Weekly Financial News Roundup
The opening gambit of the financial week was the announcement on Monday of a second rescue plan for British banks. Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling are proposing to pump hundreds of billions of pounds into banks in an effort to revive lending and bring down borrowing costs. Mr. Brown accused the troubled Royal Bank of Scotland – in which taxpayers are expected to take a stake of over 70%, under the new plans – of taking "irresponsible risks", while banks which are yet to receive an injection of taxpayers' money such as Barclays and HSBC, are expected to exchange shares for inclusion in a new loan guarantee scheme. The scheme will grant the Bank of England the power to lend to businesses directly with £50 billion set aside expressly for this purpose. Despite a total commitment of nearly £1,000 billion since the credit crunch began, in 2007, Mr. Brown denied that he was "writing a blank cheque" for banks, according to the BBC website.
The headline news on Tuesday, of course, was the inauguration of Barack Hussein Obama as the 44th President of the United States, and the first African-American to sit in the Oval Office. Millions of people – accompanied by no fewer than 40,000 security personnel, on duty, or on standby – gathered in Washington DC to listen to Mr. Obama be sworn in, and there was a sense of history in the making across the country. Mr. Obama faces no easy task in the months, and years, to come, however, with the U.S. economy facing its worse crisis in living memory, not to mention ongoing conflict in Iraq, Afghanistan and the Middle East.
The United Kingdom, however, was still suffering from the repercussions of the record losses revealed by Royal Bank of Scotland (RBS) on Monday. RBS shares, themselves, rose by 6% – after a 66% fall on Monday (which, itself, followed a 90% fall during 2008) – but the effects of the announcement were felt across the banking sector, with Barclays and Lloyds TSB down 16% and 26%, respectively, on Tuesday.
Concerns about the banking sector, in general, coupled with Mr. Brown's announcement on Monday, undermined confidence in Sterling, which slid to its lowest level for 8 years against the dollar, at $1.38, and a fresh record low against the yen, at ¥127.47.
There was some good news for British consumers, however, with the release of figures from the Office of National Statistics, which revealed that inflation fell sharply to an annual rate of 3.1% in December, compared with 4.1% in November. The fall was attributable, largely, to the temporary, 13-month cut in the standard rate of VAT announced by the Chancellor in November, but high food and utility prices still kept the rate of inflation above some forecasts.
Wednesday, too, brought the less than heartening news that unemployment in the United Kingdom rose by over 130,000 between September and November, bringing the total number of people out of work to 1.92 million; this represents the highest level of unemployment since the late Nineties, and still does not take into account tens of thousands of job losses since the end of November. Employment minister, Tony McNulty was quoted on the BBC website, saying that the figures were "very disappointing" and would "get worse before they get better."
Better news on Thursday, however, with Bradford-based supermarket chain Morrisons announcing a increase in like-for-like sales of over 8% for the six weeks to 4th January, after what it described as an "excellent" festive period. The announcement followed similar, albeit smaller, increases of 2.5% and 4.5% reported by Tesco and Sainsbury's, respectively, last week. British Gas, too, announced that it will reduce standard tariff gas prices during February. The proposed 10% cut, which will be implemented on 19th February, will reduce the average gas bill, annually, by £84, and benefit more than 7 million households, according to British Gas. The announcement received only a lukewarm (no pun intended) reception, however, with the consensus from consumer bodies being that, even if the proposed cut is reflected throughout the industry, it is "too little and too late" to impact on winter fuel bills.
The principle financial news towards the end of the week was that Britain is now, officially, in recession, following a 0.6% contraction in GDP ("Gross Domestic Product") in the third quarter of 2008, and a worse than expected, 1.5% contraction in the final quarter. This satisfies the official definition, of falling GDP for two consecutive quarters, but, while a fall in the final quarter was anticipated, it was the magnitude of the fall that took some people by surprise. In fact, the 1.5% fall is the largest, quarter-on-quarter, since 1980, and sent Sterling tumbling to its lowest level against the dollar for 23 years, while the FTSE 100 index fell more than 2%, to below 4,000 for the first time since December, 2008.
Bad news, for Barclays, too, with the revelation that the terms and conditions of investment in the bank by the Abu Dhabi Royal Family effectively prohibit the British government from taking a significant stake in the bank, without control passing to the Middle East. Essentially, a clause in the £7.3 billion deal allows investors in Abu Dhabi and Qatar to receive more shares for their money, if the bank attempts to raise capital from the government before the end of June.
Elsewhere, Chairman of the Financial Services Authority (FSA), Lord Turner, announced sweeping changes to the regulation of banks – including higher capital ratios, and more stringent liquidity requirements – on Thursday. He criticised the industry, as a whole, for inflating profits at the expense of increasing risk, and threatening financial stability. Under the new proposals, banks will be required to accumulate capital buffers – at a substantial level, well above the minimum – when economic conditions are favourable, such that they are adequately capitalised if the economy takes a turn for the worse.