Beggar Thy Neighbour
05 / Oct / 2008
What should have been a very straightforward, simple and effective delivery of confidence has been transformed into a convoluted, opaque and corrupted demonstration of vested interest. The original 3-page Bill has become a 400+ page monster and whilst the Banks holding toxic paper (both US and foreign) will be assisted, questions will be raised over the expected medium-term benefits. We will know in the next 2 weeks or so if the plan will deliver the desired result. As banks’ capital is enhanced they should begin to lend again thus reinvigorating the economy, both in the US and globally. In terms of clarity of purpose and effective delivery the Irish Government’s unequivocal guarantee of all deposits and funding (except subordinated debt) is unlikely to be beaten. By offering a blanket guarantee that the Government will support any bank in trouble the need for concerned depositors to pull their funds is now zero. A contingent liability of over EUR400 billion has immediately removed the need to deliver an actual cash payout. The UK and Europe can complain about unfair advantage as much as they want but their lack of resolve is their own problem – and their citizens. The natural consequence though is for a series of announcements as individual states seek to prove that their banks are safer than those next door.
In the current environment of fear and distrust economic figures are almost irrelevant. This morning’s Halifax house price survey for September confirmed the earlier report from the Nationwide with a monthly decline of 1.8% giving an annual fall of 12.5%. Tomorrow sees the release of September’s industrial production and manufacturing output figures which are expected to be poor, at best. The Bank of England meets this week and whilst there is an increasing clamour to cut Base Rate we feel that the Committee will wait until November 6th to avoid looking panicked.