Azure Global : June 2013

Sunday 30 June 2013

Mark Carney urged to kick start lending to small businesses

BBC ask Carney, who takes over from Sir Mervyn King today, to help sustain economic recovery by supporting small enterprises

Business leaders urged Mark Carney on Sunday to back a £1bn investment bank at his first meeting as governor of the Bank of England to kickstart lending to small businesses.

The British Chamber of Commerce (BCC) also called on Carney, who takes over from Sir Mervyn Kingon Monday, to inject further funds into the economy as part of its quantitative easing (QE) programme to maintain the UK's fragile recovery.

BCC director general, John Longworth, said Carney needed to find ways to channel money to manufacturers and smaller enterprises or risk the recovery running out of steam.

"While we are seeing signs of a stronger recovery across the business community, we have no illusions about the challenges ahead for the UK economy," he said.

NEF spokesman Tony Greenham says Mark Carney’s arrival is the perfect opportunity to review the remit of our central bank.The Bank of England's interest rate setting committee is expected to reject boosting QE beyond its current £375bn level at its monthly meeting on Thursday, despite the arrival of Carney amid a welter of expectations that he will spur his colleagues into action.

City analysts agree that the monetary policy committee will hold its fire until the publication of a review in August of its policies, which will broaden its remit and encourage committee members to adopt a more radical mix of initiatives.

A report by the Bank's officials into the prospects for rising prices is also likely to show inflation falling over the next two years, giving the MPC more leeway to boost QE.

The chancellor wants the committee to take a more active role in encouraging lenders to promote borrowing to the wider economy. He has already allowed the committee to adopt a more flexible view of how to meet the 2% inflation target.

A report by the CBI and the accountants Price water house Coopers into the health of the financial services industry appeared to support the view that the banking sector is returning to health. It found that banks recovered strongly in the three months to the end of June after long period of cost cutting following the 2008 crash, though with lower profits and further cuts in employment.

However, the BoE's own figures show that RBS and Lloyds have reduced the amount of money they lend to households and businesses, while Barclays has threatened to cut back following demands from the main City regulator that it must bolster its reserves. Meanwhile the Co-op, which until earlier this year planned to take over 600 Lloyds branches, is in trouble after discovering a large shortfall in its capital reserves.

A funding for lending scheme designed to cut the cost of borrowing has pushed down the cost of mortgages since it was launched last year, but has so far had little effect on business lending.

A leading thinktank called on Carney to bypass the main banks with a direct intervention into the housing industry to support the building of 60,000 homes.

The New Economics Foundation said that instead of using quantitative easing to buy government bonds, the BoE should buy assets that will directly support the economy, which would mean purchasing bonds to support home building and energy efficiency, infrastructure projects and small business lending.

A foundation spokesman, Tony Greenham, said: "It's time for the Old Lady of Threadneedle St to get some new clothes. Mark Carney's arrival at the Bank of England is the perfect opportunity to review the remit of our central bank.

"Measures like QE and funding for lending are not providing the investment boost our economy clearly needs. Strategic QE can enable the Bank of England to maintain independence and control over inflation whilst more effectively supporting the government's economic objectives."

Greenham said Carney should adopt a new monetary allocation committee that would redirect central bank funds for investment in green projects and house building.

Like the BCC, the thinktank also backed funding for an investment bank.

"The funding for lending scheme uses public money to give cheap loans to banks to persuade them to lend to small businesses. Strategic QE could make loans to a British Business Bank, set up specifically to support lending to SMEs.

"Capitalising the green investment bank and British business bank so they could reach a scale similar to the investment banks of our major competitors like Germany, Brazil and Scandinavia would be a good place to start," Greenham said.

Article Source : http://www.guardian.co.uk

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Friday 28 June 2013

Payday loans market faces competition inquiry

Office of Fair Trading suspects payday lenders of preventing, restricting or distorting competition
The Office of Fair Trading has referred the payday loans market to the Competition Commission, saying there are deep-rooted problems with the way competition works and that lenders are too focused on offering quick loans.

The regulator said variable levels of compliance with credit laws and guidance meant firms that invest time and effort to comply were at a competitive disadvantage.

The referral follows a year-long review of the sector which exposed widespread evidence of irresponsible lending and breaches of the law, which the OFT said were causing "misery and hardship for many borrowers".

Although lenders say their high-cost loans are designed to be taken out over short periods and that annual interest rates of often more than 4,000% are not a fair indication of the cost, the regulator found companies were making up to 50% of their money from customers who extended or rolled over loans or incurred late payment charges.

Announcing the referral, the OFT highlighted several features of the £2bn market, which it said might be preventing, restricting or distorting competition:

• borrowers using payday loans have "poor credit histories, limited access to other forms of credit and/or a pressing need to borrow", which could be weakening competition on price

• lenders are using practices which make it difficult for consumers to identify and compare costs

• there are barriers to switching when loans are rolled over.

It also expressed concern about the focus on quick loans, which it said compromised affordability checks and meant competition was on the basis of speed rather than price. Too many people were being granted loans they could not afford to repay, and there was no incentive for lenders to cut interest rates.

The OFT's chief executive, Clive Maxwell, said: "Competition appears not to be working properly in the payday lending market, allowing firms to profit from making loans that cannot be paid back on time. We have seen evidence of financial loss and personal distress to many people.

"The Competition Commission can now conduct a detailed investigation to get to the root causes and, if necessary, use its far reaching powers to fix the payday lending market."

In March, lenders were given 12 weeks to reform and notify the OFT of the changes they had made. The final deadline is the end of July, and the regulator said it was still waiting for 30 of the 50 lenders to respond.

In the runup to Thursday's announcement, three lenders had opted to leave the market, but that figure has since increased to five. Two have left the credit market; the other three have left the sector.

The OFT said payday lending would remain a top enforcement priority until it handed regulation of the sector to the Financial Conduct Authority (FCA) in April 2014.

It said by referring the market now, the commission would be able to provide the FCA with a sound evidential basis on which to develop its rules and apply its new powers after it took over responsibility.

The Consumer Finance Association (CFA), the trade body for some of the largest players in the industry, including The Money Shop, Cash Converters and QuickQuid, said it would have liked the referral to have been deferred.

Its chief executive, Russell Hamblin-Boone, said: "The CFA and its members have always supported well-designed, well-implemented regulation in order to protect consumers and drive up standards. However, no other sector has faced such intense scrutiny in such a short space of time.

"We would have preferred the inquiry to have been deferred to allow the significant improvements that lenders have made to take effect before the industry faced further judgement. We urge the Competition Commission to take this into consideration during its inquiry."

Debt charities and consumer groups welcomed the announcement but urged the OFT to continue to scrutinise the market.

The executive director of Which?, Richard Lloyd, said: "People under financial pressure being given high cost loans in minutes without proper affordability checks is a recipe for disaster. This referral doesn't mean the OFT can now stand down, it needs to stay tough with lenders and continue to take early enforcement action against any company found to be lending irresponsibly."

On Monday the government will hold a summit on the industry between lenders, consumer groups and industry watchdogs to explore whether further regulator of the sector is necessary. A growing number of organisations have taken a stand against the industry, blocking adverts and even access to lenders' websites.

The Competition Commission has previously stepped in to shake up the home credit market. In 2006 it told doorstep lenders, who like payday lenders offer small, short-term loans, that they had to make charges more transparent and share data to make it easier for consumers to shop around and drive down prices.

Article Source : http://www.guardian.co.uk

Thursday 27 June 2013

Rolls-Royce missed several chances to fix A380 engine problem – safety report

Australian Transport Safety Bureau says company knew three years before Qantas blowout that parts failed to meet standards

Rolls-Royce missed several chances over a three-year period to fix a problem that caused an engine blowout on a Qantas A380 jet with more than 450 people on board in 2010, according to a report by Australia's aviation safety body.

The report by the Australian Transport Safety Bureau (ATSB) detailed how faulty manufacturing processes had led to one of Rolls-Royce's Trent 900 engines exploding at 2,100 metres (7,000ft) over Indonesia on a flight from Singapore to Sydney in November 2010.

According to the ATSB report, Rolls-Royce knew at least three years before the accident that components manufactured at its Hucknall plant in Nottingham failed to conform to design standards. An initial investigation by the company in 2007 failed to understand the consequences of using parts that did not match the design specification.

The damaged engine of Qantas's A380 superjumbo after it made an emergency landing at Changi airport In 2009, a Rolls-Royce engineer identified the potential risk of these defective parts, but the company failed to carry out an investigation into what this would mean for its fleet of Trent 900 engines.

Rolls-Royce missed "a number of opportunities … generally because of ambiguities within the manufacturer's procedures and the non-adherence by a number of the manufacturing staff to those procedures", the ATSB report concluded. The safety agency also highlighted cultural flaws at the Hucknall plant, where it was acceptable not to report so-called minor deviations in parts.

This was the first major safety scare for the Airbus A380 jet and resulted in Qantas temporarily grounding its entire fleet – although Airbus subsequently said the aircraft's resilience was proven by its ability to land despite severe damage to its left wing.

The A380 superjumbo was just minutes into its flight after takeoff from Changi airport Singapore when members of the crew heard two loud bangs. A faulty feed pipe had cracked causing oil to spray into one of the plane's four engines, which burst into flames. Several passengers saw fuel escaping from the under the affected wing.

The pilot, praised for his competence by the ATSB, returned to Singapore and brought the stricken plane down just 150 metres from the end of the runway. None of the 440 passengers and 24 cabin crew were injured, although several homes beneath the flight path were badly damaged when fragments from the engine turbine smashed into walls.

Since the accident, Rolls-Royce has introduced software that would shut down a Trent 900 engine to prevent a repeat occurrence. The ATSB, which issued a safety recommendation to Rolls-Royce in December 2010, said it was satisfied with the steps taken regarding Trent 900 engines in A380 planes, adding that quality control at Hucknall had improved.

Rolls-Royce said it accepted the conclusions of the ATSB report. "On this occasion we clearly fell short," said Colin Smith, director of engineering and technology at Rolls-Royce. "We support the ATSB's conclusions and, as the report notes, have already applied the lessons learned throughout our engineering, manufacturing and quality assurance procedures to prevent this type of accident from happening again."

The engine manufacturer agreed to pay Qantas A$95m (£62m) in a 2011 settlement.

Article Source : http://www.guardian.co.uk

UK avoided double-dip recession in 2011, revised official data shows

But initial collapse in output following financial crash was bigger than first thought, Office for National Statistics says

Britain never suffered a double-dip recession in 2012 but suffered a deeper collapse in output following the financial crash than previously thought, according to new data that show the economy is even further away from a full recovery.

The Office for National Statistics has reworked its quarterly growth figures for the beginning of last year to show a flat performance instead of previous estimates of a 0.1% decline. Without a fall in GDP in the first three months of 2012, Britain did not suffer two consecutive quarters of negative growth that would have resulted in its second recession in three years – otherwise known as a double-dip.

The ONS said, however, that the first post-crunch recession in 2008/2009 was deeper than first estimated, meaning that economic output is now 3.9% lower than its pre-crash peak, compared with a previous estimate of 2.6%.

David Tinsley, UK economist at investment bank BNP Paribas, said the figures revealed a weak economy in need of further stimulus from the Bank of England.

"The data highlights both the damage done to the economy following the crisis and the size of the challenge still facing it to rebalance. Unless it bounces considerably it raises serious concerns that after a solid second quarter, growth will at best be weak. These are good arguments for new Bank of England governor Mark Carney to consider a significant easing in policy as early as next week."

George Osborne will be cheered that the double dip has been erased from the economic history books

Carney takes over from Sir Mervyn King on Monday and is under pressure in some quarters to take a more active role than his predecessor. But the nine-strong monetary policy committee that he will head has shown little appetite in recent months to pump further central bank funds into the economy, under the £375bn quantitative easing programme. King and two other committee members have voted since February to increase the QE stock by £25bn, only to be blocked by the remaining six.

Jeremy Cook, the chief economist at the foreign exchange firm World First said Carney and the chancellor need to take further action to bring about a sustainable recovery.

"Whether the UK entered a double-dip or - as today's numbers show, it didn't - matters little to the man on the street who is seeing large falls in real-term wage growth as a result of the lack of business output. Sterling has fallen in the aftermath of this announcement, and although this data is three months old and could be considered stale, the lack of real improvement since leaves the government and the new Bank of England governor a lot to do."

Coming a day after George Osborne was forced to announce a further £11.5bn of cuts to government spending in 2015/16, the news that a double-dip recession has been written out of the economic history books will cheer the Treasury. Ministers have battled to show that the economy was healthier than official statistics showed during the turbulent years of 2011 and 2012, which were marred by the euro zone crisis and fears that the currency zone would break up.

Separate figures revealed the economy is further away from getting back to its early 2008 peak and disposable incomes are at levels last seen in 1987. The ONS said the downturn in 2008/09 saw GDP decline by 7.2%, from the previous estimate of 6.3%.

A deeper recession and a prolonged period of low growth leaves the government with a higher mountain to climb to restore the economy back to health, said analysts.

Figures showing a long-term fall in disposable incomes emphasised the difficult task facing the Treasury as it struggles to boost consumer confidence and high street spending, both of which remain weak. Household disposable income fell by 1.7% in the first three months of 2013 compared with the previous quarter, which left it down by 0.3% year on year.

Howard Archer, the chief UK economist at IHS Global Insight, said the fall "undoubtedly reflected higher inflation, very low wage growth and faltering employment at the start of the year".

Consumer spending continued to rise, however, which Archer said was partly financed by a drop in the household savings ratio to 4.2% from 5.9% in the fourth quarter of 2012 and 7.1% in the third quarter. "This highlights the fact that consumers do still face serious headwinds," he said.

Chris Leslie, Labour's shadow financial secretary to the Treasury, said the revised figures showed the economy has grown by 1.1% since 2010, compared to the 6% forecast at the time.

"That's why living standards are falling and the deficit is not coming down."

Article Source : http://www.guardian.co.uk

Bank of England's Miles sees good reasons for low gilt yields

British government bond yields have good reason to remain low, despite a recent jump due to market expectations that the U.S. Federal Reserve may scale back its bond purchase programme, a senior Bank of England official said on Wednesday.
David Miles, an external member of the BoE's rate-setting Monetary Policy Committee, said the still-low current level of gilt yields appropriately reflected investors' risk aversion and market expectations that Bank of England rates will stay low.

He also raised the prospect that the BoE may hold some of the 375 billion pounds of gilts bought under its asset purchase programme indefinitely, even after monetary policy returns to normal - in contrast to the general assumption that almost all would be sold back to the market.

Miles's comments, in a speech to be delivered to a bond investors' conference, come less than a day after BoE Governor Mervyn King said that markets had "jumped the gun" by starting to price in tighter monetary policy.

Ten-year gilt yields hit a 20-month high of 2.597 percent on Monday, having risen almost 50 basis points since Federal Reserve Chairman Ben Bernanke said last week that the U.S. economy is growing fast enough for the central bank to slow its bond-buying stimulus later this year.

Miles dismissed the idea that this marked the beginning of the end for what central bank critics say is a bubble in government bond prices caused by too much quantitative easing.

"Yields on UK government debt - both in nominal and real terms - are unusually low," he said. "(But) there are good reasons why yields on safe government bonds should be low today. I think some people are far too quick to label this a "bubble"."

The good reasons for low British government bond yields included investors' substantially greater risk aversion than before the financial crisis, and expectations that the BoE would keep offical interest rates low, Miles added.

Miles, a finance professor, has consistently voted for more BoE bond purchases since November and effectively endorsed market expectations for more loose monetary policy.

"I do not think we should be in any hurry in the UK to move the monetary policy dials back to more normal settings - indeed it might well be right for the next move in the UK to push them even further to give more support to demand," he said.

When the time did come to tighten monetary policy and sell back gilts, more normal market conditions should limit the impact on gilt prices, he added.

Miles, whose non-renewable term on the MPC expires in May 2015, also floated the possibility that the BoE might want to hold on to some gilts as a counterweight to increased cash deposited by commercial banks.

"It is very far from clear that returning monetary policy to a normal setting means that the Bank of England balance sheet will shrink back to where it was before the crisis," he said.

Article Source :http://uk.reuters.com

Osborne plans 3 billion pound boost for affordable housing

Britain will invest an additional 3 billion pounds in affordable housing in 2015, Chancellor George Osborne said on Wednesday.

Rapid house price inflation over the past two decades has made it hard for young people to get on the housing ladder, and a lack of local authority homes has led to long waiting lists.

"We're committing over 3 billion pounds capital investment in affordable housing and we will extend the Troubled Families Programme to reach 400,000 more vulnerable families who need extra support," Osborne said.

Osborne was addressing parliament on his plans for a round of government spending cuts of 11.5 billion pounds in the 2015/16 fiscal year.

Article Source :http://uk.reuters.com

Queen scores record profit from booming London property

The Crown Estate - owned by the Queen - on Thursday said it made record profit in the year to March, thanks to the strong performance of its central London properties.

Crown Estate's 5.2 percent rise in profits to 252.6 million pounds gives the Queen a 38 million pounds 2014/15 payout, pegged at 15 percent of the total by a 2012 law designed to link her income to the UK's economic health.

The rest of the profits go to the Treasury. Chancellor George Osborne on Wednesday detailed 11.5 billion pounds of spending cuts.

Owner of wind farms and most of Britain's sea bed along with its Regent Street properties, the company has outperformed the wider economy due to strong overseas interest in London property and the UK's growing reliance on green energy.

"We are proud that another record Crown Estate performance will again make a strong contribution to the nation's finances," said Chairman Stuart Hampson. The company's property portfolio is now worth 8.1 billion pounds.

The Queen - whose payout rose 20 percent to 36 million this year - was previously paid by taxpayers through an allowance set by parliament and other government grants.

It is not allowed to borrow in capital markets and has formed joint ventures with overseas funds to finance its redevelopment plans. In May, it signed a 320 million pound deal with Oxford Properties, owned by one of Canada's largest pension funds, to redevelop London's upmarket St James's Market district.

The Queen, who celebrated the 60th anniversary of her coronation earlier this month, uses her salary mainly to pay the royal household's staff as well as items such as laundry, stationery and official functions.

The Crown Estate belongs to the reigning king or queen but its properties cannot be sold by the monarch. King George III ceded its profits to the government in 1760.

Article Source :http://uk.reuters.com

RBS steps up small business lending after government calls

Royal Bank of Scotland said it had identified thousands of British companies it could offer 1.7 billion pounds of extra credit to, as it responds to government calls for banks to increase lending to small businesses.

Britain's government and central bank are concerned that poor access to finance, particularly for smaller firms, may thwart a sustainable recovery from the country's worst slump in decades.

RBS has come under pressure to increase lending because the government controls 81 percent of the bank after pumping 45.5 billion pounds in to keep it afloat during the 2008 financial crisis.

The bank said it and its subsidiary NatWest had contacted more than 20,000 small and medium-sized enterprises (SMEs) - existing customers - and told them they were eligible to borrow from the 1.7 billion pound credit pot, on top of what they were already borrowing from RBS.

It said the next stage of the programme would see the bank target a further 100,000 SME customers. More than one million SMEs bank with RBS.

Small business lobby group the Forum for Private Business said it welcomed the RBS initiative as long as the bank was evaluating lending opportunities properly.

"Experience tells us to be cautious here, with RBS's qualifying criteria stipulating the offer is only being made to 'credit worthy' businesses. We hope this doesn't mean they're adopting an ultra-hard line approach to risk, otherwise most of the cash available will stay in RBS's coffers," said spokesman Robert Downes.

Mike Cherry, national policy chairman of the Federation of Small Businesses, described the RBS initiative as "a step in the right direction", but reminded SMEs to make sure the terms and overall costs of finance were fair and competitive.

Banks should also offer less established businesses like start-ups the credit they need, he said.

Earlier this year, the government extended its Funding for Lending Scheme, which provides banks with cheap funding to encourage them to lend to households and businesses, but recent data showed business lending has actually fallen versus last year.

Article Source :http://uk.reuters.com

Wednesday 26 June 2013

Supermarkets face fine of percentage of turnover for mistreating suppliers

Christine Tacon, the new groceries code adjudicator, will be able to arbitrate on contract disputes and investigate complaints

The UK's new supermarket watchdog wants to fine retailers a percentage of their turnover if they mistreat suppliers.

Christine Tacon, the groceries code adjudicator who started work on Tuesday, is able to impose fines and force supermarkets to apologise publicly with ads in national newspapers if they do not treat suppliers fairly. She is in charge of overseeing a legally binding code of practice, put in place more than three years ago, for supermarkets with a turnover of more than £1bn, such as Tesco, Sainsbury's and Asda.

The code does not govern the prices retailers agree with their suppliers, but aims to prevent changes part-way through the contracts. It covers groceries including food, drink and toiletries, but does not include clothing or tobacco.

Christine Tacon, new groceries code adjudicator, will oversee a code of practice governing relations between supermarkets and suppliersSpeaking on her first day in office, Tacon said her first job is to recommend the rules under which investigations would occur and the maximum fines that could be imposed.

Those recommendations are expected to be published in the next few weeks and will then undergo a 12-week consultation. The new system must be in place before Christmas Day, before which MPs will have to approve the maximum fine.

Tacon said she was inclined to base fines on supermarkets' turnover as this was a straightforward approach similar to that used by the Office of Fair Trading. She said: "Fines are there as the ultimate deterrent. I am prepared to use my powers but I hope we don't have to get to that stage."

She has spent several months talking to suppliers ahead of her official appointment this week but will only be able to look into complaints about breaches of the code that occur from her first day in office. She will be able to arbitrate on disputes and investigate complaints made anonymously or by third parties such as the National Farmers' Union.

She will be looking at issues such as supermarkets charging up to £1m to display suppliers' products, or the imposition of fines for customer complaints that have nothing to do with quality of the goods supplied. Tacon argues that such ruses add extra costs to the industry, forcing up prices for shoppers.

Article Source : http://www.guardian.co.uk

Anglo Irish Bank tapes: executives mock Germans amid bailout

Latest leaked recordings compound outrage over behaviour of Anglo Irish bankers amid multibillion-euro state rescue

The Irish prime minister has pledged to open an investigation into the €30bn (£25.5bn) bailout of Anglo Irish Bank as it emerged that an executive sang "Deutschland, Deutschland, über alles" as colleagues joked about German money flowing into the country after a state guarantee of the institution's deposits.

A banker is heard on tape joking and singing the former first lines of the Deutschlandlied – not used since the Nazis made the first stanza their anthem – as the bank's then chief executive, David Drumm, urges his executives to "get the fucking money in". The recording was made in September 2008, when the Irish state stepped in to rescue a bank brought low by a property lending spree.

Enda Kenny, the taoiseach, paved the way for a parliamentary inquiry into an "axis of collusion", although he stopped short of a full, Leveson-style inquiry. Referring to the former taoiseach Brian Cowen, who ran the country during the Anglo Irish bailout, he said: "I assume that our predecessors here, people who served … in high office and in those governments, would have the opportunity and would have the willingness, I assume, to come to a parliamentary inquiry."

The latest recordings to be leaked from inside the bank will compound national outrage in Ireland over the behaviour of Anglo Irish bankers.

Anglo Irish Bank headquarters in St Stephen's Green, DublinDublin intervened in September 2008 with a guarantee of the bank's deposits to keep it afloat – a move that angered London and Berlin because it enticed money from British and German savers.

Cowen's blanket bank guarantee, much criticised as foolish by other European Union governments, was designed to prevent Anglo's immediate collapse but instead put Ireland on a slippery slope to bailing out all six Irish-owned retail banks. In one conversation, two days after the fateful bank guarantee, Drumm giggles while his colleague John Bowe, then director of capital markets, recites lines from the Deutschlandlied.

Drumm, who has since fled to the US, and Bowe are heard laughing about fears that the guarantee would drive a wedge between Ireland and its EU partners.

The former said he would give "two fingers" to UK concerns.

Bowe was recorded boasting that he had picked as the cost of the state rescuing them a random figure, of €7bn (£5.9bn), "out of my arse".

Ireland's deputy prime minister, Eamon Gilmore, admitted on Tuesday ministers had been unaware the recorded conversations existed, even though the state has owned the bank since it was nationalised in 2009.

He said the degree of arrogance and hubris of the bankers highlighted in the tapes was shocking, and made clear the need for a full parliamentary inquiry into the Irish banking collapse.

"That's why we have brought forward legislation to establish such an inquiry, and I hope that the legislation will be enacted before the summer and we can get on with it," Gilmore told RTÉ radio. Gilmore added that the revelations couldcompromise Irish attempts to win further debt relief from the European Union. "It makes it more difficult, of course it does, but we're going to continue to work to get the best possible outcome for the Irish taxpayer," he said.

Kenny later confirmedthat the country's that police had had the Anglo Irish Bank tapes for four years. He told the Dáil they had been originally handed over to the Gardai when they began their when criminal investigations into the bank.

His cabinet colleague, the finance minister, Michael Noonan, confirmed that he, too, was unaware of the tapes, even though it was standard procedure to record calls between senior banking personnel.

Recordings obtained by the Irish Independent of Drumm joking about the rescue plan on the tapes will intensify anger in Ireland towards the top bankers, given that he remains in exile in Boston, allegedly owing the state €8m.

Bowe has denied trying to mislead the state, adding that the reported remarks were "off-the-cuff comments".".

The secret tapes have compounded suspicions that Anglo Irish Bank's senior executives had lured the then Fianna Fáil-led il-led government into a costly financial trap in the autumn of 2008. The figure of €7bn cited by Bowe more than quadrupled, to €30bn.

During the Irish boom, Anglo Irish Bank became the preferred lender to property speculators and builders. Among its high-profile clients was Ireland's one-time richest man Seán Quinn, who borrowed hundreds of millions of euros from the bank to fund a global property portfolio stretching from the US to the Ukraine and Russia. When the world property market crashed, Quinn's empire crumbled, leading him to bankruptcy and prison.

Article Source : http://www.guardian.co.uk

Credit crunch confusion sends China's stock market on wild ride

Down 6% in the morning, up 6% in the afternoon. The wild ride in the Chinese stock market on Tuesday tells the tale of confusion about the depth of the China's credit crunch and the authorities' ability to control events.

China's lending almost doubled last year from the year before to 200% of economic output The trigger for the afternoon rebound was comments from the central bank that it would guide interest rates to "reasonable levels" and that cash in the financial system would be managed flexibly. In normal circumstances, such a statement would be regarded as woefully vague, almost meaningless. But the People's Bank of China traditionally runs its communications in a near-vacuum. Two statements in two days counts as an outbreak of verbosity. Investors took that as reassuring evidence that the authorities are at least aware of the risks as they attempt to defuse a credit boom.

Well, it's something to cling to. Confidence, however, looks fragile. The big problem is the scale of the ramp-up in credit in recent years. Fitch, the credit ratings agency, has calculated that the total lending in the $7.3tn (£4.7tn) Chinese economy reached almost 200% of economic output last year, up from 125% five years earlier. That rate of explosive growth can be dangerous. History is littered with example of economic blow-ups and banking crises that followed massive increases in lending – Japan in the late 1980s, most famously.

China's recent credit explosion started in 2009, when Beijing reacted to the west's banking bust and recession by ordering a massive programme of investment, principally in public infrastructure, offices and flats. That succeeded in restoring strong growth to the economy – and, indeed, helped to prevent a bigger global downturn. But, for the bears, the critical point is that the Chinese credit boom never slowed down: the skyscrapers and flats continued to be built before demand could catch up.

"The excess borrowing that occurred in 2009 has never been absorbed by the real economy and now more borrowing is being piled on top of this," said Wei Yao, an analyst at the Société Générale bank, earlier this month. She thinks "the debt snowball is getting bigger and bigger, without contributing to real activity" and suspects many borrowers are rolling over loans at punitive rates in a desperate struggle to stay in the game.

SocGen's chart shows where the credit has come from – most of the extra lending is not being made by mainstream banks but by the so-called "shadow banking" system, which largely means small finance houses that have often funded speculative property projects.

Beijing has traditionally tolerated the shadow banks. They are viewed as an essential part of a financial system that is steadily liberalising, even if they have also become a way for state-backed banks themselves to bypass official lending caps. But it was these shadow lenders that the People's Bank of China seemed to want to punish last week.

Short-term lending rates between banks were allowed to soar – to 11% for one-week money. The official message seemed blunt: rein it in, apply discipline, and don't assume the state is always on hand to keep interest rates low. Having made its point, then central bank then managed rates back downwards, albeit not all the way down.

Beijing's mission seems reasonable enough – if there is excess credit in the Chinese economy, it's better to tackle the problem before a bigger bubble is blown. Mark Williams of thinktank Capital Economics comments: "The episode is arguably the strongest sign yet that the leadership is willing to suffer short-term economic pain if necessary to achieve more sustainable growth."

But Williams also calls the People's Bank's behaviour "extraordinarily reckless" since it offered no explanation for its initial inaction. Indeed. It's all very well to have a policy but surely it's better to communicate it. The risk is that confidence is damaged.

What's more, shock and awe tactics look ill-suited to the delicate task of finessing investment away from unprofitable property projects while simultaneously keeping the economy stable. Bank of America Merrill Lynch's analysts think the biggest risk lies in the central bank mishandling the situation. "In our view, dealing with banks in breach of regulations should be done by improving prudential regulations rather than engineering an interbank credit crunch which could potentially backfire should banks lose mutual trust," they said.

Viewed from outside, China's building boom also looks to rely on inherently shaky financial structures. The shadow banks attract cash in short-term products from middle-class savers keen to escape the low deposit rates on offer at state-sponsored banks. But then they lend to long-term illiquid building projects. In a full-brown credit crunch, they would be horribly exposed. We would also see the first test of how far Beijing is willing to go to protect the shadow banks.

"I would say the [Chinese] authorities have the situation well in hand," said incoming Bank of England governor Mark Carney. For now, that's the consensus view. While economists are busy trimming their forecasts of GDP growth – Goldman Sachs now expects the economy to grow 7.7% in 2014, not 8.4% – they are also praising China for acting early to prevent a bigger debt crisis.

The alternative view is that China has left it late to rein in the credit boom without risking a major slump. If Wei Yao at SocGen is right about the chronic problem of over-extended corporate borrowers, there are lots of bad debts that haven't been recognised. In the past, recapitalising banks has never a problem for China – but the economy's new reliance on shadow banks and hazy specialist financing vehicles makes events harder to predict. Given the size of the building boom, is it even possible to estimate accurately the accumulation of bad loans in the system?

China will also have to attempt the trick against an uncertain global backdrop. The US economy is growing but not everybody is convinced the recovery can withstand higher interest rates. In the meantime, recession rumbles on in the eurozone. But Beijing seems to have decided the country's credit pains have to be confronted anyway. After 12 years of boom, Chinese-style capitalism faces its biggest test – how to apply the brakes without crashing.

Article Source : http://www.guardian.co.uk