FOR THE EU IT'S NOT THE DEFECIT, IT'S DEMOCRACY THAT'S THE PROBLEM

I sussed it. No seriously, I’ve worked out the euro problem.

Economists can stop thinking about that £250,000 prize money. It’s mine.

This is what is needed to bring this horrible, dragging, sorry tale to its conclusion:

Abandon democracy.

Think about it. The reason why there is a deadlock between France and Germany is political.

President Nicolas Sarkozy is heading into elections and the last thing he wants is a ratings downgrade or even worse a banking collapse, to give succour and, more importantly, votes to Marine Le Pen.

Over in Germany, the voters are sick to death of picking up the bill for Europe and this is being reflected in the growing impatience of the coalition with Chancellor Angela Merkel who, to add to her troubles, now finds herself hemmed in by a ruling from the Constitutional Court.

And look at those glorious bureaucrats in the European Union. They get it. They also can see that democracy is preventing them from doing what they wish.

Only this week, European Council President Herman Van Rompuy warned that it was “dangerous to let the fate of the world economy depend on domestic policy squabbles within the parliament of one of the 17 [Eurozone] countries, large or small”.

In the ultimate expression of the ever-growing mission creep of the EU, he added that further fiscal discipline and economic and fiscal integration was needed with countries accepting a “loss of sovereignty for all”.

You see, Van Rompuy is a visionary. They all are.

Over in Brussels, they have worked out that those pesky voters and their domestic squabbles are to blame. Never mind that for the likes of Germany, Holland and the UK, voters are individually forking out a fortune on this corporatist dream.

Why should they have a say in the billions squandered, most probably illegally, in propping up countries and banks through the European Stability Mechanism and the European Central Bank?

And never you mind, you voters, that some Eurocrat will soon be able to come into your country and rule on the budget and spending polices of a government that you had voted in. Remember, this is all in the name of Europe.

Although I have frequently called out the Eurozone for its dithering and indecisiveness, it is actually healthy for the body politic to behave this way.

What the politicians are failing to do is to devise a plan that can be presented to the people of Europe.

If there is an argument for more German money pouring in or for French banks taking a haircut, find it and make it to your voters.

If they understand, and if they believe you, then you will be voted in again. Hiding behind “manifesto promises” or internal issues will not help you find the solution to this mess.

This democratic deficit extends to the UK.

From the Bank of England printing money, to buying bad banks and guaranteeing loans to the Eurozone, these actions have been done without the participation of the voter.

Now, of course in a representative democracy we expect our parliamentarians to represent us and take actions on our behalf.

But Europe is an area where there has been a deficit since 1975. I, and millions like me, am of a generation that has never had a say on the direction of Europe and our position in it.

I have grown up watching the Common Market mutate into the single market, European monetary union, and now a vicious land-grab on our economic policies through Tobin taxes and financial regulation.

Van Rompuy warned that the “great enemy of any project is the scheming mind that asks, '“What do I get out of it?"' in what I presume was a dig at the UK (though it could have been a spiteful poke at Slovakia whose parliament, in the first instance, had the audacity to reject the euro bailout scheme only to be forced into an about turn two days later).

Well, I think that rather than expecting countries just to keep coughing up ever more funds and devolve ever more of their national sovereignty, a government has a duty to find out what its citizens really want..

Prime Minister David Cameron introduced the Back Bench Business Committee to rule on whether popular petitions should be rewarded with a debate, and a non-binding vote, in Parliament.

Yet bizarrely, the government is lining up a three-line whip on the vote on our future with Europe on Monday, risking outright rebellion and resignations from the executive.

Whatever your views on Europe, surely now is the time for our representatives to debate freely and without party-bias.

It is this democratic deficit that eventually will kill the EU. Politicians should represent the wishes of the people and the bureaucrats should enact those wishes.

This fundamental principle is being turned on its head at the moment, but as with the economic deficit, eventually the bills can’t be paid.

In a democracy, this usually takes the form of a ballot box massacre but, as events in Greece and elsewhere have shown, it could turn into something altogether different, and more violent. We shall see.

By the way, actually there is one idea on solving the euro crisis that hasn’t been looked at – the hard ECU, but in reverse.

The Greeks float a new drachma tied to the Euro, used electronically and domestically while the Euro is used internationally and to honour debt.

Hopefully, the drachma would stabilise at its natural rate and Greece would have control over its interest rates and economic policies using the Euro as a control mechanism for the country’s eventual withdrawal from full monetary union.

Can I have my £250,000?

Originally published at: The Commentator

MAXING OUT

With more gloomy data and markets in freefall, it is time to take stock and maybe put that credit card away.

I am a big fan of the Arthurian legends and have read various interpretations over the years. However, there is always that time when the proud King is going to be betrayed and he is going to go into his last battle and although you know that it is going to happen, there is nothing you, the reader, can do to stop it from happening.

The global economy appears like this at the moment. Like the slow-motion of a car crash, we can only look on in horror as the world approaches the buffers.

David Cameron made a telling point to the Canadian parliament this week when he pointed out that this is not an ordinary cyclical recession. Too right it’s not, mainly because we never really left the last one. Since 2008 we have been limping along, hoping that our numbers come up and we can head to the uplands.

Despite the self-congratulations of policy makers two years ago, we are back where we started where the money markets are beginning to shut themselves down to banks with heavy sovereign debt burdens, global growth is stagnating and even China seems to have reached its peak in terms of economic activity.

We are, in the words of the World Bank’s chief Robert Zoellick, in the danger zone.

But what are we going to do?

Cameron told the Canadian parliament that “it’s a debt crisis”. And debt is a problem.

In Canada, the politicians hit the debt problem during the boom times and so led to the state of the nation today where they have a more than ample war chest to offset the hazards that are on the horizon.

Essentially, Canada paid off its credit card and stuck it in a drawer and has vowed not to take it out unless absolutely necessary.

In Greece, the debate is whether to borrow even more money to service the credit card whilst being given a diet of broth and hard labour or to declare bankruptcy and start again with creditors impatiently waiting for it to earn enough money to begin to pay back its debt – if it pays it back at all.

Here in the UK we are in a half-way house where although we know that we should be paying back the debt but our family keeps demanding new shoes so we pay a little back, spend a little more and hope to inherit some money.

America? Well, America appears to be magicking up new credit cards whenever it hits its limit.

Let me make it clear to you – if you run up a credit card, max it to the hilt, do you keep spending and to hang with the repayments bill or do you cut back on your spending and try and clear the debt?

Many complain that we must spend our way out of recession but if we just keep driving up that credit card, eventually, like some European banks are finding out, the credit will stop and where will we be then?

Now, there is a risk that we will be forced into some speculative spending. But instead of some Roosevelt public spending plan, why not a tax cut? If we are going to have to use that credit card again to stimulate the economy, put that stimulus into the producers. Yes there is a risk that people will just hoard the bonus but that is what the banks did with the bailouts and at least the money will be with the private individual rather than a further expansion of the state.

On an aside, I quite liked the idea of instead of bailing out the banks, we should have just given each taxpayer £300,000 to put towards a house. Mad, but amusing and possibly effective at the same time.

At least for the moment, we in the UK are not getting more credit cards. Quantative easing (QE) is only effective in a short spell. The QE program that the Americans embarked on has had zero effect on its economic problems and may indeed have exacerbated them with doses of inflation and unemployment.

To me, the idea of QE being an effective way of managing your way out of debt is about as useful as giving a drunk a shot of whisky so they can make it to the next pub.

There is a further problem to contend with in our current situation. Uncertainty.

The markets are marking themselves to the situation at hand which is one of sheer uncertainty. We are unsure of what the eurozone is actually going to do next. With briefings and counter-briefings flying all over the place, the markets reflect this, hence the volatility.

Whichever decisions the eurozone makes, it will have to be clear and unambiguous. Whichever way they go, the markets will act in the appropriate manner but at the moment the markets are just unsure about whether Germany is going to take away Greece’s credit card or pay it off.

SWISS HOLES IN AN INVESTMENT CULTURE

With the bank’s reputations under attack again following the revelations that rogue trader Kweku Adoboli had lost UBS $2.3bn (£1.5bn) in unauthorised trading, it will no doubt increase calls for the splitting of banks’ functions. However, once again, behaviour appears to be at the root of the loss.

Coming as it did after the Vickers Report which recommended the ring-fencing of retail banks from the investment side; the news was a fillip for critics such as Coalition business secretary Vince Cable.

However, this is not a reason for taking an even harder line with banks and there is a risk that the bigger picture – what is good for the UK? – will be lost in the catcalls that will no doubt get louder after these events.

As I have pointed out previously, a lot of what has happened in finance over the past few years, or indeed forever, has been behavioural. Judgment calls have been wrong, or banks have been too eager to lend or politicians have been too eager to tax without working out what the effects will be.

And it appears that there is a behaviour issue here coupled with poor corporate governance.

Most traders nowadays are surrounded by risk and compliance managers. They are checked at least once an hour; some are checked every twenty minutes, to keep an eye on what their positions are. In addition, traders are given ceilings with which to trade, a ceiling that will allow for an “acceptable” loss during a day’s trading.

Yet this appears to have gone wrong for UBS. Where were their risk managers? Where was compliance? How did Adoboli manage to rack up $2bn in losses?

UBS had a reputation for stolid, conservative banking before it has to be bailed out by the Swiss authorities in 2008. In total, the bank lost around $50bn in the financial crisis and the chief executive Oswald Gruebel has worked hard in restoring its reputation.

However, it may be that its conservatism was the issue.

Unlike their “Anglo-Saxon” counterparts in the US and UK, the Swiss – and for that matter the German – banks were not known as having risk cultures. Steady and sure. So when they got into the investment market boom after deregulation, could it be that they were ambushed by the risk culture? Did their behaviour cause them to not recognise where the risk issues were? Or maybe, they were swept up in the investment frenzy that was going on? Certainly, judging by their debt exposures, they certainly took on positions which most UK banks would baulk at without better hedging.

So how could $2bn disappear without being noticed? Well, the good money’s on this being in the so-called exotic markets of options and derivatives and was probably traded through an exchange-traded fund. These are not highly regulated and in the vast majority are not regulated at all as most are considered as private rather than public deals, coming as they do between two parties.

The fact that UBS allowed $2bn to be placed, probably in a series of trades, shows a disregard, or perhaps even an ignorance, of risk. Indeed, this morning there are reports that it was Adoboli who informed the bank of his losses. This appears to be a fundamental flaw in its internal control systems and seems to show that UBS has some serious governance issues.

How do you regulate against behaviour? You can’t. You can inform, educate and train but as has been seen with the outgoing Financial Services Authority, tick-boxing is no guarantee against behavioural risk, or fraudulent actions.

What is coming though is a greater transparency for these trades in the light of global regulatory changes. Will it stop rogue trading? No. One determined individual will always be able to go rogue. What this may do is help banks keep track of “off-market” trading and allow risk managers to do their jobs with good information.

Finally, there is one thing I wish to point out. Speaking on BBC News 24 on Thursday night, I gave a brief summation of the probable trade Adoboli used to get these losses. This in turn was described by the presenter as “a bet”. Well, yes, yes it is. But all investment by its nature is a bet. Unless you have inside information, you have to use your judgement to work out what the probable outcome for the company, share or currency is down the line. This is no different from using the form guide when you pop down to Ladbrokes to bet on a football team or horse.

Investment is a risk, there are always winners and losers, and it is the nature – not the fault – of the system. After all, if UBS is a $2bn loser, somewhere there is a $2bn winner.

Pic credit: This is London

IT'S LEGO BRICKS NOT BRICS

Thought you would like to see this Lego guide to the crisis in the eurozone, courtesy of JPMorgan:

1. The toreador in a floppy hat, and the F1 driver with his helmet, represent Spain, Italy and the rest of the Euro Periphery.
2. The three men with helmets, shields, and medieval weaponry represent the CDU, CSU and FDP parties in Germany.
3. The blue-and-white sailor boy is Finland.
4. The woman with an oversized carrot and her friend in overalls with a shovel represent the Social Democrats and Greens.
5. Wotan represents the Bundesbank.
6. The piggy bank is the IMF.
7. The grey-haired Banque chap is the ECB.
8. The chap in the red bib is Poland.
9. The artists are France.
10. The angry chef, the sweeper with a broom, the airline pilot, and the rest of the motley crew at bottom left, represent EU taxpayers in Core countries.
11. The storm troopers are the EU Commission and Euro Group Finance Ministers, chaired by Jose Manuel Barroso and Jean- Claude Juncker.
12. The monocled banker and his assistant are EU bondholders and shareholders.

BEHAVING BADLY? POLITICIANS V BANKS

Inevitability when something happens; there is a tendency to blame the system itself rather than the behaviour within a system. Grasping for the need to be shown to do something, politicians – backed by hectoring calls from the media - ignore the obvious in favour of introducing more strict regulations or laws. The obvious being, what was the behaviour of the people involved?

From gun laws to dangerous dogs, the effect has been that the lawful have been punished for the actions of the unlawful and the actions, or inaction, of politicians, police and judiciary.

And so it is with banking.

Three years ago, we saw the financial crash that we have yet to recover from. As banks went to the wall and the markets crashed, governments stepped in to bailout other banks.

As a result, the UK government set up the Independent Banking Commission which releases its final report on the future of UK banks in under a week’s time.

In all likelihood, the report will recommend the ring-fencing of the retail operations of a bank from the investment side.

Predictably, in these bank-bashing days, the public and politicians have applauded the suggestion and in fact go even further and want a full-blown abolition of universal banking.

However, it is important to note that, in the UK at least, the major failures in the banking system came from retail operations or takeovers.  Northern Rock and Bradford & Bingley were high-street operations, whilst RBS entered into a disastrous purchase of ABN Amro. In addition Lloyds was a paragon of virtue in banking terms until being forced to take on Halifax.

Those truly universal banks, Barclays and HSBC for example, were relatively unscathed despite having extremely aggressive investment divisions. Barclays even going for the profitable parts of Lehman’s following its demise.

The crash started with sub-prime mortgages – a political strategy from Bill Clinton. It was not casino banking, this was a politically-motivated form of irresponsible lending. When the sub-prime mortgages were repackaged, it was also not just the “Anglo-Saxons” that were caught up on the idea of ever-increasing returns. German, French and Swiss banks were happy to pick up sub-prime debt packages with the promise of monies to come.

The issue was behavioural. Poor risk management and poor decision-making at a time when politicians were making claims for an end to boom and bust and the consumer feeding frenzy was about to hit its peak. Everyone was at it. The politicians, you the public, us in the media, the banks, they were the good times. Only a few were predicting the bubble burst and their voices weren’t loud enough to be heard above the ringing of cash tills and ATMs.

Making a decision, so you appear to be decisive, is not a sensible option unless you look at the events and behaviour within the system.

In 2008, Northern Rock should have been allowed to fail and RBS should have gone to the wall, same with Halifax. This was the moral hazard that Bank of England governor Sir Mervyn King had talked about – take the risk, take the fall. A structured wind-up with depositors and mortgage holders protected should have happened.

This would have given the signal to the markets and the banks themselves that they were not protected, only their customers were. This would have led to a natural change in investment and risk habits rather than the politically-enforced one that is being suggested at the moment.

Although banks, and politicians, doom-mongered about banks being “too big to fail”, my view is tough. The economic world needed an adjustment no matter what. Speaking as one who was hit by the crash, I know how tough it could have been but I would argue that this adjustment could have prevented us from being where we are at the moment, teetering on the edge, lacking a confidence in the global economy.

It is not that some of the ICB’s ideas aren’t sound. Capital adequacy rules are already being put into place through Basel II and the European bank-stress tests, while living wills - to allow an orderly wind-up of a failing bank whilst protecting savers - are good if done correctly. But splitting operations and not allowing banks to cross-finance operations would not restrict risk and indeed could actually hinder not help the British economy.

Investment banking in its own right is not inherently wrong, in fact it provides financing for companies and income for pension funds. The issue is about people and risk. Rather than destroying a structure that rightly or wrongly, plays a big part of our economy, the question has to be about shareholder or investor accountability for management actions, protection for retail savers, and sensible regulation that promotes the recovery, not kill it dead.

With both the US and European leaders rejecting the banning of universal banking, it hardly seems believable that some in Westminster seem determined to go ahead with this and present a Britain which appears completely hostile to investment and finance.

It seems it is not just banking behaviour that carries a risk to the UK.

EAT THE RICH THEN STARVE

The UK government has done a deal with Switzerland to get a modicum of income of those UK citizens who have private Swiss bank accounts. Some moan that it doesn’t go far enough, while others warn that account holders may switch territories. However, one thing people forget is that the tax-conditions in a country will dictate where the taxable money is. And, unfortunately for the UK, we are certainly not in a goldilocks era of taxation being ‘just right’.

One refrain that keeps coming back as a result of the financial crisis of 2008 is to eat the rich. That is to say that there is an idea that the “rich” need to pay more, especially the pernicious bankers.

However, as with a Tobin tax, there is the law of unintended consequences to consider when enacting stringent measures to tax those in the top two rates of tax.

First of all, there is the simple expedient that people and capital are mobile, you tax them, they and/or the capital moves. You overtax a company, it will move. Now, there are many that say ‘call their bluff’ and, yes, for certain companies, they are intricately tied into the framework of the country – think Barclays and its high-street branches.

However, let’s say the Independent Commission on Banking insists on splitting retail operations from investment banking. Immediately it gives a framework for Barclays to shift operations away from the UK, perhaps even sell-off its high-street chain. So taxable income, people (who get taxed) and company could now move – is this what people really want?

Secondly, for others, such as BP, it is a matter of funding and development. I don’t agree with the threats to the Treasury by BP over funding oil and gas discovery in UK territorial waters, especially since compared with other countries, the windfall tax is fairly on par. But it does demonstrate another consequence. For the UK, energy security is of increasing importance. If companies like BP are willing to pay for and search for new fields then that can only benefit the UK, if and probably when, we enact emergency provision orders sometime down the line. However, tax them too much and they stop looking and paying, going to other ‘benign’ territories.

So does ever-increasing taxation work? Nope. Not at all. Yes there is a brief spike but then money starts exiting a country or ways are found to either not pay the tax or results in people being paid in non-taxable forms.  Already, the Treasury is concerned that the 50% personal tax rate is hurting income and is examining returns. Despite what the ideologues say in the Liberal Democrats and Labour parties, the Laffer curve has been known for quite a while now. Although disputed, it is a simple formula, the more you tax, the likelihood is that you will get less revenue, with the reverse being true.

Now the Laffer curve suggests the peak is at 50%, which anecdotal evidence from Treasury officials suggests is too high at least in the UK, however, in principle what happens with taxation is that there is a compact between the state and those taxed and there is a goldilocks moment where everything is just right.

The state gets its money and the individual feels that it is OK to pay. Now I am not talking about the Abramoviches and Rothschilds of this world. The mega-rich do have a habit of avoiding tax whatever the rate. I am talking about the well-off, the generators that maintain our system through taxation, services and such-like. The sweet-spot has to be just right, enough money generated for the state and not too much taken away from the individual.

Unfortunately, this spot no longer exists. The pips are being squeezed direct and indirectly and people who you would consider ordinary members of the public are employing accountants to look at avoiding tax.

Although the government has made the right noises about cutting spending, people look at their take home pay – remember no upper ceiling on national insurance anymore – and wonder why it’s getting smaller.

This will result in more and more people avoiding tax and less and less income, a nice way to try and balance the books.

If the Treasury finds what most people expect and incomes have dropped due to the 50% rate then Chancellor George Osborne must ignore the threats from his Lib Dem partners and drop it. Indeed, I would go further and examine the direct correlation of income and taxation throughout the system.

You see, by eating the rich, eventually you will end up with an empty plate and feeling very hungry indeed. 

GOING SHORT ON POLITICIANS

With the sell-off happening and European banks taking a hammering, it's good to see that the short-selling ban has worked...

Oh hang on, it hasn't has it. The problem with politicians is that they look for solutions that aren't there.

Such is the case with the short-selling ban. Short-selling was never a cause for the collapse in 2008, that was down to bad debt, bad credit and a ceasing up of liquidity. 

Short-sellers are the canaries in the mine, the problem was that far too many thought they were (to mix the metaphor) the message not the messengers.

TECHNOLOGY

On the website today, we pubilshed a story about how swaps could risk having its market structure collapsing if upgrades aren't done to the IT systems.

Which brings to mind an important question - to what extent does new regulation and protocols affect infrastructure?

Or actually, do regulators and politicians take into account the changes, and costs, companies have to absorb if new regulations result in inadequate systems to cater for a new regime?

And to extend the question further, are compliance costs genuinely factored in when lawmakers decide on policy?

US DOLLAR WORRIES

SHIFTING SANDS

Isn't it always the way, you take your summer break and all-hell breaks loose, be it US downgrades, market runs or riots on the streets of London.

However, the roller-coaster still has some way to go. 

Last night, the Franco-German summit failed to convince markets that there was an action plan in place to save the eurozone, indeed, proposals were resurrected to put fear into the stock exchanges with financials particularly taking a hit this morning. 

As I have said before, a Tobin tax cannot work unilaterally. Money moves and in this electronic age money can move very quickly. Despite the individual costs being relatively low, it will add up and traders will shift to more friendly markets - in particular the burgeoning middle east bourses, I suspect will benefit, as will New York. 

From a UK political perspective, this raises an extremely interesting scenario. The Conservatives have, for the most part, successfully clamped down on the European argument in their own party which threatened to overwhelm them with an image of being a one-issue party. Also, despite being portrayed to the contrary, Labour is also riddled with divides over Europe, indeed until the mid-80s it was Labour that was vehemently opposed to European union. 

So the two biggest parties in the UK will find themselves in possible internal civil war with MPs from both the left and the right of the spectrum rising up against a further erosion of financial independence. The Lib-Dems will, inevitably, shift in the sand to the most politically convenient outcome for their party as personal manifestos make perfectly clear around the country, there is no real uniformed Lib-Dem policy, just convenient politicking. 

And yet the question remains of whether there is anything the government can do to stop this tax? The Lisbon Treaty is an enabling document, that is it can continually be changed to suit circumstances. However, it has yet to be fully tested so it will be interesting to see what, if anything, can happen if the UK becomes a blocking point.

The so-called lines-in-the-sand that all UK governments boast about are about to be swept up in the wave of European tax proposals and it could mean that the only solution is the one that all leaders fear, the eventual departure from the EU to the European Free Trade Area by the UK.

Implausible? Possibly. But when you consider that the Tobin tax would essentially tax London which is not in the eurozone to bailout the eurozone and possibly kill-off a key component of the UK economy, the question becomes one of what risks are more important to the politicians?

AVENGING THE DEFICIT?

The UK this week sees the premier of Captain America: The First Avenger.

The good Captain was the original 9 pound weakling Steve Rogers, rejected by the army but given a second chance through the use of a super-serum that German scientist Abraham Erskine developed.

Erskine was killed just after Rogers' transformation by Gestapo agent Heinz Kruger. 

As the debt ceiling deadlock continues with politicians point-scoring and blaming each other as the deadline-day for default looms near, I wonder what would have happened back in 1940 with today's politicians?

Surely the Republicans would have appreciated getting someone out of 4F and into the US Army but would have baulked at the costs, complaining that this action can only happen if cuts were made elsewhere?

Meanwhile, the Democrats, although worried about the ever-increasing debt would have complained that the Republicans were playing petty-politics and that action was needed now to deal with the issue of a lack of super-soldiers. Any vote in favour of the Republicans would not deal with the threat in an instance but create problems six months down the line.

Of course, as events occured   in the story, the Democrats would have won but with the killing of the creator of the Super Serum, the Republicans would go into the next elections complaining that despite the Democrats spending all that money, the country was only left with one super-soldier so how could President Roosevelt justify the costs.

The Tea Party would have questioned how a German scientist got a job ahead of a good old American boy and how the lack of immigration controls and decent security checks allowed the assassin to get into the lab in the first place.


Editor's note: Erskine was originally called Reinstein, why it was changed, I don't know

CRIME DOESN'T PAY

If caught you get fined quite a lot.

Brokers Willis have been fined £6.89m for failures in its anti-bribery and corruption systems and controls which is, to date, the Financial Services Authority's largest fine imposed for this breach.

Coincidentally, the next issue of Financial Risks Today looks at criminal risks in fraud and bribery and what is noticeable about the Willis case is that its failings were exactly like those described by lawyers and consultants we talked to for the article.

In a global world there is an ever-increasing need for due-diligence and to make sure that senior management are informed of all possible risks.

Willis has taken steps to overcome its failures but how much more money could it cost another financial firm before all companies follow good practices and, as far as possible, mitigate the risks from criminal behaviour?

A sigh of relief?

So will the markets breath a sigh of relief on Monday?
It says something that if only eight banks out of 20 failed the 5% benchmark that this should be treated as good news. But, there are still 15 that are in the danger zone and that is with the frantic capitalisation that went on in the first quarter of this year.
We will see on Monday which banks find favour with the markets and despite this breather, I am sure the ratings agencies may take a different view.

BANKING ON A STORM

In around an hour and a half's time, we will see how stable European banks really are with the publication of their stress tests.

It has been kite-flighted that around 10 banks will fail but analysts will probably play spot the debtee with the banks having to disclose their exposures to debt.

It is no wonder that the result are coming out after the UK and European markets have closed because there could be some vicious figures floating around out there.

THE PRESSING ISSUE

Yes the scandal at the now defunct News of the World is important and the cross-party moves against News Corp are impressive but surely there are more important issues that should be looked at the moment?

A quick glance at the BBC's website - still the information portal of choice for the general public - shows that BSkyB is still the top story while unemployment and IMF/Italy come in at second and third place.

At a time, where Euro-leaders are in a spate of indecision, doubts grow over the state of the UK recovery and worrying signs that China is slowing down, surely these are more important business issues than the behaviour of some hacks over at Wapping?

The risks to the global economy are in stark contrast to the risks to Murdoch's empire and there should be concern that the general public will not be fully informed if the crunch does happen, because if it does, it is not going to be pleasant.

Despite this, I will make one comment about the phone-tapping scandal - one of News International's main competitors which is loving the whole shebang is DMG, which published the Daily Mail, which was the biggest offender for phone tapping according to the research that the Information Commissioner did on the topic - go figure.

SLICE OF LEMON

In the next issue of Financial Risks Today, we will be looking at the issue of impact investment.

This is a fascinating area that appears to be growing where investors can match their social awareness with the chance to make money - primarily in emerging countries.

Whether it will last the distance or, like socially responsible investment, become just one of the many investment strategies out there remains to be seen.

However, as far as names are concerned, all credit must go to the area's angel network which thinks it is a good fit for the trade body - The Global Impact Investment Network.

It's name? Toniic

WELCOME ONBOARD

The rollercoaster that is the Eurozone looks set to pick up speed again as Moody's downgrades Portugal to 'junk' status.

Like some wheezing old carney ride on Coney Island, it drags itself up to the summit, only to risk diving once again into fears of default and contagion.

Now having one agency downgrade, is not in itself dangers - although the markets are positioning themselves accordingly this morning.

And Moody's said there was better political stability and will in Portugal than in Greece.

However, somewhere down the line those in control in the Eurozone really will have to ask what the payoff is between a political will to keep the Euro going and the financial costs that this is bringing on members?

EU WHAT?

The Eurocrats have done it again.

Showing a canny lack of logic, they have, to quote Baldrick, come up with a cunning plan.

At a time when the pips are being squeezed everywhere, the EU has proposed not only a rise of 5% in their budget but also a Tobin Tax.

Yep, one of the engines of recovery for Europe in the shapes of Frankfurt and the City are going to get hit by a trading tax.

Although the individual amounts may be miniscule it all soons adds up and do you think major players are going to keep full trading here rather than going to another country?

The problem with Tobin taxes is that they will never work unless all territories, and I mean all territories, adopt the tax.

If this goes through, the playing field has become extremely uneven for European players.

GREEK TRAGEDY? OR PYRRIC VICTORY

Well the greek MPs have taken a deep breath and voted through the austerity package.

This means that they will get a temporary reprieve when they get €12bn to pay the bills before they were due to go bankrupt.

But, will the vote make any difference?

Tomorrow they are voting on how to implement these measure and the grounds for ambush come into view.

With riots sparking off throughout Athens, it is no wonder that the markets, after initially feeding into trades with optimism are now falling back into musing that the troubles may not have been avoided after.

RATING EUROPE

So moves have begun to create a rating agency in Europe to balance against the US top three - Fitch, S&P and Moody's.

As I wrote in the last Financial Risks Today, there has been a lot of anger against these agencies but at the end of the day, I honestly believe that if you just go on what an agency says and you fail to do your own due dililgence then, ultimately, it is your own fault.

Yes, there are issues over conflict of interest but does anyone honestly know a better way of payment?

Bizarrely, it can be claimed that the introduction of Fitch created the competitive environment that resulted in the agencies possibly giving kinder ratings than they should have.

Yet competition is the answer?

Yes, the agencies made errors, which the fully accept, but will the creation of a European agency help and will it be truly independent?

I hope so and to answer my own question - competition is healthy, as long as it keeps the competitors honest.

SORRY NICK YOU'RE WRONG

Nick Clegg has adopted the idea that the public should get shares in RBS which they could then sell and pay the government for the price of the share - a public option if you like.

But I am afraid it won't work. Some people will sell immediately - hey it's free right? - and the price will fall, once it falls, others will panic and sell, so completing the cycle and I doubt the public would even consider paying back the government if this happened.

So, sorry Nick, and unusually (for me) John Redwood, but I think you're wrong on this one.

THE END OF THE BEGINNING?

In the space of 24 hours the Greek government has escaped a vote of no-confidence

So far so good.

However, Allied Irish Bank has effectively defaulted and think tank Open Europe has called on the IMF and Europe not to give Greece a second bailout - instead manage its default and restructure to scale down the event's impact.

AIB's credit event is fairly minor for the bank, not unexpected and for a very small tranche of senior debt.

However, it calls into question what the scope of Greece's CDS spread will be? How many underwriters will be affected if Greece defaults and CDS are activated - indeed, will the CDS be able to cover the default?

It is now known that UK banks have been shifting their exposures away from the Eurozone and the Treasury is holding emergency talks about what to do if contagion spreads.

The problem now is what will happen? How bad is it going to get? Open Europe firmly believes that even a second bailout will just delay the inevitable and the markets appear to agree with Greek spreads heading even higher than before.

We are in new territory every day it seems and the actions of both banks and countries will be vital if the global economy is to avoid going down the pan.

In the words of Winston Churchill (I don't know if Goodwin's Law applies to Winnie):

"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

A tad hyperbole perhaps, but as we face this uncertainty then that view could be more pertinent than any of us realise.

REVOLTING PEOPLE AND BANKERS

As the government launches its White Paper on financial regulation, public sector unions announce that they are going on strike in protest about cuts.

Now, apart from the obvious - ie. In terms of real money, there are no cuts people, this government is spending more than any other government in history and will continue to do so right up to the 2015 election - one argument that will be in full display is that it is the rotten bankers' fault.

Far be it for me to defend such dreadful practices as sub-prime mortgages and packaged debts, but there is one thing that public have missed - the regulators.

Everytime something goes wrong in the UK, there is a rush of new laws that completely fail to correct what they were introduced for.

The police, councillors, regualtors, blame the law for an event.

However, it is the inaction of the regulations that is at fault, not the laws themselves. Regulators could have stopped the madness that infected the banking world if they had chosen to, but they did not.

Now, the government has formally placed in the draft bill the new system of regulators and their responsibilities. I hope it will do the trick but at the end of the day. the main risk factor that is with anyone of us, in any sphere of life, is us.

Afterall we, and in turn regulators, are only human - like bankers really.

INFLATING A RECOVERY

I've spoken about inflating your way out of debt before but I was a Charteris Treasury Porfolio Managers seminar yesterday and a few things stood out for me from its Chief Exec and Financial Risks Today contributor Ian Williams:

1) Globally we are in boom time. Ok, the barely breathing corpses of the UK, US and parts of Europe are not but essentially things are looking good elsewhere.

Of course there has been a transfer of wealth which began when factories starting shifting to China and India, but the big question for the UK and others is what do we do to keep up with the burgeoning economies of the BRICS?

2) The US is in trouble, serious trouble. Yeah I know, what's new? But, think about it, there is around $2bn (£1.22bn) floating out there because of QE1&2 and a possible third on the way. This in itself is feeding inflation through the commodities pricing but what happens if the US goes into recovery?

What does it do about the money? It can't easily take billions out of the economy without risking a recovery but at the same time, that unprecedented amount of money sloshing around the system will inevitably feed...yep inflation.

So is the States damned if it does, damned if it doesn't?

3) Oh, joy. According to Williams, we are yet to be at the top of the gold cycle.

We've still got someway to go - 2020 to be precise if the modelling is accurate.

WHY THE HIDING UK?

The UK is to increase its drawing rights at the IMF to nearly double its current arrangements.

Now, I know Douglas Carswell is very angry about the situation but it is worth bearing in mind that this is the maximum amount that we can lend if needs be. Not an amount that we are paying right here, right now.

No, the one thing that is annoying me is the use of a Statutory Instrument to announce the change.

It appears that all the talk of open Parliament and not hiding anything by using Parliamentray tools means as much to this government as it did the last.

When the economy is in such a parlous state, the Chancellor has a responsibility to announce these changes to the House in an open and honest manner, not sneaking out an instrument whereby, unless you know where to look, will escape the attention it merits.

SCOTLAND THE BORROWER

So Scotland is going to be able to issue bonds.

Now councils have issued their own bonds for years but I am interested at how the rating will be realised.

After all, the oil fields are UK-owned, and I doubt that tax reciepts are strong enough to offset risk of default.

OK there is a strong financial sector but does anyone else think that, despite the aim of the Scottish government for independence, maybe,  just maybe Westminster will have to act as guarantor?

INTEREST-ING

Yesterday the head of the ECB, Jean-Claude Trichet, signalled that interest rates in the Eurozone will rise again to stem inflationary pressures.

In the UK, the interest rate is still at its record low as the country fights against a possible downturn coupled with the austerity programme.

So who has the right policy?

Clearly, in the UK, there is a high degree of inflating our debt away while cutting the deficit but what if inflation is trending? What will that do to consumer confidence? There is already clear signals that inflation is hitting the essentials - that is food and fuel - and the harvet forecasts look quite grim, possibly leading to further price hikes.

OK, so inflation is lower than the last quarter at 3.9% but can the UK survive with high prices and low growth?

Over in the Eurozone, things are less clear. Obviously tempering the heat will benefit Germany and the Netherlands but how will a strong Euro benefit those struggling in the periphery?

Finally,  there was an interesting comment by Jürgen Stark, Member of the Executive Board of the ECB,
at the “ECB and its Watchers XIII” conference in Frnakfurt today where he explicitly rejected the idea of relaxing monetary policy: "Easy money cannot and will not address the root causes of the crisis".

However, as always, there is a sting in this particular tail, I believe that to a degree Stark is right about easy money - as far as Germany and Netherlands are concerned - but as I, among others, have consistently said, for Ireland, Greece and Portugal, easy money is precisely what is needed to get them out of their morasses and they should not simply be dismissed as a "mere 6% of the euro area GDP" as EU President Herbert Van Rompuy did this morning. 

I'm sure those countries' "perspective" differs to that of the president.   

EURO DESIGNS

This blog is meant to allow us to take a sideways glance at the news, sometimes offering serious comment, sometimes less so-serious

However, sometimes, the humour is just too easy:

10 years of the euro – commemorative coin design to be chosen by the public

 All citizens and residents of the 17 euro-area Member States will be able to vote on the design of a new 2-euro coin via the internet. The new euro coin will be issued by all euro-area Member States at the beginning of 2012 to mark the first 10 years since euro banknotes and coins were introduced and the euro became part of people's daily life. The public will be able to vote between five designs preselected by a professional jury from a competition open to citizens of euro-area countries.

So I wonder what the Greeks, Irish and Portugese would vote for?

ECB CAN GO BANKRUPT?

Open Europe is a think tank with grand ideas - namely one of a transparent Europe. Now bear in mind that the EU hasn't had its books signed-off in what seems like forever, I applaud organisations that are seemingly on a hiding to nothing, you know like the Football Association and Fifa.

However, in A House of Sand, Open Europe warns that the European Central Bank (ECB) could lose its capital base with just a 4.25% loss on its loans to the periphery Eurozone countries.

Now I do have a small issue with this estimate...namely that there isn't a chance in hell of the ECB going essentially bankrupt. Too many politicians and banks have an interest in this working. All central national banks support the ECB and, at the end of the day, the taxpayer will be called on to bailout if the unmentionable happens.

And hasn't that always been the case?

IMF

So the IMF says keep going to George and the government.

That is good for George who dismissed economists who criticised the plans in the weekend papers as "left-wing academics".

But there are still danger signs on the horizon of sluggish growth and higher inflation. On the other hand, inflation is expected to drop back to 2% next year according to the IMF.

Now whether that is because no-one will be buying anything because we are all skint or, whisper it, the Bank of England is correct and the inflation wasn't trending remains to be seen.

What ever happens next, it seems that once again we have dodged the bullet.

Napoleon said he wanted lucky generals, I wonder if the same applies to chancellors?