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This website will allow you to keep up to date with the financial world, with the Strictly BIF newsletters and allows you to have your say on our blog page.
In the latest edition of the Strictly BIF newsletter:
Story 1: Citi Takes Government AssistanceStory 2: China Feels Economic PaceStory 3: Pre-Budget DeliveredBlog: World Economies
Citi Takes Government Assistance, Bhavin Dhanani
Citigroup has become the latest financial institution to be bailed out by the US government. After its share price plummeted in recent weeks there were fears for the bank's future. However, the bank was deemed too big to fail and a bailout plan was arranged last Monday.
In exchange for preference shares in the bank, the US Treasury will invest $20 billion. The investment follows the $25 billion Citigroup received as part of the industry bailout plan by the US Treasury. In addition to the investment, up to $306 billion worth of risky loans and assets will be guaranteed by the Treasury and the Federal Deposit Insurance Corp.
At the time of the bailout the market capitalisation of Citigroup was $20 billion. Just two years ago the market valued Citigroup at $270 billion, over 13 times as much as the most recent low. This shows the extent to which Citigroup has struggled in the credit crunch, posting four consecutive quarters of losses. Its share price did rally on the news of the bailout closing 58% up on Monday. Competitors in the industry also rose sharply with Goldman Sachs rising 26% and Morgan Stanley increasing by 33%.
Several stipulations have arisen as a result of the plan. Remuneration of managers and board directors will be significantly lower this year compared to last as the government has the right to intervene in compensation decisions. The bank's dividend will also fall heavily. Per quarter, the dividend will be a maximum of 1 cent per share for the next three years.
At one time, Citigroup stood as America's biggest bank. However Citigroup's risk taking was huge, becoming the biggest issuer of collateralised debt obligations. In its search for higher profits, the bank whose universal banking model was heralded as the future, has crumbled.
The Chinese central bank cut rates by 108 basis points in one-year benchmark lending and deposit rates. This drop in rates is the most aggressive move by the authorities in more than a decade.The rate cut is the latest sign of worries in Beijing about the slowing of the Chinese economy. The Central Bank has already cut the benchmark lending rate three times since Sept. 16, and the benchmark deposit rate twice.
The one-year lending rate is important in China since banks use it to calculate their client products' interest rates, based on the maturity of the loan and the creditworthiness of the borrower. As interest rates on many outstanding loans are adjusted at the start of each year, the reduction in rates will soon leave businesses and consumers with lower interest rate payments and more money left to spend.
The central bank also reduced the reserve requirement by 1 percent for large banks and 2 percent for small banks. This means banks are now free to lend more of their assets.
Demand for residential mortgages has weakened as the real estate market slows down. However small businesses are seeking loans to get them through the current fall in sales that has resulted from the economic slowdown.
The interest rate paid by the central bank for reserves has also dropped by 0.27 percentage points.
Little explanation for the rate cut has been given by those in charge.
Pre-Budget Delivered, Sarah Lloyd
Hailed as the most important pre-budget report since Labour came to power in 1997, Alistair Darling's report outlined numerous tax changes that are being brought about.
Individuals earning more than £150,000 will fall into a new tax band, paying 45 percent income tax, which the Government intends to use to pay for an unprecedented £120billion borrowing bill.
The new rate - expected to affect 400,000 people and raise about £2billion a year - would be brought in immediately after the next general election, meaning the public would need to elect Labour to see it implemented.
Among other measures, Darling is set to cut VAT to 15 percent for at least a year in an attempt to boost spending as Britain heads for recession. He is also expected to announce plans to ensure banks lend money to families and small businesses.
The announcement of over £20 billion in fiscal stimulus in the pre-budget report is pushing the British government borrowing to a record level.
The Troubled Asset Release Program (TARP), or 'Wall Street Bailout' as named by many investment banking critics, has seen an update to its structure this week. The structural update means there is now an additional $800 billion available to the newly named Term Asset-Backed Securities Loan Facility (TALF). The new bailout bears a stark resemblance to Gordon Brown's recently announced bailout plan.
TALF will only invest in financial firms. They will implement this by buying stocks thus (hopefully) encouraging banks to lend. The initial idea of buying up banks' troubled assets has been completely wiped off the agenda. Hank Paulson, the US Treasury Secretary, said doing this now would "not be the most effective way" to handle our financial problems.
TARP will inject $250 billion into financial firms to help with liquidity and President Bush has requested another $100 billion to save AIG and Citigroup. The remaining $350 billion is understood as likely to be left for the Obama administration to allocate.
TALF will offer $200 billion in credit to support securitised auto, credit-card and student loans. It will also spend $600 billion buying mortgage-backed securities issued or guaranteed by Fannie and Freddie. TALF will add to existing commitments to support the commercial paper market which is currently worth almost $2,000 billion.
Blog, Phillip Butler
World Economies
The true effect of the current financial crisis’ impact on world economies has been revealing itself in the later half of 2008. Economies around the world have been forced to quickly implement extensive strategies to tackle the deterioration in both the global and domestic economy. The United States’ strategies may have been implemented to avert world economic meltdown, having pumped almost $2 trillion into the global market place, but conversely the highly internal policies implemented by emerging economies seem to have had a greater impact on world markets. The fear of falling demand for commodities in China has fuelled an 80% drop in oil prices over the four months to November, while the two US bailout plans stabilised the equity market at a lower threshold.
Here is a brief account of some of the most influential economic powers written by Phillip Butler, currently on placement at the Bank of England, and contributed to by Christian Esposito and Bhavin Dhanani, currently on placement at Goldman Sachs and Morgan Stanley respectively.
The questions we are asking are;
· Which economies will suffer the greatest economic impact?
· Which economies are likely to be dragged into the longest deepest recession?
UK
With the Bank rate at the lowest level for 50 years, unemployment and debt rising, technical recession all but official and a stalling housing market is the fiscal stimulus package announced in November enough to stop the UK entering a long deep recession?
Strictly BIF view: A Recession that will certainly compete with the 90’s and 80’s, all dependant on the success of the fiscal package and the credit stream made available.
US
Job losses have breached the 1990’s recession lows and are inevitably going to sink past the trough of the mid 70’s. Bank rates calamitously close to the dreaded 0% and the country has a budget deficit of over $400bn with predictions suggesting it will breach $1000bn in 2009 after the full implementation of its TARP and TALF initiatives.
Strictly BIF view: More likely to see a deep painful Recession than a long drawn out depression.
Euro Area
Already in recession and consumer confidence appearing to be the weakest since the formation of the Economic area, but bank rates seemingly well placed for more manoeuvre in the short term will the Euro area avoid the worst?
Strictly BIF view: Recession but eastern economies may help the Euro Area to a quick recovery.
France
After releasing a €26bn fiscal stimulus package to alleviate fears of a sharp downturn in the economy experienced an economic unicorn of third quarter. Unemployment however stands at 8.2%, 0.5% above the euro zone rate, and this is set to get worse as France’s manufacturing sector begins to feel the brunt of slowing consumer spending. France has some good news though the country is set to leap frog the UK in terms of economic size due to our speed of economic decline and the weaker pound.
Strictly BIF view: Long recession fuelled mainly by its proximity to other floundering European countries.
Germany
Output in the Euro area’s largest economy fell by twice that of the euro zone average for October at 2.1%, signalling the usually robust economy will suffer a third straight quarterly retraction at a forecasted rate of -1.5%. This contraction rate is the largest since the country’s reunification in 1990, there is yet to be any substantial fiscal stimulus offered due to policy maker concerns at throwing money at the impending recession.
Strictly BIF view: Long deep Recession of which only the UK and Spain can compare.
Spain
It is hard to extract anything but negative news from the Spanish economy which is set to enter recession for the first time in 15 years. The country’s unemployed number is increasing rapidly, the housing market is collapsing due to an increase in supply and PMI data is showing 28.2, especially bad when economic growth starts at 50.0.
Strictly BIF view: Long Recession set to last into 2010.
Italy
If it was not for one single quarter of positive growth in Q1 of 2008 then Italy would already have had a full year of retraction. However this is not a surprise as Italy has been in recession four times in the last ten years. A lack of control over monetary policy and not being a European super power could spell trouble for the one of the world’s most Jekyll and Hyde economies?
Strictly BIF view: Recession guaranteed for 2009, but will it make a quick recovery for 2010 amid fears of catastrophic inflation.
Japan
Interest rates are anchored at their historic lows, they have not passed 1% since 1995. The economy is technically in a recession and revised Q3 GDP figures show a worsening in the economy. Fears have increased that the 2nd largest world economy could be facing the longest contraction ever. This is primarily fuelled by the fact that Japan has not fully recovered from the last banking crisis.
Strictly BIF view: Pro-Longed Shallow Recession.
China
Industrial output has fallen to 5% the lowest level since the Asian Crisis, exports have fallen nearly 20% since October and GDP growth is projected to fall by as much as a third. Will the rigorous interest rate cuts, 4 trillion Yuan stimulus package and a desire to keep growth above 8% be enough for the economy which could save the world from a 1930’s style recession?
Strictly BIF view: Little chance of recession unless the Chinese economy implodes from reverse migration and a collapse of world demand, worst case scenario would suggest 5% growth for 2009.
Russia
With natural resource prices falling following the lack of global demand, the Russian economy is being hit hard. Construction output data shows that yearly growth has halved indicating that Russia could be the hardest hit out of the so-called BRIC’s. Standard and Poor’s seems to agree with this hypothesis it has downgraded Russia to just two places above Junk.
Strictly BIF view: Flirting with recession, but growth of 2-3% should be realistic, however this is half the GDP growth of the current decade.
India
Expected GDP growth of 6.8% for 2008 and yet India needs to prepare further for second wave of tightening in the economy. With interest rates cut by 100bps to 6.50% and a 280trillion rupee injection planned it is hard to believe the Indian economy will stutter in 2009. Contrary to this, is this the time for the economy which is less reliant on foreign demand to outpace its BRIC cousin China?
Strictly BIF view: Markedly slower growth but will lie between 3-5%.
Brazil
Boosted by the higher than expected 1.2% Q3 GDP growth, the Latin America economy is on course to achieve above 5% growth for 2008. However with interest rates at 13.75% and the financial crisis spreading to the tenth largest economy the unemployment figures are set to increase as businesses retreat.
Strictly BIF view: Growth will slow, but with Interest rates in their favour recession should be a long way off.
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Only 0.24% of the shares from The Royal Bank of Scotland's (RBS) recent rights issue were taken up. The offer price of 65.5 pence per share was significantly higher than the market value. As a result taxpayers made an immediate paper loss of £2.4 billion. The rights issue takes the Government's holding in RBS to 57.9%.
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The UK's biggest building society, Nationwide, has decided to stop its standard variable rate mortgage to all new borrowers. It will still be available to customers on fixed rate deals.
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The Land Registry has stated that house prices across England and Wales fell by 10.1% in October compared to a year ago. The average price of a house is £165,529 in England and Wales.
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On Saturday OPEC ministers met to discuss oil production after recent falls in the price have eroded income to oil producing nations. In the end it was decided to leave the oil quota unchanged. However, it was mentioned that next month's meeting may see a cut.
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Theo Paphitis was this weekend trying to mount an eleventh-hour rescue deal for Woolworths' high street stores, saving thousands of jobs.
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Spain and Italy have both announced plans to boost economic prospects. Italy will use €80 billion to provide tax breaks for the poor as well as mortgage assistance. Spain's €11 billion stimulus plan will attempt to create 300,000 jobs after unemployment reached 12.8% in October. No other country in the eurozone has a higher level of unemployment.
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Inflation in the eurozone has fallen sharply. Eurostat said that the figure was 2.1% in November compared to 3.2% in October. Meanwhile unemployment has risen across the region, fuelling speculation that the European Central Bank will cut interest rates.
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Commerzbank, the second largest bank in Germany, has announced its takeover of Dresdner will be completed earlier than expected. In addition, it will pay 48% less than what was originally agreed. The deal is now expected to be finalised in January.
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Commerzbank, the second largest bank in Germany, has announced its takeover of Dresdner will be completed earlier than expected. In addition, it will pay 48% less than what was originally agreed. The deal is now expected to be finalised in January.