Get Out Of Jail Free Card

1st June 09 - Get out of jail free card

According to a quote from Kyle Bass of the US fund Hayman Advisors, there isn’t one (a get out of jail free card, that is). He was referring to a worldwide fiscal deficit crisis. His firm estimated that Governments have to raise $6 trillion in debts this year with huge demands in Japan and Europe as well as the US. "Markets are choking on debt. There isn’t enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there."

What is happening in the US is that the interest yield on 10 year US Treasuries, the benchmark for long-term credit, rose 33 basic points last week to 3.45% after the warning on the UK’s AAA credit rating (see this diary dated 29th May 09). This yield has now increased by 90 basic points (or 0.9%) since March 09 when the US Federal Reserve announced its plan to purchase treasury bonds directly. This move was intended to reduce borrowing costs to help stabilise the housing market. Instead, US mortgage rates have gone up to 5%. As in the UK, monetary easing does not seem to be working. Does it matter?

The US dichotomy is similar to that in the UK. On the one hand money is pumped into the economy (purchasing bonds and the like), on the other, the treasuries have to sell bonds to fund the deficits. And how. This week, the US Treasury must try to sell $100bn of bonds and to an increasingly sceptical market. And that is only the initial tranche. $900bn of bond sales are targeted by September 09 and a whopping $2 trillion by the end of the calendar year. Of the first $100bn, some is over two years, some over five years and the rest over seven years. 

This is where a cold compress is needed. The US has not so far had a failed sale auction (the UK and Germany have) but traders are said to be watching closely to assess what portion of this bond sale by the Federal Reserve is purchased by the US government itself! Refer back to paragraph two above. This element is pure monetisation of the deficit. Whirligig, Whirligig.

China is getting mad, not a good sign for a new owner!

Back To The Doom And Gloom

29th May 09 - Back to the doom and gloom

There were supposed to be green shoots appearing but if so, the ground-root beetle must have had a go at them. To place this in context, we have reported on the outlook of ratings agencies in the past and most notable of Moody’s and the collective reputation took quite a battering post the breaking of this crisis since they appeared not to see what was coming. Indeed, some commentators accuse them of contributing to the fundamental causation. Having said that, the world’s leading agency has sent tremors throughout the currency, gilt and stock markets by placing Britain’s AAA rating on to "outlook negative". This is the first time for such a rating in more than three decades. We are talking about Standard & Poors. 

S & P justified its new lower rating by saying that Britain’s total net debt would  approach 100% of GDP rather than the 80% as forecast by the UK Treasury. There are two really significant things about this move. First, just over one in three countries that historically were put on outlook negative are downgraded in the following 24 months. If that should happen to the UK it would join the ranks of Japan, Ireland and Spain. Secondly, the downgrade threat came only one day after the IMF warned that the Treasury needs to cut debt faster than promised in the Budget issued last month.

The ink had hardly dried on the announcement by S & P than the Treasury said that it had borrowed £8.5bn last month, the highest for any April since records began (April is always a good month for tax receipts from business). The question is: does it all really matter? Well, if the taxpayer in the longer-run (see yesterday’s entry on the short-term) has to stump up between £100bn to £145bn in rescuing the banks, and S & P think they will have to, then this will represent a whopping 10% of the UK’s GDP. Furthermore a triggered downgrade would lead to an exodus of investment from the country.

The final bit of gloom to end this week is that the Bank of England in its own data finds little evidence that its £125bn QE programme is producing any increase in lending to the wider economy. UK public spending has to be cut and drastically.

Debunking The Balance Sheet

A new e-book from John G Smith FCCA. Describes, using the example of a start-up business, how a balance sheet is created from actual events such as buying or renting the business premises and starting to trade. 

The distinction between capital and revenue costs is explained as is the relationship between the profit & loss account and the balance sheet. Easy to follow in tutorial style. Includes a glossary of terms.

"An example is given of how profit can be manipulated to strengthen the balance sheet."

This easy to read E-book tells the tale of a small business from start up to full operation from an accounting perspective with particular reference to the role of the balance sheet in performance and financial management.

Glossary of terms 

Illustrative Spreadsheets and Profit & Loss Statements 

Hints and Tips 

Related Definitions 

PDF Format - 23 Pages -Instant Download - £7-95 

http://www.jgwalkersmith.co.uk/debunking.html

UK Taxpayer Doing Nicely (Short-Term)

28th May 09 - UK taxpayer doing nicely (short-term)

The UK Government is making a cool £100m from a little deal with the Lloyds Group Bank and of which the taxpayer owns 43.4%. In addition, Lloyds is also reimbursing the legal costs involved of a mere £30m (it is quite amazing how the legal boys always come out smiling).  The transaction is an open offer to redeem the £4bn of preference shares the Government took as part of last October’s bank recapitalisation and the intricacies of which were covered in this diary. The £100m is to pay for underwriting the offer (£60m) and the rest is a 1% redemption premium. Not bad for an enforced transaction. As was the £995m reported profit made by the Bank of England from its emergency support packages.

There is another potential plus on the way and long before there is any possibility of 

Lloyds regaining its lost equity slug. The prospectus accompanying the open offer warns that the Government (or taxpayer if you prefer) might renegotiate the terms of the original asset protection scheme. It seems that the state can seize Lloyds’ £3.2bn of deferred tax assets in "the occurrence of certain specified events." Were this to occur, a further profit would materialise for the taxpayer.

The payments to and profits for the taxpayer are of course at the expense of Lloyds itself as a business and therefore of its shareholders. One possible consolation is that the open offer gives an existing shareholder 0.6213 of a share for each 1 share held and the new shares are priced at 38.43 pence which was a discount of 54.6% to the closing price on the critical day of 13th May 09. Taking up the full entitlement therefore reduces the average buying price of a shareholder’s total holding. The downside is that the original buy price is likely to be way above the current market price and the wait to break even could be a long one. The other consolation is that redeeming the preference shares will save an annual £480m of dividends and add 0.8% to the core Tier 1 capital ratio. 

So, overall, the taxpayer makes a bit, the company saves a bit and the shareholder takes a further risk. That further risk is a biggy. Share prices are bound to feel the effect once the Government stock is offloaded and the EU is muttering in the wings about cessation or disposal of certain parts of the business as its price for approving the original state aid. Still, for the time being, the taxpayer is on top.

Germany Leads Europe Down

27th May 09 - Germany leads Europe down

Eurostat is the official body that issues economic statistics for the EEC. Its latest batch of figures make grim reading for those that thought/hoped that mainland Europe would escape the worst of the credit crunch. Leading the pack downwards was the largest player, Germany. It has been a regular feature of this diary that the German authorities have held back from the fiscal and monetary stimuli applied by the UK and the USA, indeed, leading ministers have been highly critical of this approach. In turn, the so called Anglo-Saxon (bearing in mind the Saxon bit is German but is not!) economies have accused Germany of wanting to piggy-back onto the results of their pump-priming. 

The big point is that the Germany economy is dependent heavily on the two big consumer nations (USA & UK) continuing to gobble up its exports. When that consumerism stalls, so does Germany. And Eurostat has the proof. The German economy contracted by 3.8% in the first quarter of 2009 and is now deeper in recession than any other major state. As a comparator, the quarterly fall in GDP elsewhere was reported as :-

• UK 1.9%

• Italy 2.4%

• Austria 2.8%

• Netherlands 2.8%

• Spain 1.8%

• France 1.2%

The sharp drop in economic output in Germany is the worst since the Second World War and it has been calculated that the cost of bail-out will exceed that of reunification after the fall of the Berlin Wall. For those of us who saw Eastern Germany before that time with its empty streets and square automobiles and dismal people, a cost exceeding that repair is incomprehensible. 

Charles Dumas of Lombard Street Research said "German economic policy is bankrupt, and the Mediterranean countries stuck in EMU are also condemned to ongoing economic collapse. Already we have real GDP levels that are up only about 3% from 2000 in Germany and Italy- i.e. growth has been only a little over ¼% a year - making this a lost decade for much of continental Europe on a worst scale than Japan in the 1990’s."

What is unspoken and hopefully will remain so is the dreaded threat of social unrest.

Dr Doom And The Dollar

26th May 09 - Dr Doom and the dollar

Professor Nouriel Roubini of New York University’s Stern business school wrote in a column in the New York Times that by proposing a new global reserve currency via the IMF, China has, in effect, started to usurp the dollar. Professor Roubini believes that while such a major change is some way off, the Chinese government is laying the ground work for the yuan’s ascendance.

Because it still has, notwithstanding the credit crunch led fall in demand for its exports, a huge current account surplus, a focused administration and few of the economic worries of the US, China is better placed than the US to provide a reserve currency for the 21st century. He predicted that China will want to see the yuan included in the IMF’s special drawing rights "basket" and also having it "used as a means of payment in bilateral trade."

It did not hurt this philosophising that the latest US economic data had producer prices experiencing their biggest year on year drop in April 09 of 3.7%. The biggest fall since 1950. The number of Americans claiming unemployment benefit for the first time rose by 32,000 to 637,000 in the week to 9th May 09 and brought the total number of claimants to 6.56 million. This was a record high for the 15th consecutive week in a row.

Professor Roubini is known in certain circles as Dr Doom. 

A False Dawn?

25th May 09 - A false dawn?

As diaried on the 22nd, the OECD indicators point to a bottoming out of the UK recession. The flash of light on the darkest horizon might have been the headlights of a car on an early morning test-run (probably not leading to a sale). It was not the sun coming up or at any rate the chances of it being dawn are no more than even. This is an author’s way of capturing what the governor of the Bank of England had to say in presenting the Bank of England’s latest Inflation Report. The economic growth forecast within the report has been cut and Mr King said that there is as much chance of the UK economy still shrinking this time next year, as there is of it growing. The Bank forecast that GDP would fall by 4% this year.

The contents of the Inflation Forecast caused both the pound and the yield on gilts to tumble on the basis that there must be no immediate plans to tighten economic or specifically monetary policy. Not only, traders surmised, has £125bn of money been printed but more could be on the cards. A longer-term and higher value of sale-back of gilts at a time when the Government is still issuing huge chunks of debt is a sort of inflationary nightmare scenario. Added to which, the B of E said that the Government might well have to put more money into the big UK banks and maybe nationalise more of them to further strengthen balance sheets and get lending freed up again.

To add to the false dawn scenario, US consumers spent less on the high street in April for the second month in a row and the number of repossessed houses hit an all-time high. RealtyTrac reported that a record 342,000 homeowners were given notice of default in the month which was up 32% on the same month last year.

Hate to repeat it but it does look awfully like a false dawn.

Having Reached The Bottom?

22nd May 09 - Having reached the bottom?

The Organisation for Economic Co-operation and Development (OECD) has published a snapshot of the global economy. Somewhat surprisingly it suggests that the recession in the UK could be over. That the bottom of a trough has been reached. Using its own language from its "leading indicators", Britain has progressed from being in a "strong slowdown" to a "possible trough" in the month of March 09 as the pace of decline slows. 

For the Paris-based forecaster any increasing number below 100 represents recovery, and the UK measure rose by 0.3 points to 96.6. On an annual basis, the UK was down 5.4 points. For comparison purposes, the G7 nations as a whole registered 91.4 points which was a drop of 10.3 points from the previous year. 

Of the other G7 countries, France and Italy also reached a possible trough but Canada, Japan, the US and Germany were still deemed in the category of strong slowdown. The statistics are based on the results of up to ten economic indicators per country and are widely watched as reliable pointers to future trends in the economic cycle.

Among the BRIC countries, only China made it into possible trough land to stand at 93 points. Of the others, Russia declined the most on an annual basis falling by 21.8 points. The erstwhile star of Brazil fell to 92.7.

Jean-Claude Trichet, president of the European Central Bank (ECB) also emphasised that in his opinion the global economy had reached a turning point. "In all cases, we see a slowing down of the decrease of GDP that has been observed in the last quarter of last year and the first quarter of this year. In certain cases you see already a picking up, in other cases you see it continuing to fall but at a lower pace."

Let us all hope that the indicators are seen as if through a crystal ball and not merely as a triumph of hope. Somehow the phrase "slowing down of a decrease" is not exactly enthralling. But then, not much about Europe is.

Laying The Blame

21st May 09 - Laying the blame

The Institute of Economic Affairs (IEA) has published one of the most detailed analyses on the causes of the credit crunch and their conclusion is the opposite of that which has been mainly propounded thus far. It was not down to hedge fund managers, operators of tax havens and not even to avaricious bankers. The principal culprits they say were governments and regulators. Worse, it is these regulator miscreants that have been rewarded with more funding and new responsibilities.

The conclusions of the IEA are as follows:-

• Central banks created a monetary bubble that fed an asset price boom and distorted the pricing of risk

• Regulators and central bankers failed to use their considerable powers to stop risk building up in the financial system and an extension of regulation will not make a future crash less likely

• Evidence suggests that serious systemic problems have not arisen amongst unregulated institutions

• Bank depositors must be made preferential creditors. Banks must be allowed to fail

• The growth of broad money must be monitored together with the build up of wider inflationary risks

My favourite economist Professor Tim Condon was amongst the signatories to a summary letter of the findings. His overall view has been described earlier in this diary. The book detailing where the solution lies to the crisis is more likely to focus on these five conclusions than elsewhere. I believe so anyway.

This Diary As A Best Seller?

20th May 09 - This diary as a best seller?

Since the credit crunch started and developed, there has been a phenomenal rise is the sale of books telling what is going on. Earlier this month, for example, Vince Cable’s book The Storm was lying second to the late Jade Goody’s farewell memoir Forever In My Heart in the best seller list.

According to Nielsen Book-Scan, the specialist non-fiction market was the only publishing area to grow in terms of value last year. While sales in the publishing market as a whole slipped 1.5% to £1.8bn, specialist non-fiction rose 6%. Within that category, business, economics and industry sub-group rose an industry-leading 8.8%. Fiona Kennedy, category manager for non-fiction at Waterstones said "It feels like the market has been waiting for these books to arrive. There are a number of best-selling titles out there at the moment, but there are more books about to come out every week." One theory is that although the credit crunch crisis is intangible by nature, its effect on people is profound so leading to a natural urge to understand what is going on. 

If the stages of any crisis have been correctly diagnosed as first, denial, then anger, then acceptance, to the final phase of finding solutions, then it is writing about the last stage that will be the next best-seller. Maybe I will write it. Time we had solutions. But they do not lie in bonuses and outright greed but rather in solid honest management. Talking of which, time to stop thinking about becoming a parliamentary researcher as the fast track to becoming a UK MP, the gravy train just hit the buffers. Tampons and horse manure and all.

Can You Believe It?

19th May 09 - Can you believe it?

According to a report by Jonathan Russell in the Daily Telegraph, Stephen Hester who was appointed to run the now nationalised RBS and who was put on a basic salary of £1.2m per year, could be in line for a "multimillion-pound" bonus. Of course the UK Financial Investments, which was set up to oversee the 70% taxpayer’s stake, will have to agree although it has already said that it will not get involved in "individual cases" - that is up to management. Can you believe it? Even thinking about it, whether the chairman Sir Philip Hampton pulls it off or not? What on earth is going on? 

The whole idea about sacking Sir Fred Goodwin and the state taking over in consideration of pumping all the dosh in was to eschew the bonus culture. Wasn’t it? It makes my blood boil. Have we learned nothing? We want an honest job done for an honest day’s pay. Isn’t £1.2m enough? PS: Someone named John Hourican (not Hurricane), head of global banking and markets at the same RBS, is reportedly potentially £11m richer on paper following an award of shares and options last month: these shares having doubled in price. Hester told the world that it would take five years to restore RBS to health and that much would depend on global issues outside the control of management.

Perhaps ranting about the whole misguided philosophy of rewarding bankers with, one assumes, risk reward money, will make the next best-seller list?

HSBC’s Legacy Woes

18th May 09 - HSBC’s legacy woes

The last entry in this diary contrasted the current successful investment banking of the big three UK banks against a backdrop of huge legacy losses. And so it is too from Europe’s biggest bank HSBC (that for the UK used to be Midland Bank). The website moneyam.com summarised the latest results as "a resilient start to 2009 with revenue recovering strongly from the fourth quarter last year". HSBC turned in record results in Global Banking and Markets (it is particularly strong in the Far East and especially Hong Kong) due to improved market share and better margins. Other features of the revenue side of trading were that Commercial Banking was strongly profitable in all regions as was Personal Financial Services excluding North America in relation to the legacy consumer finance portfolio. That word legacy pops up again.

We need to turn from current revenue success to our old friend "the capital side" (see debunking the balance sheet on this website). HSBC bought a US bank called Household in 2003. It is all in a name. Household sounds a bit US domestic and a bit mortgage prone. And it was. The purchase price back in 2003 was a staggering $14.6bn. Since then our old sparring partner Goodwill has shown itself to be a self-delusion. The small matter of $10.6bn has been written off since the purchase. Written off because the trading performance ran into the red in 2007, escalated in 2008 and has worsened in the first quarter of this year. Indeed, in the three months to 31st March 09, losses hit $4.7bn. Goldman Sachs has estimated that losses will amount to $5.7bn in 2010. Bear in mind this is from a single US purchase by a world-leading bank that has always pushed its local market knowledge notwithstanding its global reach.

The US Household division’s bad debts are running at $3bn to $4bn per quarter and the mortgage problems have migrated to credit card losses. Every business is entitled to one big mistake but it is sad that this one is undermining the meritorious achievement of being amongst a minority of big banks not to have taken the state shilling. It did raise £12bn from its shareholders and as a result has a Tier 1 capital ration of 8.5%. 

There are rumours that HSBC is interested in RBS’s Asian activities. Let us hope the due diligence is as good as their Asian knowhow.

Current Heaven From Legacy Hell

15th May 09 - Current heaven from legacy hell

The three big UK banks of RBS, Lloyds and Barclays now appear to share one notable feature, they are making good money again on current trading but posting worse and worse write-offs from the credit crisis era.

Our favourite and maverick Barclays posted a 2009 first quarter profit up 15% at its investment banking arm. Overall, Barclays made pre-tax profits for the three months to March 31st 09 of £1.37bn and within that, profit hiked 361% at Barclays Capital to reach £907m. This result had much to do with the take-over of Lehman Brothers’ operations last autumn. The thing is though that according to Jonathan Pierce of Credit Suisse, Barclays profits excluding write-downs was more like £2.5bn, so where has the gap gone? The answer is that impairment charges and other credit provisions increased by about £1.1bn. The bank said that the loan loss rate was likely to increase across all its businesses. Yet, its shares have risen because of the first part, i.e. the recovery of capital markets indicates that the worst could be over. Just the legacy remains, if one can excuse the tautology.

Meanwhile down at the new Lloyds Group bank, Eric Daniels the chief executive said that the bank had delivered a good revenue and cost performance in the first quarter of 2009 adding that while he expected difficult economic conditions to prevail, the group was well placed to "comfortably manage" (we will overlook the split infinitive) the expected near-term economic downturn. But then here comes the schizophrenia, the Group warned that corporate loan impairment will rise more than 50% above 2008 when it was reported at £9bn. So something approaching £15bn this year? 

Since the story is similar at RBS, the spin of current good trading must be like putting shiny white gloss paint onto rotting window frames. 

Stressed Out US Banks

14th May 09 - Stressed out US banks

The long and anxious wait has come to an end. The US Government’s financial stress test of a worst case economic scenario applied to the largest 19 US banks has revealed the good and the bad. In the former camp sit Goldman Sachs and JP Morgan Chase and seven others whilst the 10 bad boys are headed by Bank of America which is found to need $33.9bn - 45.4% of the collective total of the 10. Of this huge figure, $17bn will be raised by selling shares and $10bn by disposing of assets that will include First Republic bank which was acquired as part of Merrill Lynch. The rest of the money will be raised by selling debt.

Of the other creditor banks, Wells Fargo was found to need $13.7bn which, like BoA,

raised new equity and Morgan Stanley raised $8bn via equity and debt selling. 

The quantifying of the worst case for the big US banks, probably on the basis of appearing to draw a line under the theory that total financial meltdown was still a possibility, gave a fillip to both US and UK equity markets and, coincidentally or not, so did two surprise announcements on other banking fronts. The Bank of England announced it was to pump a further £50bn of money into the UK market through its QE programme and so bringing the total to £125bn. Even more surprising was the ECB’s decision to cut its interest rate to 1% and to start purchasing 60bn’s euros worth of  covered euro bonds. The former case is the unwilling finally being dragged to the table and in the latter case it is a veritable u-turn. 

Whether the de-stressed US banks or the UK and European money tricks did it for the market or not, the FTSE moved into positive territory for the first time in 2009. the index reached 4,462 compared with the 4,437 it started the year off with. 

Let’s hope the mood lasts. 

It’s Good News Week

13th May 09 - It’s good news week

Someone dropped a bomb somewhere. But it did not go off. Instead it was defused at considerable personal risk and then the metal was sold off to buy bread.

The UK Nationwide Building Society has a "Consumer Confidence Index" that ticked up 8 full points to reach 50 in April 09. Consumers were slightly more optimistic about their present situation and more positive about economic prospects in six month’s time. Whoopee!

The UK shares benchmark index, FTSE 100, has risen to its highest level in four months and, rather surprisingly, driven by a rise in mining stocks. The pound is rising against both the dollar and the euro and the interbank borrowing rate (that featured heavily in the early days of this diary) and which reflects wholesale market liquidity, dropped to a record low. Libor’s three-month dollar rate is at 0.98% - the lowest level since set-up in 1984. 

These upbeat signs from the UK are despite anxieties about the impending results of the "stress test" on the 19 largest US banks and perhaps because the chairman of the US Federal Reserve has said that he expects those that are found to need an increase in capital will be able to raise the money from the private sector. He referred to the options of new share issues, conversions and exchanges of existing shares and asset sales.

Back on this side of the pond, the other bit of potentially good news is that my old friends in Malaysia are threatening to ride in on their white charger to rescue white-van man. Right on the brink of LDV - the erstwhile product of British Leyland - being placed into administration, Weststar (to be probably re-named Eaststar), the Malaysians, have stepped in and the UK government is offering a £5m bridging loan. The present owner, a Russian oligarch, could not save the 850 direct staff or its extimated 6,000 indirect staff in the Birmingham area. 

It’s good news week, don’t spoil it.

The Problem Of Storing Oil

12th May 09 - The problem of storing oil

Rotterdam is Europe’s biggest port. It is also running out of room to store more oil. The scene is mirrored elsewhere with US reserves running at a 19 year record high and in the UK, tankers are being used as floating storage off the Dorset and Devon coasts. All this is despite OPEC reducing production by 4.2 million barrels a day effective from February 09. 

Ahmad Abdallah, a commodities analyst at Gavekal the economics consultancy, said "From a commodities point of view, world trade is appalling and the demand is just not there". Goldman Sachs have estimated that global storage capacity could be exhausted by June 09. Official figures in the US, which is the world’s biggest oil consumer (though not now the world’s biggest car manufacturer - a baton handed to China), puts reserves at 375m barrels. One estimate is that a further 100m barrels is being stored in tankers afloat around the globe. 

Estimates of the reduction in demand per day throughout 2009 relative to 2008 range from 1.5m barrels by the average analyst to 2.5m barrels by the International Energy Agency to a high of 3m barrels based on current economic growth figures for the major nations. These figures are having an inevitable impact on prices. Goldman Sachs have set a price target of 10% lower than at present to stand at about $45 for July 09.

Oil demand is classically a proxy for global growth. Is the current bull run on the major stock markets around the world a false dawn?

As Car Marques Collide

11th May 09 - As car marques collide

It is beginning to look more and more as if the rapid decline in the sale of cars in the US and Europe is forcing the erstwhile famous independent car marques to collide. Last week we diaried the bankruptcy of US Chrysler and the anticipation that if that famous name comes through Chapter 11 successfully, some 20% will be owned by Fiat Group Automobiles of Italy (FGA). As well as Fiat itself, let us recall that this company also owns Alfa Romeo and the Ferrari brands. Now it is reported that FGA is negotiating to forge a merger with General Motors Europe and for the whole to be re-titled Fiat/Opel. For those still concentrating, GM Europe also encompasses, as well as the German Opel badge, the UK Vauxhall brand and Sweden’s somewhat sick Saab. 

This is quite a bag of tricks for the Italians to pull off and aside from management (can anyone remember British Leyland?), it would represent a financial mega-deal. For example, Opel alone has said it needs 3.3bn euros to see it through the current crisis and true to form (tracked throughout this diary) the German government does not intend to give direct state aid. This is despite or maybe partly because the German scrapping scheme has been the most successful in Europe. Launched in January 2009, and costing a whopping £4.45 bn, this programme caused an increase in annual sales of 21.5% in January 09 and 39.9% in February. 

As a postscript, it should be said that this massive marquee consolidation under an Italian leader is not a forgone conclusion. The Canadian car parts maker Magna International has thrown its hat into the ring over Opel and, as stated last week, will also emerge post the Chrysler bankruptcy with a stake in that company.

We have heard much about the hybrid electric car. Post this latest agglomeration, try telling the neighbour what sort of new car you have just scrapped your old and trusty banger for.

Is UK Manufacturing Reviving

8th May 09 - Is UK manufacturing reviving?

Well, not exactly, but at least the rate of decline is slowing according to the latest manufacturing Purchasing Managers’ Index (PMI). Any number below 50 indicates a contraction in activity so a figure of 42.9 in April 09 doesn’t sound too clever. However, in so far as it is better than the 39.5 registered in March 09 and at an eight-month high, does mean that the decline is pulling out of a nose-dive. The reason is an improvement in export orders driven principally by the weak pound. It may seem small beer relatively but in looking for a silver lining, the PMI does carry much respect. 

Ross Walker, economist at RBS, said "British industry continues to contract but there are at least clearer signs that the break-neck pace of contraction suffered over the past six months is alleviating". So as not to get carried away, Roy Ayliffe, a director at the Chartered Institute of Purchasing and Supply, which produced the survey, warned against excessive optimism "Although April saw some reprieve for the UK manufacturing sector, we are still far away from a turnaround and the industry is firmly embedded in the trenches of recession". To add more dampening, the Insolvency Service reported that insolvencies rose 56% in the first quarter of 2009 compared with the same period last year.

Nevertheless, as anyone who seriously wants to lose weight will testify, the really hard bit is the turn-around, that is, when fat stops going on and starts coming off. Of-course with UK manufacturing we had shed the fat and got rather lean and mean. If only we could start to grow again and stay fit. On the back of a weaker pound is ok with me.

Chrysler Is Bankrupt

7th May 09 - Chrysler is bankrupt

We have followed the story of the dire straits of both General Motors and Chrysler virtually from the start of this diary. Of the three big US motor manufacturers, only Ford has seemed able to steer its own path through the consequences of the drop in vehicle sales. While it is still unclear what will happen to GM, Chrysler has filed for Chapter 11 bankruptcy. Last minute and early morning negotiations with dissident hedge fund creditors to stave off bankruptcy broke down.

Chapter 11 is not the end for Chrysler. Major creditors will suffer as have equity shareholders but a plan is in place to steer the business through the bankruptcy protection process and out of the other side. On the other side the major shareholder will be the United Auto Workers (UAW) union with 55%. The US government will own 8% and the Canadian and Ontario governments will have 2%. The big news, and negotiations towards which has kept Chrysler afloat thus far, is that the Italian Fiat company will have a 20% stake to start with and eventually probably about 35% as the governments’ holdings unwind. Such unwinding will occur if the loans now in place are repaid. These loans are colossal. In December 08, the US government put in $4bn, there will be access to $3.3bn in new debtor-in-possession financing and on coming out of Chapter 11, a further $4.7bn in loans will be extended. The Canadians will loan $2.42bn to the plan. 

For all this re-structuring to occur, employees, unions (hence the big stake) and 70% of creditors by value had to agree. The impending partnership with Fiat is intended to give Chrysler the benefit of the Italian’s superior technical capability on fuel efficiency and building small cars. In return, Fiat will get access to the US market.

With 30,000 jobs at risk, tens of thousands of suppliers and dealers in the balance and not least 170,000 retired Chrysler workers and families with healthcare rights, this bankruptcy process is one of the biggest happenings from the credit crunch crisis. 

Chrysler has been in bed with a European partner before. It was not a wholly successful "union".

UK Banks Still Not Lending

6th May 09 - UK banks still not lending

Despite all the money pumped in and the control gained by the Government, there is evidence to suggest that the UK banks are still moribund. I could have proved this statement relating to the business I am involved with (manufacturing) but a sample of one hardly seems justification. Now, however, a part of the Daily Telegraph’s business issue called "Your Business" reports that it commissioned the specialist finance broker ASC Finance for Business to test how the major banks would respond, through their small business call centres, to a request from an "ideal business customer". 

ASC pretended to be an owner of a hairdressers with a turnover of £75,000, £25,000 in the bank that it was prepared to put into a savings account, had a five year trading record and wanted to borrow £50,000 for expansion. Not one bank jumped on the opportunity with several saying they would telephone back but failing to do so. Most asked whether any security was available with some saying this was a condition to securing access to the government backed enterprise finance guarantee (which squares exactly with my experience). 

Henry Ejdelbaum, managing director of ASC, said "There was not one bank that said this looks like a good deal, let’s do it. What this tells us is that the banks are not falling over themselves to lend. There’s no one opening the door. The moment they sniff security they zoom in on it like an Exocet missile. Their message that there has been a collapse of demand does not stand the test that we have done". 

It is one thing having an "enterprise finance guarantee scheme" which guarantees the first 75% of any business loan of up to £1m and it is one thing for the Business Secretary to claim it is being used. It is quite another to penetrate a business call centre and incidentally my personal story involves the "client manager" actually visiting the factory (that had a bit more than £25,000 in the bank). The story was the same - unless of course the owner put up his home as security.

Talking of homes, 26,097 home loans were approved in March 09, a 7% fall on February. Least said.

Private Sector Pay Freeze Is Best Hope

5th May 09 - Private sector pay freeze is best hope

The British Chambers of Commerce (BCC) have a monthly business survey. In the latest poll of 400 of its members, 58% said they intended to freeze wages this year and a further 12% said that pay would be cut. It follows that only 30% envisaged that the payroll would increase. As further evidence of the belt-tightening (the diary entry yesterday gave the national statistics for the recession) four out of ten businesses said they would consider making redundancies over the next six months and some 12% said that job cuts were certain. It is pertinent to emphasise that this is a forward look at a time when the unemployed claimant count has already reached a level of 1 in 22. This count is of the number of active jobseekers on unemployment benefits and stands at 1.46 million or 4.5%, its highest level for more than a decade.

Some time ago, this diary listed some of the bigger retailers that had failed as a result of the reduced spend by the general public. A hint was given that this could only be a sample due to the volumes likely to be involved. According to research by accountancy firm Pricewaterhouse Coopers, 705 retailers entered insolvency in the three months to March 09 - up 60% on the same quarter last year. Andrew Garbutt of the firm said "Survival of the fittest will be the mantra for 2009. Those with an inappropriate capital structure or a poor proposition will struggle to survive. Even good companies may disappear as they are exposed to low sales volumes and debt burdens. While many retailers were suffering, their difficulty provided opportunities for chains and smaller independent stores to grow market share even in this tough climate". 

While the BCC survey and the accountants’ research both seem to confirm or state the obvious, they nevertheless provide a backdrop to the UK private sector scene as it exists in early 2009.

UK Economy Falling Fast - Official

4th May 09 - UK economy falling fast - official

Figures from the Office of National Statistics show that the UK economy contracted by 1.9% in the first quarter of 2009. That may not sound much but it exceeded the expectations of most independent economists and was greater than the fall in GDP in the final quarter of 2008 when Britain officially fell into recession. The 1.9% fall was the biggest quarterly decline since the third quarter of 1979 when, for those of us old enough to remember, there was mass unemployment and a debilitating class war raging. Perhaps the worst news of all came from the IMF that forecast that the UK economy will shrink by 4.1% this year and will continue to decline in 2010.

The latest official statistics bring out one other feature of the UK economy namely that it is the private sector that is in the teeth of the storm. Indeed, public sector services actually grew by 0.5% as the Government increased its spend. Manufacturing continues to be the worst hit notwithstanding the weakness of sterling (25% down against the dollar over the past year) having fallen by 6.2% in the quarter. That is the biggest decline since records began 61 years ago. Within this overall figure, the construction sector fell by 2.4% as the property market continued to stall. According to a survey by the Confederation of British Industry (CBI), industrial companies reported their lowest volume of orders in nearly 30 years and 51,000 jobs were lost in manufacturing in the quarter ended December 08.

One really surprising aspect of the latest statistics is the decline in the service sector which brings in 75% of the UK’s wealth. Worst hit sub-sectors are transport, storage and communications which collectively fell 2.9%. It is revealing that the biggest increase by job applicants for welfare benefits currently is amongst heavy goods vehicle drivers. Amongst the professional ranks of those out of work, the worst hit include architects, quantity surveyors and solicitors. 

The tentacles of a downturn are no respecter of training or skill as will undoubtedly become more and more apparent as 2009 unwinds. Even tax specialists are losing their job. No further comment required.

General Motors, Shutdown and Bankruptcy?

1st May 09 - General Motors, shutdown and bankruptcy?

Ray Young, the chief financial officer of General Motors, is reported as finalising the terms for a debt-for-equity swap for the company’s $28bn of unsecured debt. Bondholders will then be given a month to accept or reject the deal. If the proposal is turned down, Chapter 11 bankruptcy will almost certainly follow. It really is crunch times for these bond holders since Mr Young is already on record as saying that the company has no intention of meeting a $1bn bond payment due on 1st June. A deadline that itself is academic because by that date they will have to have agreed to the swap or else GM will enter Chapter 11. Such a filing will protect the company from its creditors which will include even the bond holders.

GM is said to be preparing to shut the majority of its US factories for nine weeks over this coming summer as it attempts to reduce some of its growing backlog of finished but unsold cars. The crunch arises due to a deadline of 1st June imposed by the new US administration for GM to prove it has a viable future. Not easy with total debts of $62bn. Months of talking between the company, its bond holders, unions and other creditors have failed to find a way forward.

In another move that may give credence to the likelihood of bankruptcy, the Canadian government is believed to be in talks with the US Treasury about providing $6bn in financing as part of a combined $40bn debtor-in-possession financial package. This whole package would help GM and Chrysler to continue to make supplier payments and function normally during the early stages of a Chapter 11.

It has been noted earlier in this diary that Chrysler are in late-stage talks with Fiat over a rescue and now there are rumours that the Italians and Magna International (Canadian parts supplier) and linked to a possible rescue of GM Europe. If this were to be true but only of the Opel brand, wither the UK’s Vauxhall marquee?

A UK car scrapping scheme has belatedly arrived. Let’s hope it does no include Vauxhall.