The Bank of England’s unorthodox actions to turn around the UK’s flagging economy were reaching the limits of their effectiveness, Sir Mervyn King has warned that Britain faces a prolonged economic adjustment. In a bleak assessment of the economy and the ability of monetary policy to generate a strong recovery, the Bank governor urged Britain to be “patient” in the face of a difficult global economic adjustment, which may force younger generations to “live under its shadow for a long time to come”. Sir Mervyn urged banks, in particular, to recognise the need to accept many of their pre-crisis loans would ultimately go sour. “I am not sure that advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values and recapitalisation of their financial systems,” he said. Sir Mervyn warned there were limits to the Bank’s policy of quantitative easing, under which it prints money and injects it into the economy by purchasing bonds: “Printing money is not …. simply manna from heaven. There are no short cuts to the necessary adjustment in our economy,” The Financial Times explains.
The European Commission has backed plans for 10 countries to impose a financial transaction tax (FTT), claiming the controversial levy will “raise billions of euros of much-needed revenue”. Jose Manuel Barroso, president of the commission, rebuffed complaints made by other member states – most vocally Britain – and said he was “delighted” that the group was pushing ahead with the plan. Mr Barroso said the legal requirements and conditions had been met and he did not believe the tax would undermine the single market if it were imposed across limited parts of the European Union. “I am delighted to see that 10 member states have indicated their willingness to participate in a common financial transaction tax,” he said. “This tax can raise billions of euros of much-needed revenue for member states in these difficult times,” The Telegraph writes.
BNM Mare Nostrum, and other mid-tier “Group 2” banks such as Popular, Caja 3, and Liberbank, have little chance of tapping the markets to cover most of their capital deficits, according to Troika officials. They are also losing patience with the glacial pace of cuts at Bankia and other nationalised lenders such as Catalunya-Caixa and Banco Valencia, according to the Spanish newspaper El Confidencial. Brussels fears a repeat of the fiasco at Bankia, which had to be rescued just weeks after its recapitalisation plans had been approved. “We have had too many bad experiences with financial restructuring in Spain to be sure the plans will work this time,” said one official, The Telegraph reports.
BAE Systems has pledged to stand by chairman Dick Olver and ignore attempts by its biggest shareholder Invesco Perpetual to oust senior management following the failure of the defence company’s merger talks with EADS. The company claimed in a statement that Invesco’s views “differ widely” from the majority of the company’s principal shareholders and that the board remains “fully supportive” of the directors, The Telegraph explains.
Royal Bank of Scotland has come under further pressure to sell its Citizens division in the US and make more cuts to its investment banking business. The future of Citizens was re-ignited yesterday after it emerged there had been talks between RBS and the agency in charge of the taxpayers’ stake. Jim O’Neil, chief executive of UK Financial Investments (UKFI), told MPs: “I would confirm that among the strategic issues we have discussed with management are the US operations and the investment bank. “The investment bank shape and size ultimately should be smaller than it is today.” O’Neil said that all investment banks were dealing with the capital requirements of Basel III and he felt that most of them would consequently be smaller over time, The Scotsman reports.
A Chinese sovereign wealth fund is set to become a landlord in the UK’s most important office market: the City of London. China Investment Corporation (CIC), the country’s $410bn fund, is in talks to buy Deutsche Bank’s UK headquarters for £250m. According to people close to the situation, Invesco, the asset manager, will buy the 312,000 sq ft office block on behalf of CIC. Invesco declined to comment. The building, which produces an annual rent of £14.3m, is being sold by Kanam, the German open-ended real estate fund, which was left with the property when Malaysian fund manager Permodalan Nasional Berhad (PNB) chose not to include it in a portfolio it acquired from Kanam earlier this year, The Financial Times says.
At a moment when many of its crisis-hit Eurozone partners are left counting their pennies, Germany is seeking to count its gold bars. The German Federal Court of Auditors have called on for the country’s central bank to carry out a physical inspection of the gold reserves it stores at foreign central banks because the precious metal holdings have never been fully checked. Germany’s Bundesbank owns nearly 3,400 tonnes of gold. Like many central banks, it stores part of its reserves in vaults at foreign central banks, including the Federal Reserve Bank of New York, the Banque de France and the Bank of England, The Daily Mail reports. Yesterday, Germany’s federal auditors said in a report to the Bundestag lower house of parliament’s budget committee that the Bundesbank should, in accordance with commercial law, negotiate the right to physically inspect its reserves with the three foreign central banks. That leads the newspaper to ask if Germany knows something that we do not.
