If Greece goes bust....

Boris Johnson's vote-attracting column in today's Telegraph might get a few knowing nods from the anti-coalition chapter but is this just his love of Rome clouding his vision?

Having read his book comparing the Roman Empire to the EU, I am a bit lost as to where he puts the Greeks in the same scenario being as most modern civilisation, law and sophisticated language in Europe originates from the Greeks. It now seems he has nailed his colours to the mast. Let the devils sink.

The Euro is defunct, the EU fiscal policy is to be shredded and let any country that cannot hold its own whither and die. Heath was a traitor for taking us into the EC, Brown a genius for keeping us out of the Euro. Oh Boris, where do you stand? It's dog eat dog out there, survival of the fittest and one less mouth to feed at the table means more for the rest of us, perhaps?
There is a slight problem with this noble argument. Firstly, should we let Greece fail then they take all that nice money we lent with them down the creek without a paddle. Secondly, where does a bankrupt country go? Do we all pick over the assets and choose which relic we want, how many olives can we carry away, which Greek island becomes ours and do we eat all the moussaka we can? Thirdly, where does it leave the global financial system?

To think that Greece can fall into oblivion peacefully all by itself is naive in the extreme. You play the game of high risk finance in a globalised money market and you pay the price. Now we are into the realm of picking and choosing who we want to cull. We saved our banks who participated in this craziness, now we think we can play God in the world in which we allowed them to participate. Think again.

You see, we could not afford to see Dubai go down - far too many Brits have interests over there. We couldn't let Ireland go down, they represent a large trading partner. We wouldn't let Portugal or Spain go down as we have properties, holidays and wine interests to protect. Italy is far too nice a place as we like their fast cars, low sense of morals, football and fashion. Greece? What have they ever done for us bar a few nice holiday resorts and feta cheese?

So it's a nice vote winner to pick on Greece. Easy target, no one cares if it disappeared off the map.

Or would they? It's a small fact but if Greece went down an estimated 7% of entire EU financial liquidity disappears. Drachmas have no value if they were to start again so who would trade with them? Here's a thought, when you look at the 'Law of Unintended Consequences', when Argentina defaulted on its debt back in 2002, 20% of the Italian pension system went with it meaning hundreds of thousands of Europeans lost their life savings. For the UK, we have around £14bn of lending exposed and £3.4bn of Government debt. Money we can afford to lose?

The resultant aftermath of a major default let alone bankruptcy is the cost of borrowing goes up for others. For the other members of the PIGS (Portugal, Italy, Greece and Spain) this would be disastrous as they would be the next in line to be cut off. But hovering precariously around the edges are countries like the UK. As we battle our own issues, what a lovely idea that we can be cold-hearted to those in a worse position? The way I Iook at it is that that just bumps us one place forward in the queue of countries next to go on the Credit Rating black list. And what joy that would be for us all.

On this subject, France and Greece each have exposure of $79bn to Greece and Germany a further $43bn. For the knock-on PIGS debt, Britain's exposure to PIGS Government debt is actually the largest in Europe. Of all the PIGS countries, the total debt exposure in the banking system is a mere $2.9 trillion, so no worries if there is a domino effect.

So as we sit here pontificating and gloating as the Unions prepare to make our lives hell as we suck in our breath to make our girth fit our financial belt, we are but a few steps away from a similar fate. The Euro was wishful thinking at best but it's way too late to start bleating about it. We live by the sword in financial terms, we die by it. This isn't like a bank failing, there are no insurance schemes, it is the slippery slope into financial gloom.

Beware, Boris, what you wish for.......

Social Economics

I am absolutely sure I am using the term 'Social Economics' wrongly. Then again, I am not an economist or a real socialist for that matter. However, I probably know as much about economics as those who profess to by the state in which we find ourselves.

Recently, I blogged on National Debt being the new sub-prime but in the heart of that piece was the idea that external markets are watching our economy closely with a keen view to see how we can tackle our budget deficit and therefore be able to pay our debts. Given much of our National Debt is being subsidised by Quantitative Easing (QE) money to the tune of £200bn, soon it will go back on the open market and we will see what the real world, with real money, thinks of our ability to service our debt. There are many who now believe that as we leave a cogent strategy to tackle our debt until after the election and have built our strategy to date on using new money which we don't have to support ourselves, that Britain is in a precarious state.

It was described by an editor for the FT the other night as a period where a boy scout is trying to light a fire - the QE money is the firelighter which is burning brightly but there is little evidence that it has lit the fire that will be our economic recovery. But I would argue there is far more at stake here.

In my idea of 'Social Economics' which has nothing to do with its real definition, our future relies on two aspects which are not classical economics. 1) Politics - we are in a period of hiatus, marked by our lack of enthusiasm to actually do anything about the budget deficit, not even a spending review in preparation which is due to the imminent General Election. This may be understandable as cost cutting is not popular and it seems that inaction is as voters have actually polled in favour of the Government in recent months. Perhaps it is 'Denial', my age old theme - put your head in the sand and the problem will somehow right itself. Gordon Brown may be foolish to start believing in free market economics at the wrong time, especially as he believes it's what got us into this mess. The issue here is that the longer we delay and not tackle the problem, the worse the problem gets and the cure will need to be more drastic - in both spending cuts and tax rises.

2) Hand in hand with this comes the mood of the people. We have just had a dramatic illustration of how voters can change Government policy as Iceland has refused to back its Government in paying our Government compensation for those who lost savings in Icelandic banks. I have a great deal of sympathy with the Icelandic people - while they had many good years, by the end of this year they will have lost almost a third of their take home pay due to the banking disasters, and they are not a rich people. Besides, it was our Government's decision to repay the losses to individuals, not theirs. What it means is that there is a breaking point and people will have a finite limit as to how much they believe they can pay in taxes which is fair, while the same may not apply for spending cuts as they can be far more localised or general. The clear learning point is that if there had been a referendum on the bank bailout beforehand, it is suggested we would have all voted against it.

The outside world will watch closely as to what our breaking point will be. Astutely, Lord Mandelson has understood that there is a limit that people will pay in taxes but I don't think he was referring to us but to bankers who are royally miffed about the windfall tax, on top of the announced 'super tax' on those who earn £150,000 or more plus the new curbs on City bonuses. In a microcosm what bankers do about it will illustrate a wider reaction. Let's face it, if bankers get cheesed off their employers will relocate them and they will rise again elsewhere to earn their money. For real people like you and I, we will have to pick up their share of the tax burden and the rest.

So the question arises, how much will we all tolerate in Britain? How much are we prepared to sacrifice in order to keep bankers here and London as one of the biggest and most influential of financial centres? Are we prepared, as Iceland is, to say, 'Up yours, take your Casino banking elsewhere and the fools that play it' or are we realistic enough to know that we cannot have a Britain without the support of the City, its earnings and influence?

I am sure there is a line that we all cannot cross. I am also certain that the later we leave that 'stress test' the worse it will be. I do believe that part of the attempted and almost farcical leadership coup at Labour was fuelled by the PM's inaction on the whole matter. While it is nice to talk about halving the budget deficit and talk generally about the numbers, the reality is that every voter in the country would like to know what it means before they vote. Yes, it's true we are stupid lot - we think we are still relatively prosperous and that if house prices rise again, boomtime will be back - Christmas and new year sales spending shows we are that daft. It seems we have no idea what really may happen after the election or we are just in denial that it will not deteriorate.

The reality is that after the election, when the economic mire hits the fan, there will be pressure on two sides - 1) to impress the markets that Britain is doing more than enough to reduce its budget deficit and pay its debts and 2) the people will not like the bitter medicine we will have to follow to cure us of the years of excess.

It's at that point that my 'Social Economics' will kick in. Hubris and hiatus are two funny words but we have both to contend with right now and both are all about manipulating our minds and votes. Personally, I would rather know how much all this £1.3 trillion of bailout will cost me in real terms before, not after the election, and how parties are going to give us cast iron guarantees it will not happen again.

I see nothing of it from any party right now - which means we will cast our vote once again, as at the last election over Iraq, without any of the real facts at our fingertips. Some things never change.

National Debt - The New Sub-Prime?

If sub-prime mortgages in the US really did cause the Credit Crunch then perhaps National Debt will be the cause of the next Crunch.

Newsnight featured a piece on it last night and the subsequent discussion saw Will Hudson of Workgroup defending Government policy saying there was a clear pathway to cutting £100bn off the budget deficit. He seems to know a lot more than others, possibly the Government itself as today Peter Mandelson, fresh from giving us an extra Bank Holiday to celebrate the Queen's reign (how appropriate but which Queen?) is moving to allay market fears that Britain really knows what they are doing about cutting the deficit.

One thing is clear, it is no longer simply a matter of economics. There is plenty of techno-speak on what it's all about but it boils down to politics and the stomach of the British people to fund the deficit. The politics is all about the approach to tackling the deficit - current Government thinking is no better than to continue spending and hope for growth, making a few cuts and raising taxes after the election so as not to spook people. Conservatives seem to be lost in a parallel universe where they seem to have the same recipe but different ingredients. The Lib Dems - yes, well they always seem to be a bit lost on such matters.

What it boils down to is this - there are going to have to be drastic spending cuts and these will need to be deeper and more harsh the longer we leave it and we will be paying considerably more tax in the future. The people of Iceland just voted with great drama about how they feel on paying for the mistakes of their banks in allowing deposits from foreigners to burn elsewhere, there could be a time when the British voter wakes up and smells the whiff of bull enough to know that we are being fleeced for huge economic hubris.

The point being, should we slither down this pathway then Britain will almost certainly look like, if not become, a bad debt risk in the eyes of the markets. There is a view, expressed last night, that the Government may even flirt with being a bad risk before galvanising to do something about it all - like being put on a watchlist as many other nations are now. The reality is that many nations, some richer than others, are now showing warning signs that their ability to service their national debt is worsening. Britain is not yet one of those nations but as the Quantitative Easing is due to exhaust soon, our National Debt will become the focus of the open markets and at that point we will get the first clear indication of how others see our true economic condition.

I think we are in for a rude surprise.

Icy Reception

Iceland has agreed to pay a sum equivalent to 40% of its GDP as compensation for the money lost by Dutch and British savers in the collapse of online bank Icesave.

Icelandic voters are up in arms, seeing this as taxpayers coughing up for the mistakes of businessmen, to the tune of almost €12,000 per person in a country of only 320,000 people. In terms of lost opportunity, the interest on the payments alone would run the cost of their entire health system for six months.

Icesave attracted savers and Local Authorities alike through its marginally higher interest rates but when it collapsed it was not covered by the FSA compensation schemes - something that savers had ignored in order to get at the extra savings interest. One could argue convincingly that the apparent lack of care by the FSA and the savers allowed this to happen while taxpayers in Iceland can rightly say that they should not be liable for compensation for the mistakes of a small group of greedy businessmen who happily risked the deposits on crazy products as a result.

In Britain, even before the banking collapse, saver deposits were protected to a certain extent and the Government moved in quickly to support all deposits, following Ireland's lead. The FSA has always had such a scheme - but why should it support the deposits of foreign savers? And should Iceland have a similar scheme?

Perhaps more importantly was the question of why several local authorities, including my own, were depositing funds in such saving schemes when they knew they were not protected by the FSA? It seems that not a single person in Local Authorities lost their jobs for not checking this and many such staff in charge of the management of funds do not even have formal accountancy qualification. Yet, such mistakes have to be funded by private citizens who pay tax in Iceland.

The Icelanders are not taking it lying down. A large petition has been put together and around 56,000 or 23% of Iceland's voters have signed it to try and prevent the payouts. If only the British voters could have been bothered to do the same perhaps we would have saved paying out such massive blank cheques to save the careers and fuel the wealth of a tiny percentage of this nation's citizens or at least made sure there were enough caveats to make them all culpable should it ever happen again.

But that's the stoic Brits for you. £1.3 trillion bail out to save rich bankers? Why not.

Shopping At Iceland

As the financial implosion occurred around us, Gordon Brown manfully rallied around saving worthless banks and helping savers. As he battled to put fingers in the dyke, so to speak, another calamity came from Iceland.

As Iceland melted under its own financial follies, it was found that not only had many UK savers, who had been lured by excellent online savings rates at Icelandic banks, but also many UK Local Authorities had several £billion between them in accounts which were rapidly tending to zero. Brown, warrior-like, thrust an accusatory finger at them demanded the money back or he would sue. Iceland waved a frozen two fingers at him and asked with what shall they pay?

The country was on its knees, virtually bankrupt.

In fact, ministers in Iceland reckoned they could name just 6 individuals who had caused the financial disaster via vaulting ambition, one of whom, a Director at Kaupthing, is under investigation for fraud. Icelandic companies owned many UK High Street shops including Iceland itself and so the knock on effect could be huge. If only we could have named our individuals beyond Gordon Brown himself. The savers in Icelandic banks would have to wait a long while to get any of their money back.

Iceland looked inwardly for salvation. At least it could feed itself if it came to it. Then some bright spark came up with an idea. We have seen before small islands trying to capture specific markets - in Mauritius, for example, there are many high fashion factories for companies like Ralph Lauren, while in the Channel Islands they tried to use VAT loopholes to attract music download business having already attracted CD and DVD distribution. Sooner or later such opportunities dissipate as the world moves on or the HMRC closes the loophole. But Iceland has an ace card.

Today, Iceland produces all its own energy. It is limitless and freely available, all they pay for is harnessing. While Britain scrabbles around laying vast cables between here and Norway to get cheaper electricity, Iceland has plenty for itself and much more. By tapping into the vast heat reserves below its surface, Iceland has access to vast amounts of the most renewable energy of all - the centre of the earth. And it has another unique, lots of cool water surrounding it. This unique combination has opened a credible business opportunity that has powerful selling points. It has already started to build specialist, state of the art premises to house vast server farms. As data grows exponentially, Iceland's unique combination of hot and cold means it can both power the servers cheaply with no impact on the CO2 levels and cool them again as it takes almost the same energy to cool them as power them under normal circumstances.

Banks and companies like Google, who alone is rumoured to have over a million servers worldwide, are already expressing interest and vast fibre cables are being laid to handle the incredible bandwidths required to transport the data to and from the island. Iceland's location means it may not ideal for the kinds of speeds required for certain companies, but for the plain old internet, it is more than acceptable.

As Britain fire-sells puny assets in an attempt to make ends meet that looks like people begging to the homeless, Iceland has a future which is exciting and potentially unique. Of course, there are issues about housing so much IT real estate in one place - it is the terrorist's dream - but if all these can be overcome, Iceland will have an amazing future that makes our pathetic efforts look as they are. We spent all our money to save a few rich people - Iceland is using all its resources to tap into something that can make it rich and powerful.

Icelandic bankers may not be getting fat bonuses this year, but they can at least go home thinking of a future that is worth investing in. Our boys will be rich again this year as they convert rubbish, toxic debt into £billions of profit right in front of our eyes and so just delaying the obvious and the inevitable.

Guess who stands the best chance of a sustainable future?

Where Will You Go To, My Lovelies?

Over the weekend some 100 public figures lobbied the Chancellor, Alistair Darling, to curb the 'excessive pay packages' of the few, elite high earners in the banking and financial system, describing them as 'Masters of the Universe'.

The Chancellor himself, in fairness, had already fired a few warning shots about curbing some of the bonuses and particularly guarantees, which is a perennial sore point, claiming he would give more teeth to the FSA to impose tighter rules. He has a problem here as the FSA is crammed full of ex-finance types who bear allegiance to their former colleagues - or worse still, they are the failed bankers who were not competent enough to dip their snouts into the trough effectively and so are not quick-witted enough to catch the banks out while harbouring petty grudges.

It boils down to what the rules are and how the FSA and Government allow banks to operate within them. We have already seen a spate of neat tax avoidance tricks announced by clever accountants on the web who will help anybody who earns above £150,000 next year to minimise their tax bills with some shabby tricks on paying into new companies, some of which are not imaginative enough to scare the HMRC. But it will be the banks who become the most devious as they are absolutely obsessed by the idea that if they limit the bonuses of their 'Top Talent' then they will have a mass exodus of the high-flying high earners to places where the pay is better.

And so where will these little darlings go?

Well first of all, do not underestimate the ability for banks to invent clever schemes to get round the issue or for us to forget the fact that the Government is currently paying around £11m a year in fees to investment banks for advice on the whole issue, let alone around £29m in legal fees. Certainly we may see more of their top traders become non-domiciled so at least more of their 'hard-earned' bonus is spirited away from the thieving hands of the Chancellor. More likely, we will get dummy companies set up and these will be paid lavish 'Consultancy Fees' - and these companies, like strange quantum particles, will exist but briefly to liquidate cash on a capital dispersal idea and avoid things like National Insurance. The fact is that there is nothing in the FSA or Government thinking about 'Consultancy Fees' and I dare say we shall see more of this flying around. In the short term there are stock options which are handy as the market gets back some of its old ground but that is likely to not appeal in the long term as traders like ready cash and they certainly don't want to be held accountable for any collapse in the bank's profits or share price - they have proved that conclusively already.

There will be plenty of 'Guns to Heads' at the moment as the profits clock up on the banks' bounces and traders will be dismissive of their employers' excuses. They will be playing the 'If you don't pay, I'll go to somewhere that will pay me what I'm worth' cards. Theoretically, they have a point as the problem will be that if Britain acts in isolation then they will lose these little mites to other banks who are out of reach of our 'punitive' bonus scheme allowances. This will mean that British banks will become uncompetitive in the 'New World Order' that Gordon Brown talked of.

As the Government wants to show the public it is curbing the excess and high risk strategies by banks, but they do not want Britain to lose out as so much of our economy depends on earnings from the City - there is a dilemma. One way would be to impose windfall taxes on every financial institution for the next 10 years in order to pay back what is generally owed. Of course, most banks would then put their HQs outside of the UK and thumb their noses at us which would be counter-productive but it may be a start that each of them pays exactly what tax they should do from now on and any scheme to avoid tax is fined double the tax owed. It still doesn't solve the problem.

Traders will depart for sunnier climates - to the US or Asia, wherever the banking system allows excessive bonuses to be still earned. This is where I see an advantage. Let them go.

Skimming Off The Highest Risks

You see, the whole system was brought to its knees by the actions of a comparatively small group of people employed in high finance. They say in Iceland you could identify just 6 people who actually nearly bankrupted the whole country and in the City you could draw up a similar but more extensive list. I would do so and I would say to those who think that they can get jobs in other countries, in banks who are willing to pay excessive sums - go. It may well produce a 'Premier League' of banks but frankly it will put all the risk into one area. UK banks can then recruit a new wave of traders who can be weaned on sensible, lower risk banking that never exposes Britain to the kinds of problems we have seen in the last two years.

By skimming off those with the highest risk-taking index and letting them go elsewhere, we make Britain a safer place. And we need it. Should we just lurch into another credit crunch and recession in the near future then we risk simply not having enough resources to bail ourselves out with. Already there are predictions from established sources that by 2014 that British Sovereign Debt could be almost 100% of GDP and we will be paying for every penny of that borrowing, roughly double what we pay were paying for last year.

So my solution would be to let the little blighters go to wherever they think will pay the money for them. Go exercise that egotistic point of view they have that they are 'Masters of the Universe' and far more more intelligent than the rest of us. At some point, I dare say that someone will realise that in order to keep the scam of their elaborate schemes going you need every bank in the world to be as bad at mathematics equally and hopefully one or two will find out how to use calculators and realise that all does not add. Perhaps it will be those banks who first realise that it may be better to trade things you know the value of who will break away from the schemes and focus on logic rather than hot air. Perhaps that is what will help heal the banking system and make it stronger for the future, and perhaps by having a few banks break away more will follow leaving only the very high risk banks in one place. And if they want to be the super-rich ones and pay incredible bonuses, then fine.

Let's just make sure it is the British banks that lead us out of the high risk zone and the first step will be to unequivocally stop high bonuses being paid on high risk business; the second will be to curb high risk business - full stop.