, the two parties that were formally opposed to PR, the Tories and Labour, between them polled 19 million votes. The party that supports PR polled fewer than seven million votes. Is this what Mr Clegg means when he talks about the “new politics”? And what is “new” about a deal brokered by three unelected Labour figures – Lying lords Mandelson and Adonis and Alastair Campbell?

Since last Friday we have lived with the fiction that Mr Brown was simply doing his constitutional duty by staying at the helm until a new government could be formed, acting in the national interest.

Now we see that all the time he has been acting in his and his party’s interest, defying the verdict of the electorate by trying to create a coalition of the election losers. This is a bleak day for our democracy.

The discredited labour govt has caved in to demands that British taxpayers underwrite at least £13 billion of debt held by other European governments as EU finance ministers agreed an even bigger bail out for the flawed euro.
Labour, representing Britain until a new government is formed, was forced to participate in a £95 billion “stabilisation mechanism” aimed at helping European Union countries who face a debt crisis.

The decision followed a crisis meeting in Brussels to discuss the financial turmoil that has raised doubts about the future of the euro.

It exposes the British taxpayer to £9.6 – £13 billion in liabilities should Spain or Portugal go the way of Greece.

Mr Darling had no choice but to surrender because the decision was taken under a Lisbon Treaty “exceptional occurrences” clause that stripped Britain of its veto.

Britain last night succeeded in staying out of an even larger fund solely for the 13 countries using the euro.

The EU agreed a £624 billion rescue package of bilateral “special purpose vehicle” loans for the 16 euro zone states struggling to finance their debts.

As well as the loans, an extra £52 billion of new cash for a “stabilisation mechanism” will be raised by allowing the European Commission to use the EU budget as collateral on international debt markets.

Britain escaped being sucked into the wider bailout loans but was forced to underwrite the “stabilisation mechanism” which, added to an existing “facility” of £43 billion, makes British taxpayers liable for £13 billion of a new £95 billion fund.

Already indebted euro zone states will be on standby with £382 billion of loans, which will be topped up by an IMF contribution of £191 billion).

The measures were rushed through over the weekend to be in place when the markets open today. Yesterday President Barack Obama urged EU leaders to restore confidence in their economies.

European stock markets and the euro have fallen and government bond yields have jumped as investors fear that the large deficits run up by some EU countries will cripple economic growth.

Mr Darling said Britain would not provide support for the single currency, but Sweden, another influential non-euro country, called that stance into question, saying it would “not rule out” being part of the wider fund.

Separately, the European Central Bank is later expected to announce that it will buy up Spanish and Portuguese government bonds at premium rates even if they are junked by markets.

Last night, the final UK leaders’ debate last focused on the economy with messers Cameron, Clegg and Brown answering questions ranging from the deficit to unemployment to benefits.

However, given that in theory at least, the subject material divided the parties much more than the previous exchanges and therefore one may expect more of a ‘debate’, the overall spectacle was extremely poor.

Mr. Cameron was judged by snap polls to be the winner, but petty squabbles and an inability to answer questions properly on important issues and dodge committing to actual figures were the main themes the leaders brought to the debating plinth.

A hung parliament is still the bookies favourite outcome, but Mr. Cameron’s relative strength last night has at least opened the door to a one party majority gaining power.

Sterling has reacted positively to the news, moving above 1.53 against the Dollar and towards 1.16 vs the Euro and given a boost this morning by the announcement of record profits by Barclays.

Over in Europe, Greece has announced further austerity measures totalling €24 bn. We have also received supposedly reassuring messages from top Portuguese and Spanish politicians on how committed they are to economic stability and that debt levels in both counties is under control.

Déjà vu anyone? With German officials leaking that they think the Greek bailout may cost €120 billion over three years, leading economists are furiously calculating just how much it might cost to do the same for the rest of the PIIGS. The first tentative answer… the massively scary number of €600bn.

Which is way beyond anything the eurozone partners can afford on their own. Step forward the IMF. Or say hello to the D Mark again?

After stabilising on Friday, the Euro took another pounding this morning as details begin to emerge about the proposed €45 billion rescue package.

Greece’s request for emergency aid looked to stem the flow of selling as Finance minister Papaconstantinou warned investors they will “lose their shirts” if they bet the cash strapped nation will default. The debt saddled country has announced billions of euros in austerity measures, including tax hikes and public sector wage cuts.

The Euro has been trading back above 1.16 against Sterling while Euro/dollar has fallen below 1.33.

Friday’s UK data proved negative for the Pound as we discovered the economy grew at half the pace economists predicted in the first three months of the year. The office for National Statistics reported that GDP grew by 0.2% in Q1 2010 against the 0.4% analysts had expected.

The focus in the UK will be on the final weeks of the election campaign and the possible outcomes that may emerge as polling day draws closer. Leader of the Lib Dems, Nick Clegg, has warned current PM Gordon Brown not to expect a coalition with his party, though a tie up with the Conservatives also looks unlikely.

The Dollar advanced to a two week high against the Yen as government reports showed US new home sales rose in March by the most in almost five decades and orders for durable goods surged. Bookings for US durable goods excluding transportation items advanced 2.8 percent last month after a 1.7 percent gain in February.

It appears there is no more effective a way for a small country to get its own back on a larger one for it’s antisocial behaviour than to have an erupting volcano spew it’s lava towards the bully.

No trade embargo, however effective, could compete with the economic devastation that Iceland’s Eyjafjallajökull volcano threatens to visit on Britain and much of Northern Europe.

How costly it ultimately proves depends, on the prevailing winds and the length of the eruption, but any prolonged shut down of UK airspace would certainly have profoundly disruptive economic consequences.

Britain is one of the most open economies in the world. As such it depends vitally on getting people, goods and food in and out of the country.

The only remotely comparable event in recent times is the shut down in US airspace that occurred immediately following 9/11.

It is impossible to disentangle the immediate costs for the airlines of the 2001 terrorist atrocities from their longer term consequences, but ultimately the US government had to provide the industry with a package of federal aid to keep it afloat, including $10bn of loan guarantees and $5bn of short term assistance.

Lost economic activity ran to hundreds of billions of dollars.

Britain’s still unresolved dispute with Iceland over the costs of bailing out UK depositors in the collapsed Icesave might give reason to believe, if you were living at the time of the great Nordic sagas, that the eruption is some kind of divine act of revenge.

The compensation demanded of Iceland amounts to thousands of euros per head of population and will take years to pay off.

In the view of most Icelanders and most international observers, Britain has behaved in a most ungentlemanly manner by it’s prime minister using anti terrorism legistlation to freeze billions of Pounds worth of depositors’ money.

If Iceland’s Eyjafjallajökull volcano continues to erupt for a similar length of time as it’s last eruption- 2 years, and the UK continues to endure artic weather of a similar BBQ forecast summer as last year the financial effect on the UK will be enormous.

Following a strong day for the Euro yesterday is the auction of €1.2 bn worth of 6m and 12m Greek bonds which will provide the main movement in today’s markets as Greece tests confidence hoping to find sufficient investor demand.

If the sale goes well, look for the Euro to strengthen as bailout plans from the EU/IMF would be shelved. On the other hand, a weak or failed auction would put further strain on Greece’s finances and with the bailout plan still being finalised, a Euro sell-off would be imminent with traders looking back to Fridays 1.1450 levels against Sterling and 1.33 on Eurodollar.

In the UK, business leaders have slammed Labour’s party manifesto for not taking enough action in cutting the country’s deficit.

Meanwhile, the Conservatives will be announcing their manifesto today following plans by Tories to scrap the FSA and hand most of the powers to the Bank of England.

The general consensus in the City seems to be victory for Cameron and co will produce more decisive measures in cutting the deficit and getting the country back on track. Overnight data from the BRC shows Retails Sales YoY increased 4.40% providing bullish news for the struggling retail sector.

With the Eurozone slipping on Greece and politics in the UK grabbing the limelight, the US markets have continued to surge higher with the Dow Jones getting back above the psychological level of 11,000. Expect the US back in the news this week with ample volatility in the Greenback.

Still, the bond auction from Greece will be the key for today’s trading as they look to avoid another Tragedy.

Gordon Brown has headed to Buckingham Palace to ask the Queen to dissolve parliament for a May 6 General Election.

As we have mentioned  many times before, this election will be the most closely watched by the money markets for many years with most attention focused on the how any incoming Government plans to deal with the budget deficit.

All sides have already announced policies aimed at reducing the deficit but expect many more polices over the next month. Markets will closely scrutinise any declared polices and will also be looking for more details from existing proposals so expect increased volatility in Sterling pairs as markets digest the information.

After the announcement by Germany and France of a rescue package for Greece, Government debt stopped making headlines – for last week at least. The Euro continues to be weighed down by expectations of Sovereign risk of its member countries.

The Greek deputy prime minister clearly suggested that if borrowing costs for indebted countries do not decrease the next domino in the pack to topple will be Portugal. Quite how Mr. Pangalos thinks this pearl of wisdom helps any of the PIGS is not clear!

Overnight the Royal Bank of Australia has, as expected raised interest rates to 4.25%, its fifth rise in six meetings, sending the AUS Dollar higher against Sterling, which now trades at 1.64.

A largely political budget failed to rattle the financial markets and the Pound was unmoved on the back of the budget- although it did slip against the US Dollar due to other factors.

It was announced that there would be a reduction in the government borrowing requirements but it was not enough to shift sterling especially as no clarity was divulged on how exactly the deficit would be reduced. Sterling did slip against the US Dollar following jittery trading on the downgrade of Portugal and the ongoing back and forth with Greece and the EU which led to USD buying.

This morning the Pound has staged a recovery following much better than expected retail sales data from the UK at +2.1% month on month; currently we sit at 1.4950 on the USD and 1.12 against the euro.

The euro was the big mover in the currency markets yesterday- on the downside.

There is hope of an agreement for Greece in the next couple of days from the EU summit but until this is definitive the euro will be under pressure.

Interestingly the PBOC (Public Bank Of China) have commented that the Greece debt crisis is just the beginning for the Euro zone- not good news for the euro and this could encourage longer term holders of the single currency to start dumping it and thus forcing it lower still.

Today is finally the pre election budget day which Alistair Darling will unveil to the House of Commons this afternoon.

So what can we expect from Mr Darling today? Will he be specific and open about how the government plan to reduce the deficit by half within 4 years? Very unlikely…today is the last chance saloon for Labour to dance around the realities and focus upon trying to get re-elected.

Expect to see bashing of financial institutions and for Darling to drum home the point that early cuts or the Conservative policy could spin the economy back into recession. One item that would help this argument and sterling is the expectation of the announcement that the government borrowing forecasts are expected to be revised down from the record £178 billion.

Depending on how much it is revised down will be key for sterling. I would expect to see the budget on this basis to be slightly sterling positive as the financial markets do not expect clear plans on reducing the deficit- the post election budget will be much more relevant for this regard.

Today we have seen the euro trip through to an May 2009 low at 1.3340 against the US Dollar. The catalyst was again uncertainty with Greece coupled with news that Fitch has downgraded Portugal’s long term default rating from AA to AA-, with outlook negative.

The Swiss Franc has hit new all time highs against the euro and currently sits in the low 1.42’s. With imminent intervention not likely we could see further CHF gains.