Category Archives: Financial Markets

Britain, Economic, European Union, Financial Markets, Government, Politics, Russia, Society, Ukraine, United States

What will happen next following the crisis in Ukraine?

ECONOMIC REALITIES

Intro: Economic havoc and a global slump could materialise from the crisis in the Crimea

So far, financial markets in the West have remained remarkably undisturbed in the face of the crisis unfolding in Ukraine. Following Crimea’s referendum at the weekend, which effectively sealed Vladimir Putin’s grip of the Ukrainian peninsula, sanctions were always likely to follow. Whilst, then, we may anticipate just how long the sanguine calm will continue, Western leaders should also be careful of supplanting diplomacy with threats to Russia that they are unwilling or unable to back up. The decision by the European Union and United States to impose sanctions on several Russian officials is a limited response to the breach of international law that has taken place in Crimea. The measures include travel bans and the freezing of assets against individuals who were deemed to have played a major role in the referendum – a vote, officials say, in which 97 per cent of voters backed a breakaway from Ukraine and, instead, opted to join the Russian Federation.

In the years since the dissolution of the Soviet Union, Russia has steadily become more integrated into the global economy. We know that many rich Russians have shifted their gains (ill-gotten or otherwise) into more stable and secure environments, such as investing on the London Stock Exchange or by diversifying their stocks in the UK property market. In actual fact, more money has flowed into Russia than out. According to data from the Bank for International Settlements, foreign owned banks have lent the country at least $260 billion. That is nearly double the value of its estimated assets in the West. As a consequence, Russia’s bilateral trade has risen to more than $100 billion annually. Almost a third of Europe’s gas, coal and oil imports come from Russia, and there has been a huge upsurge in direct investment by foreign firms.

Rhetoric used by the international community implied that there would be consequences if the referendum went ahead while the peninsula was still occupied by Russian troops. No doubt, Mr Putin will have considered the penalty a price worth paying. The question now, though, is what will happen next. Washington insists the screw will be tightened if the situation were to escalate in Ukraine – a distinct possibility that could happen fairly swiftly since the aim of the Crimean separatists is to secede from Ukraine within a month. They also aspire to adopt the rouble and by joining the Russian time-zone.

Whilst a military response to Russian aggression has already been ruled out by Western leaders, meaningful sanctions are not really much of an option, either. A full-blown trade-war would inflict serious damage on both sides. However, capital flows between Russia and the West are already in a parlous state in anticipation of lesser action, including assets freezes and travel restrictions already imposed. In order to defend the rouble, Russians are withdrawing billions from Western banks and selling off US Treasury Bonds. Mr Putin also raised interest rates to 7 per cent; a move that will discourage capital outflights from Russia to the West, a rate of interest that will be far more attractive for Russians to invest at home. The West seems certain to reciprocate by dumping Russian assets.

Yet, this all comes at a particularly delicate time for the world economy. Emerging markets, including China, have rapidly slowed down; the Eurozone is expecting a period of deflation to start anytime soon; and, America’s economy has started to inflict severe withdrawal symptoms to many countries around the world following its tapering of quantitative easing. The global economy may be just one sharp shock away from lurching into another recession.

A standoff with Russia over Crimea’s breakaway is the last thing the world needs. Economic considerations cannot surpass the higher purpose of defending international law, and as such must be secondary to it. Nonetheless, the interplay between politics and economics is what is making this situation so dangerous and destabilising. All concerned should be aware of just how very much more disruptive this crisis could yet become.

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Banking, Britain, Business, Economic, Financial Markets, Government, Society

Banking practices of the Royal Bank of Scotland referred to City regulators…

DAMNING REPORTS

The latest accusations being levelled at the Royal Bank of Scotland are as incriminating as any in its recent chequered history.

Small and Medium Sized Enterprises (SMEs) have long complained that they cannot get the loans they need, despite protestations by the banks to the contrary. A newly released report from Sir Andrew Large, a former deputy governor of the Bank of England, on the bank’s small-business-lending, confirms that much of the criticism levied at the bank in recent times is justified and the taxpayer-rescued institution must explain why it has not been doing all it could to assist Britain’s economic recovery. In normal circumstances, such practices would be worrying enough for the newly installed chief executive of the bank, Ross McEwan.

But these are not normal circumstances; Mr McEwan is also faced with a more troubling contention. According to another published document from Lawrence Tomlinson – deemed a successful businessman and ‘entrepreneur in residence’ at the Department of Business – RBS may have sunk to even greater depths in its condescending and haughty treatment of Britain’s SMEs. Contemptuous, because not only has the bank been transferring perfectly legitimate and profitable companies into its high-risk Global Restructuring Group (GRG), but the West Register (the bank’s property division), has reportedly been acquiring their assets on the cheap after imposing deliberate and exorbitantly high fees on them. Many companies in this high-risk category, deemed perfectly viable, have been unable to pay these fees imposed and as such have found themselves having their assets taken over by the bank at heavily discounted prices.

Both these reports must be put into context. Prior to 2008, RBS had been reckless over a number of years in its dealings, over-extending loans to many small firms that did not justify such levels of confidence. As the bank now struggles to repair its balance sheet, bad debts are continually being written off and lending practices have been tightened.

The findings contained within these reports have left many feeling aghast, not least Mr Tomlinson himself. His inquiries and formal deliberations suggest something altogether more serious. Vince Cable, the Business Secretary, has acted quickly and sent the evidence to City regulators. For his part, Mr McEwan has called in the law firm Clifford Chance to conduct an internal review of the bank’s practices. Such deviant and acute methods would be inexcusable from any bank, but from one that is largely owned and controlled by the state makes matters even worse.

COMMENT & ANALYSIS

The claims made in Lawrence Tomlinson’s report into the way the Global Restructuring Group at the Royal Bank of Scotland has dealt with struggling enterprises are truly dire.

It rightly is a matter that needs to be examined by the regulators the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

Forcing struggling firms into insolvency when there may have been a chance of survival is bad enough. Ruthlessly seizing property and assets for its own gain is immoral and much worse.

Yet, should we be surprised? RBS had a hand in almost all the post-crisis scandals, including Libor fixing, interest rate swaps and the sale of payment protection insurance. The bank is also being sued by investors for failing fully to disclose the parlous state of its finances ahead of the £12bn rights issue to shareholders in 2008.

Tomlinson and the Department of Business also have some questions to answer. The in-situ ‘entrepreneur in residence’, for example, is a little mysterious. How was he chosen for this appointment, what is the scope of his role and how much did he tell civil servants and the Secretary of State, Vince Cable, about his own business affairs before he took on this rather curious role?

What also of the poor judgement by Tomlinson not to disclose that NatWest, RBS’s main operating offshoot, had granted him an overdraft and that in the last couple of years he was engaged in a major refinancing operation? Financial analysts will find it extraordinary that this was not considered a relevant factor either by Tomlinson or the Department for Business, and that it was not disclosed in the report. Making a strong case against the predatory behaviour of RBS is one thing, the dealings and judgments of Mr Tomlinson are clearly and significantly related.

The published accounts of Tomlinson’s business LNT Group are, even by the standards of many private empires, on the opaque side. They show a group that is indebted and making losses, with a host of intercompany relationships that are difficult to untangle.

The main product of Tomlinson’s dealings looks to be the design and building of new care homes, something the UK badly needs. But this is a notoriously difficult sector in which to operate – as was seen from the fate of Southern Cross – and management often has to choose between keeping costs under control and maintaining high standards of care.

Before giving Mr Tomlinson a government imprimatur one should trust that Vince Cable and his Department looked carefully at all his dealings before approving the appointment.

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Banking, Britain, Economic, Financial Markets, Government, Society

Statements by RBS are clear on two points…

ROYAL BANK OF SCOTLAND

A series of rash statements issued yesterday by the Royal Bank of Scotland is clear on two points. Firstly, the decision taken to create an internal ‘bad bank’ with toxic loans amounting to £38 billion will hardly provide an instant cure. It will take a further three years of write-downs and bank disposals before the institution will even be considered to have recovered from its 2008 financial collapse and taxpayer funded rescue.

The second relates to serious deficiencies in the day-to-day management of RBS – from its chronic failure to meet targets on lending to small and medium sized firms, through shortcomings in service to personal customers, and to the provision of £250 million made by the bank for mis-selling payment protection insurance.

It is extremely unlikely there will be any start to the sale of the bank back to the private sector until well after the General Election.

RBS has announced a bottom-line loss of £634m for the three months to September. Far from the internal ‘bad bank’ resolution being hailed as a panacea, it is little wonder that shares in RBS have slumped. Even in its darkest hour of 2008, few would have believed that the recovery of what was then the UK’s largest bank would have taken eight years and a massive restructuring and shrinkage of its business. RBS has suffered a major curtailment in much of its global business and activities, not just the unwinding of the vainglorious acquisitions of the Fred Goodwin era but is also shorn of the overseas expansion delivered by his predecessor, Sir George Mathewson.

The protracted period of indecision on whether the bank’s bad loans – much of them incurred in Ireland by Ulster Bank – should have been left with the government or treated as a separate entity, is a nettle that should have been grasped in 2009 rather than allowed to have festered for the length of time it has. Chancellor George Osborne had had to recognise that RBS’ problems – structural and cultural – will take far longer to resolve than the government first anticipated before a share sale can be undertaken.

The traumatic legacy of its near-collapse remains problematic today. This induced a deep reluctance within the bank to lend, in particular to small and medium-sized businesses. A highly critical report by Sir Andrew Large found RBS was performing so erroneously it was not even in a position to meet its own targets. In the meantime, a review by RBS into how it serves its personal customers is scheduled to report next year.

The bank still has a mountainous task ahead under its new chief executive, Ross McEwan. There is much to do to overhaul the bank’s lending practices; by moving away, for instance, from the sales target-driven excesses of the previous era and by making major improvements to its overall service to customers.

RBS will eventually revert to being a domestically focused retail bank, stripped down to those core banking competencies it should never have deserted in the first place. The biggest challenge ahead will be to rebuild customer and investor trust. The bank’s widespread loss of confidence makes that a daunting and difficult task.

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