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?

ECONOMISTS

According to newspaper reports today, economists are divided over the coalition plans to cut the deficit. Some say that it is too fast, too soon, while others say that the UK is still in growth and that to change course now would be fatal.

There is something to be said about not changing course mid-stream, indeed in our latest issue Mark Roeder, author of The Big Mo makes this very point.

With the IMF making its judgement today, the Treasury will be hoping for a grand endorsement - both for political and economic reasons - but if I was the Chancellor I wouldn't be too worried.

As the old saying goes, when economists agree then the world really is in trouble.

A MINISTRY OF FINANCE - REALLY?

Apologies but this is a gift that keeps on giving.

Greece is in a terrible state, Ireland and Portugal would dearly love some of that Quantative Easing that we and the States have indulged in and German is worried that its economy could overheat.

So not really the most ideal time to call for further centralised monetary controls and a ministry of finance is it Jean-Claude?

GREECE SLIDES

I make no apologies for coming back to this topic - the periphery Eurozone countries are going to be in the news quite a bit over the coming months.

The interesting thing to note about Moody's latest downgrade is that there is an evens-chance of a default on Greece's sovereign debt.

Although Moody's says that it doesn't think that Greek debt restructuring is inevitable, it is curious that of all the Caa1- rated insitutions, within a five-year period, 50% have defaulted. 

Many in the media have concentrated on the fact that Greece is now at the bottom of the league table with a worse credit rating than Montenegro, but is this the first time that the odds have significantly foreshortened for the worst from a ratings agency?