Guardian: Irish Government Faces Growing Fears of National Debt Default

Fears are growing that Ireland could default on its national debt after the

cost to insure against possible losses on loans to the country rose to

record highs at the end of last week. Credit ratings agency Moody's

recently followed rival Standard & Poor's in warning it might downgrade

Irish debt, amid fears that one of Europe's former success stories is falling

into a deepening recession. The cost to hedge against losses on Irish debt

tripled last week to a record 355 basis points - meaning t for every £100 of

debt, investors have to pay £3.55 to insure against default, according to

data firm CMA Datavision. It was about 262 basis points at the end of

January. Moody's has warned there is a more than fifty percent chance

Ireland will lose its triple A rating within 12 to 18 months . . .

Hurting on the High Street

Store closures, layoffs, and bankruptcies among British retailers underscore the seriousness of the economic downturn.

If 2008 was the year financial services melted down in Britain, 2009 is shaping up as retail's moment to implode. The once-booming retail sector -- known in Britain as the High Street -- is reeling as weak consumer confidence, tight credit, and rising unemployment throttle sales and profits.

The list of victims is eye-popping. Upscale clothing and food seller Marks & Spencer said Jan. 8 that its fourth-quarter sales fell 7.1 percent, and announced plans to close 27 outlets and lay off 1,230 workers. Woolworths, which failed to find a white knight last year as it wobbled toward insolvency, closed the last of its 807 British outlets on Jan. 6, putting 27,000 employees out of work. And music emporium Zavvi, originally owned by Richard Branson, has called in the administrators and closed 22 of its 114 outlets as management struggles to sell the business.

Retail's Drag on Broader Economy

All told, says insolvency and restructuring consultancy Begbies Traynor, nearly 2,000 retailers already are in bankruptcy proceedings in Britain. The carnage is likely to get worse. By yearend, predicts credit researcher Experian, some 135,000 storefronts -- one in seven across Britain -- may be vacant. And up to 135,000 retail workers could lose their jobs by the end of 2009, says the London-based Center for Economics & Business Research. "There definitely are tough times ahead," says Jonathan De Mello, director of Experian's retail consultancy.

The implications for the broader economy are worrisome. Consumer spending accounts for 65 percent of British gross domestic product, and retail is the third-largest source of employment behind business services and health care. A High Street slowdown thus translates quickly into sharply lower economic performance, declining tax revenues, and higher spending on jobless benefits. Economists figure Britain's GDP contracted 1.2 percent in the fourth quarter of 2008, after falling 0.6 percent in the previous quarter. Brokerage Morgan Stanley now predicts Britain's overall GDP will shrink 1.1 percent in 2009.

Even before the most recent spurt of retail layoffs, Britain's unemployment rate already had jumped almost one percentage point annually, to 6 percent, as of October, according to the Office for National Statistics. The last time joblessness was that high was in the first half of 1999. Now, with retailing expected to remain in the doldrums until 2010 at the earliest, Morgan Stanley figures unemployment could hit 7.4 percent this year. Other, more pessimistic estimates range up to 9 percent.

Government Intervention

So far, government efforts to help the retail sector haven't made much difference. To spur spending, the government trimmed Britain's value-added tax (VAT) before Christmas as part of an overall stimulus package. Most analysts say the modest cut was too little, too late. Likewise, the Jan. 8 decision by the Bank of England to chop interest rates to a record low of 1.5 percent may not do much to ease credit or kick-start consumer spending. Prime Minister Gordon Brown is now rumored to be mulling a new round of tax cuts to goose the economy.

Until stimulus sets in, retailers are left scrambling to save themselves. Over the Christmas holidays, some offered discounts of up to 90 percent to woo shoppers. That brought short-term relief for a few: Upmarket department store Selfridges, for instance, recorded the most profitable hour in its 100-year history on Dec. 26 as customers snatched up luxury brands like Louis Vuitton and Burberry for knocked-down prices.

More Carnage to Come

But slashing prices cuts both ways. "All the discounting has done is squeezed margins," says Tarlok Teji, head of British retail at consultancy Deloitte. He reckons that sales promotions will help keep like-for-like sales broadly flat over the first half of this year, but cautions that discounting will hit profits. Margins will likely fall 30 to 40 percent in 2009, and demand for big-budget items such as flat-screen televisions and home furnishings will remain weak even despite price cuts.

"More retailers will enter administration in February and March," Teji says. "Companies will have to batten down the hatches until the economy starts to recover."

More than 3 million will be out of work next year, CBI warns

Britain faces a toxic combination of a deep and prolonged recession, deflation and soaring unemployment this year and next, the CBI warns today.

It says that the country's economic output will fall by 3.3 per cent this year - the sharpest annual contraction since the Second World War - and will all but stagnate in 2010. The recession will force companies to axe hundreds of thousands more jobs and unemployment will top three million next year.

The CBI Director-General attacked the Government for failing to head off the worst of the downturn. Richard Lambert criticised the attempt to stimulate consumer spending by cutting VAT from 17.5 per cent to 15 per cent. He said: “Was a VAT cut the best way to spend £12billion in the face of the onset of the most severe recession in decades? No.”

Mr Lambert said that the Government needed to draw up a timetable to outline when its multibillion-pound package of measures, announced last month, would come into force. “Business needs the Government to hurry up,” he added.

Related Links

• CBI calls for easier credit as job cuts grow

• Oligarchs down to their last few billions

The CBI said that consumer spending would plummet by 2.7 per cent this year, reversing the 1.7 per cent rise last year, as workers, worried about falling house prices and deteriorating employment prospects, conserved their cash.

Businesses grappling with the slump in demand and difficulties in securing funding from banks were taking drastic action to cut costs, the CBI said. As a result, unemployment was likely to climb by more than a million to peak at 3.04million between April and June next year - the highest since 1986. The CBI said that dole queues would nearly double to 2.36million by the end of 2010.

Unemployment levels reached nearly two million between October and December, official figures show. The sharp deterioration in the global economy will compound Britain's problems because businesses cannot rely on trade with other countries.

The CBI said that GDP would drop by between 1 and 1.5 per cent in the first three months of this year and fall by a further 0.75 per cent in the next quarter. Although the CBI said that the pace of decline would ease later this year, it predicted there would be no quarterly growth until April next year. Even then, the recovery will be so shallow that GDP will stagnate at 0 per cent on an annual basis.

Despite the dismal figures, the CBI said that the peak-to-trough drop in GDP would still be more modest than that of the recession of the 1980s.

The CBI's outlook is even more gloomy than that of the International Monetary Fund (IMF), which said last month that Britain would be harder hit than any other advanced nation, shrinking by 2.8 per cent this year.

The Government estimates that GDP will drop by between 0.75 per cent and 1.25 per cent this year.

A separate survey out today shows that 39 per cent of British manufacturers are finding it more difficult to get finance now than they did three months ago. The Markit Credit Conditions survey shows that one in six factories said that this holds them back.

In a further blow for savers, the CBI said it expected interest rates to remain low as the Bank of England battled falling inflation. But it said that consumer prices would continue to drop, pushing the country into deflation for several months this year and keeping inflation at well below the Bank of England's 2 per cent target until 2011. Pay or pensions linked to the alternative RPI measure of inflation could suffer from a dip in the rate as low as minus 4.4 per cent this year, the CBI said.

Government finances will also be hit hard as tax revenue falls. The CBI expects that the Treasury's tax receipts will have slid by £60billion by 2010, while its borrowing will nearly double this year to £148 billion and rise to nearly £170 billion next year.

Only one part of the Government's stimulus package, including a scheme to guarantee banks' toxic loans to help them to lend, has started. The Bank of England began pumping up to £50billion into British companies in return for short-term IOUs on Friday.

Britain’s bankers plumb new depths

Jon Moulton, the private equity chief, warned a City lunch this week that he feared serious civil unrest. There was, he said, a 25 per cent chance of one of the 15 member countries of the eurozone pulling out of the currency club. That, he said, would be a catastrophic shock leading to a “far greater financial crisis” than the current one.

The mind boggles at a financial crisis far worse than the current one. Is such a thing possible? Even with this one, it may already be too late to prevent social unrest, especially in Britain, which is tipped to be one of the worst-hit countries economically.

The spectacle of bankers continuing to award themselves bonuses while taking taxpayer support is feeding an extraordinary public rage and a fierce sense of injustice. With 40,000 people losing their jobs each month, it is a recipe for trouble, come the traditional rioting months of the summer.

It won’t be bankers being lynched, of course, but small shopkeepers in inner-city areas having their windows smashed and their stock looted. The only surprise is there haven’t already been antibanker demonstrations in Threadneedle Street – secretly cheered on by 99 per cent of Middle England.

The seething sense of unfairness is almost palpable. The view that a small elite not only caused the crisis, but continues to profit at the expense of everyone else, is near universal. Gordon Brown’s promise of no rewards for failure in state-supported banks is looking ever more threadbare. We now know that Peter Cummings, the highest-paid person on the HBOS board, headed a division responsible for £7 billion of losses last year, yet he was still given a reported £660,000 payoff when he left in early January clutching his £6 million pension pot.

The suggestion by Lord Myners, the City minister, that some bankers simply have no sense of the broader society around them is getting harder to refute. To be preparing to pay out billions of pounds in discretionary bonuses over the next few weeks suggests an ignorance of the public mood and a single-mindedness bordering on sociopathic.

All this may be a bit of a side show for Sir Victor Blank and Eric Daniels, chairman and chief executive, respectively, as they try to stop the water slopping over the gunwales of the combined Lloyds/HBOS. Yesterday’s bombshell was grave for the bank, dispiriting for taxpayers and damaging to the chief executive. The timing is acutely awkward, coming just 48 hours after he appeared before the Commons Treasury Select Committee. MPs might have pressed him rather harder if they had known what was just around the corner.

The £10 billion loss at HBOS is humiliating enough, but the admission that the losses are £1.6 billion worse than when shareholders were asked to approve the deal in November is worse. Lloyds got HBOS to sweeten the terms twice. With hindsight it still wasn’t enough. Mr Daniels admitted to Parliament this week that he was not able to conduct as much due diligence as in a normal deal. His shareholders and UK taxpayers are now paying a heavy price for that failure.

The 32 per cent slump in the Lloyds share price yesterday speaks volumes about the market’s fears. Although Lloyds insists its balance sheet is still strong, the need for additional capital will be back on the agenda. If HBOS’s corporate loans could have soured by £1.6 billion in the space of just a month, its surplus capital cushion could quickly be wiped out. That could lead to full nationalisation eventually.

Lloyds says that one of the reasons for the losses was the more conservative methodology it uses for gauging potential loan losses. That comes close to suggesting the old HBOS board was somewhat less than conservative itself. If the reputation of the old guard at HBOS, including Gordon Brown’s former favourite Sir James Crosby, is capable of sinking any lower in the public estimation, it will now be doing so.

IMF chief Dominique Strauss-Kahn warns second wave of countries will require bail-out

A "second wave" of countries will fall victim to the economic crisis and face being bailed out by the International Monetary Fund, its chief warned at the G7 summit in Rome.

Edmund Conway in Rome

Dominique Strauss-Kahn's warning comes amid growing concern that at some point in the next year a major economy could have to seek support from the Fund. Mr Strauss-Kahn, who was yesterday attending the Group of Seven leading finance ministers' meeting in Rome, said: "I expect a second wave of countries to come knocking."

The IMF managing director also said the rich world was now in the midst of a "deep recession". It came as the G7 pledged to avoid slipping into protectionism and repeating the same political and economic mistakes as were made in the 1930s. Ministers also pledged to do more to support their banking systems, sparking speculation that a number of countries, including Germany and France, will unveil new bail-outs and possibly set up "bad banks" as they scramble to fight the crisis.

But with some countries' economies effectively dwarfed by the size of their banking sector and its financial liabilities, there are fears they could fall victim to balance of payments and currency crises, much as Iceland did before receiving emergency assistance from the IMF last year.

Some have speculated that the UK may have to seek IMF support if capital markets become frightened of the size of its foreign financial liabilities, which increasingly appear to have become supported by the state. But there are a swathe of Eastern European countries which appear particularly vulnerable and may need IMF support.

With the Fund's warchest expected to run dry later this year, the Japanese confirmed in Rome that they would supply an extra $200bn of capital to the Washington-based institution.

Mr Strauss-Kahn, who warned recently that his resources could run dry within six months, said: "This is the largest loan ever made in the history of humanity.

"The biggest concrete result of this summit is the loan by the Japanese... now I will continue with the objective of doubling the Fund's resources."

He added that it was now essential for countries to support their banking sectors.

BMW to cut 850 jobs at Oxford Mini plant

BMW, the German vehicle maker, today announced plans to lay off 850 weekend agency staff at its Mini factory in Cowley, near Oxford, as the slowdown in demand for cars worsens.

Agency workers leaving Cowley this morning expressed their anger at being given just one hour’s notice of losing their job. The company made the announcements just as the staff affected were finishing their shift.

"It’s a disgrace. I feel as though I’ve been used. We should have been given one month’s notice, not one hour," said one worker.

John Cunningham, who has worked at the factory for more than two years, said he felt betrayed. "We’ve been given a week’s pay for an enforced week off, which I suppose is a week’s notice. I don’t know what’s going to happen to me and my family. It’s very scary."

Related Links

• KFC to create 9,000 jobs in UK expansion drive

• More than 3m out of work next year

• Tempus analysis: A Mini scandal

Union sources said workers booed and threw apples and oranges at managers after being told the news.

"Sacking an entire shift like this, and targeting agency workers who have no rights to redundancy pay, is blatant opportunism on BMW’s part and nothing short of scandalous," said Tony Woodley, the joint leader of the Unite union.

"BMW’s parent company couldn’t attempt this in Germany because it would be illegal to do so. It is a disgrace, therefore, that workers in this country can be so casually thrown to the dole."

The number of production days at the factory will be reduced from seven to five once the job cuts come into force on March 2, and permanent staff deployed on weekend shifts will be redeployed to the week.

BMW also announced today that it will close down production at the plant for one week in response to plunging demand for new cars.

The company said in a statement: "While Mini has been weathering the economic downturn, it is not immune from the challenges of the current situation.

"Against this backdrop the company felt that a review of its shift patterns was necessary. This decision has not been taken lightly. The plant’s union representatives have, of course, been involved in the discussions."

A spokeswoman said that there were "no current plans" to make permanent staff redundant. The plant employs 940 agency staff alongside 4,300 permanent workers.

BMW's factories at Swindon and Hams Hall near Birmingham, which supply parts to Cowley, will not be affected by the cuts, the company said.

The job cuts at BMW follow 220 jobs cut last week by Bentley, the luxury carmaker, around 10 per cent of its workforce. Ford axed 850 jobs earlier this month. Last month Nissan cut 1,200 jobs in Britain and Jaguar Land Rover cut 450.

Toyota and Vauxhall, which is owned by General Motors, are also considering reducing their British workforces and Honda enforced a four-month lay-off at its Swindon plant.

Derek Simpson, joint leader of Unite, said the job losses showed how deeply the recession was now affecting the motor industry, given that BMW was a "hugely profitable" firm and Cowley was an efficient factory.

He said: "There is a huge onus on the Government to take drastic action to support the motor industry and to encourage people to buy cars. The banks will also have to start making credit available again or this is going to lead to disaster."

Malcolm Harbour, a Conservative MEP for the West Midlands and a former director of the Rover car company, said: "The British Government is not tackling the underlying cause of manufacturers’ woes: the lack of demand for new vehicles.

"Getting loans to car and commercial vehicle customers now is essential, but all the Government has done so far is set up a committee. The Government should be seeking to make the vehicles already on the forecourts more attractive to hesitant consumers."

In January, Lord Mandelson, the Business Secretary, outlined a £2.3 billion aid plan for the motor industry that will guarantee loans to car and components companies.

Gordon Brown’s spokesman said that the job losses at Cowley were very disappointing news. "All I can say really is the Government is doing and will do all that we can to help those affected.”

The Mini celebrates its 50th anniversary in August of this year. Cowley was one of the factories that produced the original 848cc model designed by Sir Alec Issigonis.

After production of the old design finally ceased in 2000 it was replaced by a new, more powerful version with a 1.4 litre engine which has also proved hugely successful, especially abroad, with 80 per cent of the factory’s output sold for export. But worldwide sales were down by 35 per cent last month and by a similar amount in the UK, in line with a slump which hit all car manufacturers.

Cowley started building the new Mini in 2001 and the factory has a capacity to produce 260,000 models a year.

Failure to save East Europe will lead to worldwide meltdown

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.

By Ambrose Evans-Pritchard

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.

Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

Under a "Taylor Rule" analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system.

Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.

Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

"This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank.

"There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."

Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter.

If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.

The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.

So we watch and wait as the lethal brush fires move closer.

If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?

• More on Ambrose Evans-Pritchard

• Eastern Europe 'in danger of a hard landing'

• Europe on the brink of currency crisis meltdown

• EU refuses bail-out package despite crisis fears

• Euro at risk from Europe's economic storm