History > 2008 > UK > Economy (IV)

Dave Brown

cartoon

The Independent

Tuesday 28 October 2008

http://www.independent.co.uk/opinion/the-daily-cartoon-760940.html?ino=32

British Prime Minister Gordon Brown

Barclays turns to Middle East

in £7bn fundraising

Friday October 31 2008 10.15 GMT
Graeme Wearden and Jill Treanor
Guardian.co.uk
This article was first published on guardian.co.uk
on Friday October 31 2008.
It was last updated at 10.20 on October 31 2008.

Barclays is raising up to £7.3bn, mainly from Middle East investors who could end up owning nearly a third of the UK's second largest bank. The move announced today allows the bank to strengthen its balance sheet to ride out the financial crisis without getting help from the taxpayer.

Most of the cash injection is coming from the royal families of Abu Dhabi and Qatar, who have both agreed to pump billions into Barclays to bolster its capital ratios. The Qataris, who already own a significant shareholding in Barclays through two different investment funds, are providing up to £2.3bn. Once the deal goes through they will own up to 15.5% of the bank.

Sheikh Mansour Bin Zayed Al Nahyan, a member of the Abu Dhabi royal family, will provide up to £3.5bn and will become Barclays' largest shareholder with a 16.3% stake. A further £1.5bn is being raised from institutional investors.

The deal means that Barclays has avoided selling a stake to the UK government - the partial nationalisation option taken by Royal Bank of Scotland, Lloyds TSB and HBOS.

This means it will avoid restrictions on executive pay, bonuses and shareholder dividends.

The two Middle Eastern royal families appear to be getting generous terms in return for injecting capital into Barclays.

A large chunk of the £5.8bn investment will buy "reserve capital instruments", similar to the preference shares which the UK government is taking in RBS and Lloyds TSB-HBOS. They will pay a dividend of 14% a year, compared with the UK government's 12% a year. The new shareholders will also own warrants allowing them to buy shares in Barclays at 197.775p, any time in the next five years.

Shares in Barclays jumped by 10% this morning in early trading, but had soon fallen by almost 10% to 185.5p as the City digested the deal.

Chairman Marcus Agius brushed aside the suggestion that Barclays was now too reliant on overseas investors. "This is a forward-looking and progressive approach to managing the share register," said Aguis, insisting that these deals create new commercial opportunities around the globe.

"When these strategic investors increase the exposure they have to Barclays they naturally leads to new business," Aguis added. Last year Barclays sold stakes to the goverments of China and Singapore, and in June this year it raised £4.5bn from new and existing shareholders - including Qatar.

Keith Bowman, equity analyst at Hargreaves Lansdown stockbrokers, said Barclays had "proved the doubters wrong again".

"Barclays continues to underline management's strength in outflanking its rivals. RBS has been sunk through its desire to win Dutch Bank ABN from the hands of Barclays, whilst the group's knowledge of the wholesale markets and experience of the property downturn of the early 1990s has left it better positioned than the likes of HBOS," said Bowman.
 

Satisfying the government

Barclays has been forced to raise more capital as part of the bail-out scheme which seven banks and one building society have signed up to in the government's attempt to shore up confidence in the banking system.

The chief executive, John Varley, said the deal would enables Barclays to meet the capital issuance plan agreed with the UK authorities earlier this month, following the decision by the Financial Services Authority to increase the capital ratio requirements for all UK banks.

"Today's capital raising provides certainty and speed of execution, and combined with the strong third-quarter performance in a volatile operating environment enables us to continue to implement our strategy and build our business by serving clients and customers around the world," said Varley.

When the UK banking bail-out was being agreed with the Treasury earlier this month, Varley had convinced government officials and the Financial Services Authority, that it had one backer prepared to stump up £1bn. Roger Jenkins, a colleague of Barclays executive Bob Diamond, is believed to have led the negotiations to find backers prepared to put more cash into the bank.

The government is due to announce later today that it has approved the takeover of HBOS by Lloyds TSB. Based on today's share prices, Barclays will still be the UK's second largest bank by market capitalisation, worth almost £19bn, behind HSBC which is today worth some £89bn. Lloyds TSB and HBOS are today worth slightly over £17bn.

Barclays turns to Middle East in £7bn fundraising, G, 31.10.2008, http://www.guardian.co.uk/business/2008/oct/31/barclay-banking1

Chancellor demands cheaper petrol

as Shell posts record profits

Trace the rise and fall in crude prices in the last decade

Thursday October 30 2008
12.15 GMT
Guardian.co.uk
Graeme Wearden

Alistair Darling today called on oil companies to pass on lower costs to consumers by cutting petrol prices as Royal Dutch Shell posted a 71% rise in profits.

The chancellor said that he wanted the recent drop in the oil price, which has halved in recent months, to be passed on to the pumps as soon as possible.

"People are entitled to see the benefit of that falling price reflected in what they actually pay when they fill up the car," Darling told GMTV.

Shell defied the economic gloom this morning and smashed analyst forecasts when it reported a profit of $10.9bn (£6.6bn) for the third quarter of 2008, up from $6.4bn the previous year, thanks to the earlier surge in the price of oil.

The company benefited from the record oil price, which hit $147 a barrel in July before falling sharply in recent weeks. This more than made up for a 6.5% drop in the amount of oil and gas it produced, due to hurricane damage in the Gulf of Mexico.

Its chief executive, Jeroen van der Veer, called the results "satisfactory" and insisted that Shell was "robust across a wide range of oil prices".

"We are watching the world economic situation closely," he added.

The figures come just two days after rival BP sparked a row by posting a 148% jump in profits. Unions and MPs called for a windfall tax on the oil giants, who they said had profited from speculation on the oil price.

Oil was trading at around $70 a barrel today, less than half its price in July, and motoring groups have complained that this is not yet reflected in the cost of petrol. Last weekend the average price of a litre of petrol dropped back through the £1 a litre mark, down from a high of 119.7p a litre in July, following price cutting by supermarkets.

But as around 70% of the cost of a litre of petrol goes to the government as duty and VAT, the drop in crude oil prices can only have a limited effect on the cost of filling up at the pump.

The AA said it was important to keep pressure on suppliers and retailers, but warned that further price falls may be unlikely.

"We think the supermarkets have pared their costs to the bone and are now engaged in cut-throat competition over petrol. We can't necessarily expect the rest of the industry to move as dramatically, but it will catch up," said an AA spokesman.

"I do wonder if we've reached a bit of a trough for the moment, unless the supermarkets fight for Christmas trade by cutting petrol prices to try and fill the aisles."

The fall in the value of sterling, which has dropped by around 25% against the dollar since July, is also undermining the benefit of lower oil prices as both crude oil and petrol are traded in dollars.

Darling himself is under pressure to help motorists by scrapping the planned rise of 2p a litre in fuel duty, which has been postponed until March 2009, but the AA does not believe this is likely to happen.

"The government needs all revenue it can get, so they have no option but to bring in the 2p rise next year," the AA spokesman predicted.

Shell itself struck an upbeat tone today. Van der Veer said world markets were experiencing "unprecedented volatility", adding: "We are steering the Shell ship through rough waters and so far, OK."

"Yes, we are generating large profits. Yes, we have the largest investment programme in Shell's history to create value for shareholders and to play our part in providing safe and cost competitive energy for consumers," he added.

The high oil price has also proved profitable for Exxon Mobil, the world's biggest oil company. It posted record quarterly profits today of $14.8bn (£9bn), up 58% on last year, beating analyst expectations.

Chancellor demands cheaper petrol as Shell posts record profits, G, 30.10.2008, http://www.guardian.co.uk/business/2008/oct/30/oil-royaldutchshell

Cost of crash: $2,800,000,000,000

• Bank of England calls for reform
• Markets jittery after Asian losses
• Brown defends borrowing

Tuesday October 28 2008
The Guardian
Larry Elliott, Phillip Inman and Nicholas Watt
This article appeared in the Guardian
on Tuesday October 28 2008 on p1 of the Top stories section.
It was last updated at 08.17 on October 28 2008.

A worker walks past a screen displaying stock market movements at a window of the London Stock Exchange in the City of London, October 27, 2008. Photograph: Alessia Pierdomenico/Reuters

Autumn's market mayhem has left the world's financial institutions nursing losses of $2.8tn, the Bank of England said today, as it called for fundamental reform of the global banking system to prevent a repeat of turmoil "arguably" unprecedented since the outbreak of the first world war.

In its half-yearly health check of the City, the Bank said tougher regulation and constraints on lending would be needed as policymakers sought to learn lessons from the mistakes that have led to a systemic crisis unfolding over the past 15 months.

The Bank's Financial Stability Report, which will be sent to every bank director in Britain, more than doubled the previous estimate of the potential losses faced by all financial institutions since the spring, but said that given time the actual losses could be pared by between a third and a half.

The £50bn pledged by the government had helped underpin the system, the Bank said, and would provide a breathing space for UK banks so that they did not have to sell assets at cut-price values immediately. The report also expressed cautious optimism about the effectiveness of the recent global bail-out plan.

The Bank's estimate exceeds that made by the International Monetary Fund recently. The IMF concentrated on US institutions and did not include losses from the turmoil of recent weeks. Estimated paper losses from UK banks on mortgage-backed securities and corporate bonds are currently £122.6bn, the Bank report said.

Gordon Brown insisted yesterday that it was right for the government to increase borrowing in order to fund investment to help the economy through tough times. But he moved to reassure markets that he would not preside over a reckless increase in borrowing during the recession and said he would reduce it as a proportion of GDP once the economy picks up.

Paving the way for an expected abandonment of the tight fiscal rules he established as chancellor, Brown said: "The responsible course of government is to invest at this time to speed up the economic activity. As economic activity rises, as tax revenues recover, then you would want borrowing to be a lower share of your national income. But the responsible course at the moment is to use the investments that are necessary, and to continue them, and to help people through very difficult times.

"I think that's a very fundamental part of what we are doing."

In another turbulent day yesterday on global markets, there were hefty falls in Asian stockmarkets and a fresh fall in the pound. Japan's Nikkei index closed down more than 6% at a 26-year-low of 7162.9. London's FTSE 100 recovered from an early fall of more than 200 points to close 30 points lower at 3852.6, while the Dow Jones closed down 2.42% at 8,175.77.

Brown and Peter Mandelson, the business secretary, served notice that Britain should brace itself for a downturn when they both warned about rising unemployment. Brown said: "I can't promise people that we will keep them in their last job if it becomes economically redundant. But we can promise people that we will help them into their next job."

Mandelson was more blunt as he warned of the impact of the recession. "We are facing an unparalleled financial crisis," he said during a visit to Moscow. "I don't think yet people have realised what the impact is going to be on our real economy."

The Tories intensified their attacks on the government by depicting Brown as not a man with a plan but a man with an overdraft.

Responding to Brown's remarks, George Osborne, shadow chancellor, said: "What they are talking about is borrowing out of necessity, not out of virtue. Gordon Brown is a man with an overdraft, not a man with a plan. He is being forced into this borrowing. He presents it as a strategy but it is actually a consequence of his great failure that borrowing is already out of control before we even get into the worst of the economic circumstances that we are in."

Brown was speaking as the Treasury finalised plans to rewrite the fiscal rules which have governed his approach to the economy over the past decade. Alistair Darling will use his pre-budget report next month to say that it is time for a more flexible approach in the new economic cycle, which started in 2006-07.

The previous FSR in April envisaged a gradual recovery in global markets and the Bank was careful today not to sound the all-clear despite the coordinated action in Britain, the US and the eurozone this month to recapitalise banks and provide extra liquidity to markets. "In recent weeks, the global banking system has arguably undergone its biggest episode of instability since the start of the first world war," it said.

Sir John Gieve, the Bank's deputy governor for financial stability, added: "With a global economic downturn under way, the financial system remains under strain. But it is better placed as a result of the exceptional package of capital, guaranteed funding and liquidity support. That is helping to underpin the banking system both directly and by demonstrating the authorities' determination to do whatever is needed to restore confidence.

"Looking further ahead, we need a fundamental rethink of how to manage systemic risk internationally. We need to establish stronger restraints on the build-up of risks in the financial system over the cycle with the dangers they bring to the wider economy.

"That means not just increasing capital and liquidity requirements for individual institutions but relating them to the cyclical growth of risk in the system more broadly. Counter-cyclical policy of that sort should complement regulation of companies and broader macroeconomic policy."

The Bank believes that the capital injection from the taxpayer will also prevent banks from slashing their lending too aggressively over the coming months, relieving the recessionary pressure on the economy.

Figures released yesterday, however, from financial data provider Moneyfacts showed banks were failing to pass on interest rate cuts to mortgage borrowers despite making severe cuts in savings rates. It said most institutions had already passed on the last half-point base rate cut to savers while holding back on cuts in home loan interest rates.

"Some providers are using the base rate cut as a way of increasing their margin for risk, by not passing on the full cut to mortgage customers but passing the cut on in full to savings customers," it said.

A separate study last week marked a new low in the number of mortgage products available.

Concerns at widespread job losses across the finance sector prompted unions to demand a "social contract" to protect jobs. Derek Simpson, Unite's joint general secretary, said: "Workers in the financial services are facing insecurity as the world is gripped by economic turmoil. The Unite 'social contract' sets out the principles which employees expect the government and finance companies to now sign up to.

"Unite is calling for the protection of jobs, pensions, the end to short-term remuneration policies and an overhaul of the regulatory structures in the financial services sector. There must be a recognition of the importance of employment in the financial services sector, as many communities now depend on the sector since being decimated by the collapse of the manufacturing industry.

"Workers in the financial services industry are not the culprits of the credit crunch and we are not prepared to allow them to become the victims. The taxpayer must now get firm assurances that the financial lifeline extended to these large organisations will be used to protect jobs and the public. It is not acceptable for the government to socialise the risk without allowing the wider society to capitalise on the rewards in the finance industry."

How much is that?

The Bank of England may have put the paper cost of the global crisis at a staggering $2.8 trillion, but how does one come to grips with such a sum? Think of it like this: it could pay for 46 bail-outs of the kind the Treasury handed to the banks RBS, HBOS group and Lloyds TSB; or pay off the last quarter's public debt 45 times. It is more than three times the sum of UK annual public spending, and also equivalent to the wealth of 100 Oleg Deripaskas - before the credit crunch anyway. It's equal to 138m bottles of 1947 Petrus Pomerol, the bankers' favourite vintage; or, if it's your turn in the coffee round, 773bn lattes - nearly 13,000 each for every UK citizen.

    Cost of crash: $2,800,000,000,000, G, 28.10.2008, http://www.guardian.co.uk/business/2008/oct/28/economics-credit-crunch-bank-england

BP smashes forecasts

as profits soar 148%

Tuesday October 28 2008
09.52 GMT
Guardian.co.uk
Julia Kollewe
This article was first published on guardian.co.uk
on Tuesday October 28 2008.
It was last updated at 11.30 on October 28 2008.

Oil giant BP has reaped the benefits of this summer's record oil prices, smashing all forecasts with a 148% rise in third-quarter profits.

The figures are likely to spark fresh protests from motorists and businesses that have been hit hard by higher petrol prices.

The shares rose 19.5p to 457.5p this morning, a gain of 4.5%. BP said it would pay a dividend of 14 cents a share in December, up some 30% in dollar terms from a year ago and 60% higher in sterling terms.

"Although it has since fallen away sharply, the high oil price of the third quarter obviously helped our absolute result," said BP's chief executive, Tony Hayward.

Oil surged to a record high of $147 a barrel in July, but the price has since more than halved amid mounting fears of a global recession. Today the price of crude rose to $64 a barrel.

BP, Europe's second-biggest oil producer behind Royal Dutch Shell, posted replacement cost profits of $10bn (£6bn) for the quarter from July to September, up from $4bn a year earlier. Replacement cost profit is a measure often used by oil companies and is calculated using the cost of replacing supplies at current prices, rather than the prices at which they were bought.

Revenues climbed 45% from $71bn to $103bn over the quarter.

"We are well-placed to weather the prevailing financial storm and to benefit from the business opportunities that may well arise from a downturn," Hayward said. "Our balance sheet is strong and we have committed less of our portfolio to high-cost options like tar sands and gas conversion than some of our peers."

Analysts were worried about the impact of the recent fall in oil prices on BP, but noted that the company had made good progress on restructuring its crude-processing division, which has underperformed rivals in recent years.

"In refining and marketing they have a restructuring plan under way and that looks as if it has helped the results there," said oil analyst Tony Shepard at brokerage Charles Stanley.

The oil firm, which expects to spend up to $22bn on capital investment this year, counts pension funds among its major shareholders.

    BP smashes forecasts as profits soar 148%, G, 28.10.2008, http://www.guardian.co.uk/business/2008/oct/28/oil-oilandgascompanies

Home repossessions and arrears rise

as borrowers struggle

Tuesday October 28 2008
10.53 GMT
Guardian.co.uk
Hilary Osborne
This article was first published on guardian.co.uk
on Tuesday October 28 2008.
It was last updated at 11.31 on October 28 2008.

The number of properties repossessed by lenders in the second quarter of this year was up 71% on the same period last year, figures showed today.

Rising household bills and increasing mortgage costs resulted in 11,054 new possessions cases in the three months between April and June this year, compared with just 6,476 in the same quarter of 2007.

The figures, from the Financial Services Authority, also showed an increase in the number of homeowners who had fallen behind on mortgage repayments.

The City watchdog said while the number of new arrears cases had stayed constant, at around 54,000 each quarter since early 2007, consumers were increasingly struggling to clear their arrears. Consequently the total number of accounts in arrears was rising.

At the end of June there were 312,000 loan accounts in arrears, an increase of 3% on the first three months of this year and 16% up on a year earlier.

Over the past year borrowers have been hit by a double whammy of rising mortgage costs and inflation.

Borrowers coming to the end of cheap fixed-rate deals have seen repayments jump, with the credit crunch forcing lenders to reprice deals upwards.

Some have stopped lending to borrowers with big mortgages, leaving those who took out large loans with lenders like Northern Rock unable to move away from high standard variable rate (SVR) mortgages.

The figures still represent a small fraction of the mortgage market, with just over 2% of outstanding mortgages in arrears or possession. However the rising number of people unable to catch up with repayments they have missed suggests repossession rates will continue to rise.

Last year, the Council of Mortgage Lenders predicted the number of homes repossessed this year would rise by 50%, to 45,000, and the FSA's figures for the first half of the year are broadly in line with that, showing just over 20,000 properties were repossessed.

However recent economic news has been more gloomy than anticipated, and rising job losses could push many more homeowners than expected into difficulties.

    Home repossessions and arrears rise as borrowers struggle, G, 28.10.2008, http://www.guardian.co.uk/money/2008/oct/28/repossessions-debt

Commodities slide

amid demand fears

Published: October 27 2008 10:35
Last updated: October 27 2008 10:35
The Financial Times
By Javier Blas in London


Commodities prices continued to fall sharply on Monday, with oil prices falling to a fresh 17-month low just above $60 a barrel, on growing concern that a potential global recession was unavoidable, raising further fears for raw materials demand.

The fall in oil prices came in spite of last week’s Opec oil cartel agreement to cut its production official limit by 1.5m barrels a day in an effort to put a floor on dropping oil prices. Opec officials said they were monitoring the fall in prices.

Iran said Opec was ready to cut further its production if last week’s reduction does not stop the slide, the country’s Opec governor was quoted as saying in the local media.

“In case the reduction in production does not stabilise the oil market, Opec will again reduce its production ceiling,” Mohammad Ali Khatibi Khatibi was quoted as saying by Farhang-e Ashti newspaper.

In London morning trading, Nymex December West Texas Intermediate fell by a further $1.45 a barrel to $62.82 a barrel having earlier hit a fresh 17-month low of $61.30 a barrel. Heating oil and gasoline in New York also fall sharply.

In London, ICE December Brent crude futures lost $3 to hit an intraday low of $59.05 a barrel, its lowest level since February 2007.

Opec’s decision to cut production sparked criticism from the US and UK governments but the continuing fall for oil prices led to talk that the cartel would try to reduce output further before the end of the year.

Robert Laughlin at MF Global in London said whilst many will not shed a tear for oil producers at present it should be noted that several countries may well be running into a ” nil-margin ” production scenario with oil prices sub $ 60 a barrel

The key signal for prices in the medium term will be Opec’s adherence to its agreement. Many traders doubt that it will fully implement the cuts, noting that historically the group has managed about a 60 per cent adherence rate.

But Chakib Khelil, Algeria’s energy minister and Opec’s president, insisted that the group had “no other choice” and it was having trouble selling its oil as buyers stayed away or were unable to secure letters of credit.

Other commodity prices also fell sharply on Monday as investors continued to unwind positions in what now is seen as a risky asset class.

Oliver Jakob, of Swiss-based Petromatrix consutants, said that financial flows were overall dominated by the closing of bets of raising prices in commodity indices.

“With volatility indices at levels of systemic breakdowns it should be expected that more risk is still to be taken off the table, meaning that the waves of indiscriminate selling across asset classes are not yet necessarily over and will dominate in the near term over fundamental considerations,” he said in a note to clients.

Gold prices also came under pressure, as the strengthening dollar reduced the metal’s appeal as a currency hedge. Spot gold slipped nearly 3 per cent to $717.80 a troy ounce, having hit a low of $712 an ounce.

Base metals were also hampered by the spectre of a global recession and its likely implications for demand. Copper continued its fall under the $4,000 mark, losing almost 5 per cent to $3,645 a tonne on the London Metal Exchange.

Agriculture commodities were also down, with CBOT December corn falling 7 cents to $3.65 ¾ a bushel, its lowest in 11 months.

    Commodities slide amid demand fears, FT, 27.10.2008, http://www.ft.com/cms/s/0/aefd7198-a402-11dd-8104-000077b07658.html

Economy shrinks

as Britain enters recession

October 25, 2008
From The Times
Gary Duncan, Economics Editor

Britain’s economy is shrinking for the first time in 16 years, official figures showed yesterday, confirming that the country is in recession.

The toll from the credit crisis and housing crash has ended Britain’s longest unbroken run of growth since quarterly records began in 1955. City analysts gave a warning that the economy could shrink at an even faster pace in coming months.

Figures for gross domestic product revealed a worse-than-expected fall of 0.5 per cent over the past three months. A recession is defined as two consecutive quarters of negative growth, but a further contraction is inevitable.

The response on the financial markets was swift and brutal. The pound plummeted against the dollar and nearly £49 billion was wiped off the value of Britain’s leading companies. Alistair Darling, the Chancellor, sought to shore up confidence among fearful families and businesses. “It’s obvious now that our economy, other economies across the world, are moving into recession,” he said. “Yes, it’s going to be difficult, yes it’s going to be tough, but we can get through it.”

Charlie Bean, the deputy governor of the Bank of England, said that Britain was only “in the early days” of the fallout from unprecedented global financial convulsions. “This is a once-in-a-lifetime crisis, and possibly the largest crisis of its kind in human history,” Professor Bean said.

Shares in London slumped in response. The FTSE 100 closed down a further 204.5 points, or 5 per cent.The pound suffered one of its worst batterings since it was floated in 1971. At one point it was down by 8 cents against the dollar, before closing a little over 3.5 cents down on the day at $1.5837. In Europe, leading shares also fell by 5 per cent, while US blue-chips fell almost 4 per cent in a day of wild swings in financial markets.

Currencies and commodity prices also suffered. Oil prices continued to fall despite a decision by Opec to cut production by 1.5 million barrels a day. Benchmark Brent crude fell $3.94 to $61.98 per barrel – from a high of $146 in July.

Even gold, the traditional safe haven in times of panic, fell sharply, although it later rcovered. Pressure is growing on the Bank to deliver drastic cuts in interest rates. Its rate-setting committee is expected to order a half-point cut at the start of next month.

    Economy shrinks as Britain enters recession, Ts, 25.10.2008, http://business.timesonline.co.uk/tol/business/economics/article5010581.ece

Mega-mall:

Is this the future of shopping?

He's built a global empire of malls.
Now, in London, Frank Lowy
is about to unveil his boldest project yet
– just as recession hits.
Does he know something we don't?
Rob Sharp reports on a £1.7bn gamble

Thursday, 23 October 2008
The Independent

On a building site in west London, 8,000 contractors are crawling across a gargantuan, soon-to-be-finished shopping centre. Lifts raise builders in hi-vis jackets as they finish painting restaurant exteriors. Droves of stone masons hurriedly shift huge granite slabs into their final resting places. Sparks from welding torches cascade to the floor. Rivers of polythene wrapping snake as far as the eye can see.

When Boris Johnson opens its doors on Thursday next week, Westfield London will be Britain's largest urban shopping centre. Sprawling across 43 acres just north of Shepherd's Bush Green, it will house 265 shops, with Tiffany & Co, Louis Vuitton, Gucci, Prada and De Beers offering glitz alongside Waitrose, Russell & Bromley, Marks & Spencer and other familiar high-street names. There will be dozens of restaurants, a library, and two new London Underground stations to bring in the masses. Those who drive will have the option of employing the services of a 70-strong team of valets. Needless to say, this is no ordinary shopping centre. Its makers are marketing it as the cutting edge of "retail experiences".

Costing £1.7bn, it is also the biggest venture – in monetary terms – that the development company, Westfield, has ever undertaken. Back in 2004, when Westfield bought the site, it must have seemed an irresistible way to ride the consumer boom. Given the current economic climate, it feels like an even more audacious move than the company may have intended. Household budgets are under pressure; consumer confidence is far from buoyant. Earlier this week, The Ernst & Young Item Club, an influential forecasting agency, predicted that consumer expenditure on everything from food, clothes, holidays, household bills, home improvements and entertainment will fall by 1.2 per cent in 2009. This compares with an average annual growth of 3.5 per cent over the past decade.

One would think such statistics would send a shiver down the spine of even the most hardened of businessmen. But Westfield's chairman Frank Lowy, who turned 78 yesterday, is no ordinary corporate suit. According to Australian media reports, he boasts a fortune of £2.4bn, making him the richest man in Australia. Born in Slovakia, he arrived in Australia in 1953 after spending a period shortly after the Second World War in a refugee camp in Cyprus. After founding Westfield in 1959 with business partner John Saunders (who died in 1997 aged 75), Lowy has grown his company into the biggest publically listed retail property group in the world. It is valued at more than £26bn, and leases 10 million square metres of retail space to 23,000 retailers in 119 centres around the world. In the company's homeland, as many people speak of "going to Westfield" as they do of "going shopping".

But pulling off this audacious development is more than just a question of battling economic forces. Local residents are far from pleased about the effects of bus routes imposed by Hammersmith and Fulham council to serve the new centre. Writing in the London Evening Standard this week, the novelist Sebastian Faulks slammed the new routes planned for areas close to the development for running through some of the capital's historic conservation areas. He also described how the council's consultation over the new routes was radically under-resourced, and how new buses will add unnecessary pollution and congestion to already busy and dirty streets. In addition, the scheme – located just three miles from London's West End – will draw customers away from already cash-strapped Oxford Street shops. For years, Westfield London has been spoken of as the nail in the coffin of Oxford Street.

Meanwhile, tax authorities in Australia are investigating Lowy amid claims by the US Senate that he hid £42m from the Australian Taxation Office. But this is all in a day's work for a man who obtained a shrapnel scar on his forehead when fighting for the Israeli army. Westfield London, experts say, will still manage to bring a smile to his lips.

Lowy was born into a Jewish family in 1930 in Fil'akovo, a rural town in what was then Czechoslovakia. According to the official biography on the Westfield website, at an early age he helped his mother to run the family grocery shop. When the Second World War broke out, his family sold their shop and fled to Budapest. Here, Lowy helped his older brother, John, run a metalware business, but the family was soon hit by tragedy. When the Nazis invaded Hungary in March 1944, Lowy's father was captured and sent to Auschwitz, where he eventually died. Without the family's main breadwinner, Lowy supported his mother by foraging for food.

When the war ended, Lowy left Europe for Israel. On his way, he was picked up by the British Army and spent several months in a refugee camp in Cyprus. After his release, he reached Israel, aged 17, to join the nation's Golani Brigade, an army unit fighting in the 1948 Arab-Israeli war.

When the war finished the same year, Lowy spent a brief time working in a bank, and studying to become an accountant at night school. Eventually, he decided to go to Australia, to where many members of his family had already moved. He arrived there on 26 January 1952, carrying a small suitcase, and possessing only a basic knowledge of English. "All those events shaped my life," Lowy said in an interview earlier this month. "It's a requirement to have some sort of paranoia. You have to think of what can go wrong even when times are good. So you can never enjoy your success fully."

In Sydney, the man who would become a property magnate managed to scrape together enough cash to buy a van. He began work as a deliveryman, and it was then that he met Saunders, another Holocaust survivor, who had set up a small shop in the outskirts of Sydney. The pair's first business venture together was running a delicatessen. They soon realised that along with salami and rye bread, newcomers from Europe needed a wider array of goods. They borrowed from a local bank manager and used profits from the deli to buy farmland out of town. The pair read about the popularity of American shopping malls, and in 1959 built their first shopping centre on that land. Westfield Investments was listed on the Australian stock exchange in 1960. Over the next two decades, the pair built up their company to become one of the best-known shopping centre providers in Australia, where Lowy now owns 44 malls.

In 1977, the company bought its first US shopping centre, in Connecticut, but it was not until 2000 that the company gained its first foothold in the UK market. In March of that year it bought the Broadmarsh centre in Nottingham, in partnership with the investment house Hermes. The same year it also acquired shopping centres in Tunbridge Wells, Guildford, Derby and Northern Ireland.

Now, Lowy runs his worldwide empire – across Australia, New Zealand, the United States and Britain – with his two sons, group managing directors Steven and Peter. Frank Lowy is based on the top floor of the 24-storey Westfield Towers in Sydney, which his company built in 1974. The company founder's own floor has uninterrupted views of Sydney's Opera House and Harbour Bridge, near to which Lowy's 74-metre yacht, named Ilona IV after his mother, is berthed. It was here that the Australian executive worked on his plan to enter the UK market – a plan that took his three decades to perfect.

The company developed its first UK shopping centre, after demolishing an existing mall in Derby. The £340m Westfield Derby project opened in October of last year. It was the biggest shopping centre to open in Britain that year. Now, Westfield hopes its west London development – located in an area known as White City – will move shopping centre development in the UK to the "next level".

"All our projects are about evolution," says Westfield UK and Europe managing director Michael Gutman. "In the White City project we are trying to bring together all the knowledge we have gathered from our 118 centres in four countries around the world. This will be our 119th. It is a unique trading area and demographic in terms of the power and disposable income of the people who live nearby. It is unparalleled in terms of connectivity. It contains some phenomenal public spaces both inside and out."

The story of how Westfield created Westfield London goes back four years. It involves a complicated series of acquisitions and joint ventures, but essentially involved Westfield taking control of an existing scheme being developed by fellow property firm Chelsfield in 2004.

Westfield bought out its partners in that acquisition, the Reuben brothers, billionaire private investors, and Multiplex, the Australian construction firm. In 2006 Westfield also took control of the project's construction from the Australian construction firm Multiplex, which at the time was dealing with negative press surrounding the late delivery of Wembley Stadium, which it was also contracted to build. Westfield currently owns a half stake in Westfield London, with the other half being owned by the property arm of the German financier Commerzbank.

Before Westfield's acquisition of the development, the acclaimed British architect Ian Ritchie had designed a concept for the shopping centre. He had suggested a number of features, which included the interior of the centre being covered by a fabric roof. When Westfield took control, it decided not to continue its relationship with Ritchie and brought its own in-house designers on board, who collaborated with out-of-house architects on specific elements of the scheme. These external designers included a young firm of London architects, Softroom, who designed a futuristic-looking café court called "The Balcony". Acclaimed New York designer Michael Gabellini took charge of blueprints for "The Village" – the separate area of the centre where the luxury brands such as Tiffany & Co are housed.

Westfield's own architects scrapped the fabric roof in favour of a glass version that would allow more light to enter the centre's interior. They also introduced a street of bars and restaurants that will be open around the clock – the "Southern Terrace" – at the centre's south-east corner, at the suggestion of superstar architect Richard Rogers, who at that point was acting as an adviser to former London mayor Ken Livingstone. Rogers felt the street would improve the area's public space.

"Normally we design all of our own buildings. But when we acquired the property, its design had already won planning permission from the council and it was under construction," says Gutman. "On a major retail development, the planning and circulation requires knowledge and experience. So we needed to bring on board some specialists, which we got through Softroom and Michael Gabellini."

On a private tour with the developer late last week, two weeks before the completion of construction, things appeared to be in impressive shape. Approaching Westfield London from the south-east, where a new bus terminal and specially designed, sleek-looking Shepherd's Bush Tube station sit, shoppers ascend the shallow granite ramp or "shopping street" of "Southern Terrace". This street is already lined with finished restaurants, outside which diners will sit on terraces overlooking the thoroughfare. The façades of the restaurant are of various sizes and designs to give each its own character. Overhead, various canopies, each again of unique size and material, offer protection from the elements. The red Westfield logo is affixed at key points to the street's façade.

Entering through a huge glass entrance, customers encounter a massive central space. Above this, one gets a look at the distinctive, undulating glass roof, through which daylight streams to cast triangular patterns on perfectly white walls.

This central space contains a large central "well" surrounded by the centre's three floors. On the uppermost of these, a 14-screen cinema, due to open next autumn, will allow film-goers to take a beer, wine or cocktail to the newest film releases as well as to reserve special "VIP" areas.

On the floor beneath this, the clothing store Timberland has turned the front of its shop into what appears to be a large wooden box, in line with the company's "rugged and outdoor" branding. A short distance away, Apple has finished its unit with typical white minimalism. To one side, Softroom's "Balcony" stretches for some 50 metres. Its futuristic, capsule-like appearance is contained within a façade that appears to be divided into a series of wooden slats. Here, an array of dedicated restaurants such Crocque Gascon – who will serve modern French cuisine like "duck burger classique" – and Vietnamese street food restaurant Pho, will serve to customers who will then sit at a shared seating area.

On the lowest floor, DKNY and Russell & Bromley have leased units. Gabellini's "Village" lies to the north-east of this central space. Here, the ceiling is shaped into soft ovals of plastic from which chandeliers hang.

Such features seem to have gone down well with retailers. At the time of opening, Westfield says the centre will be more than 96 per cent leased. Around 90 per cent of the tenants locked into 10 to 15-year contracts before the full extent of the current economic crisis was known. Unless the shops go out of business, Westfield will get their money.

It may sound worrying for the retailers concerned, but signing on Lowy's dotted line may well prove to suit them as much as Westfield. It's impossible to know the details of each deal, but industry experts believe that they may not have to part with any cash for the first year or two. So they can take their places in this glittering cathedral to the future of shopping, and pay for it when (they hope) the economy, and consumer confidence, is in an altogether better place.

And many believe that Lowy will prosper despite the current economic gloom. "Rather than being troubled by the financial crisis, Westfield has almost landed on its feet," says Retail Week editor Tim Danaher. "In fact, far from being unenthusiastic about the development, retailers don't want to be left out. While the details of the deals they have struck are mired in secrecy, Westfield, like all developers of new shopping centres, will have made concessions – such as rent-free periods and contributions to the shops' fit-outs, which have helped to persuade people to come on board. While some of the smaller retailers might go bust, the big guys won't come unstuck. Westfield has got the stomach to cope."

It has not all been plain sailing for Lowy and his empire, however. The business news agency Bloomberg reports that the billionaire is embroiled in a bout with tax authorities. The Australian Taxation Office is investigating claims that he hid £42m from tax officials. A US Senate panel had alleged in July that the Lowy family and LGT Group, a bank owned by Liechtenstein's royal family, had used a foundation and companies registered in Delaware and the British Virgin Islands to conceal the fact that the Lowys owned the money in question. This is something Frank Lowy has vehemently denied.

On a more local level, the White City scheme has encountered a degree of opposition. Nigel Kersey, director of the London branch of the Campaign to Protect Rural England, tried unsuccessfully to take the local council to court in 2000 for failing to ask for an environmental damage assessment over the initial Chelsfield scheme. "Had the planning authority played by the rules, it would have shown that the impact would be substantial," he said at the time.

Since then, Westfield says it has conducted broad consultations and that local groups now welcome the project. Indeed, the company is so confident that it is pressing on with plans to build a £1.45bn, 175,000sq m centre in Stratford, east London, to be completed in time for the 2012 Olympics. "The current slowdown is only likely to be relatively short-term compared with the planning process and the active life of a shopping centre," says Richard Dodd, a spokesperson for the British Retail Consortium, which represents British shopping centres. "Now, when retailers are competing more fiercely for customers' every pound, investing in your premises can be a good thing to do. Shopping centres offer great access and investment in retail."

Certainly, Michael Gutman feels the company has done enough to make sure that it is not hit by any forthcoming economic crash. "Most definitely we are in this for the long haul," he concludes. "We have a history of being long-term owners. We are beginning our relationship with Londoners and we hope to be embraced as a new icon on the landscape, like Covent Garden or the O2.

"We have opened projects in recessions before and in booms before. These buildings are built for long-term and they take several years to settle. The retailers who have taken stores are our customers and we are in a partnership with them to maximise their performance. The ability to effectively come in the morning to do grocery shopping and have a coffee and maybe go to the gym and go back home as well as doing fashion shopping surpasses anything you currently see in the high street."

In an interview last month, Frank Lowy, Gutman's ultimate boss, divulged that a few times a month, he plays poker. The billionaire says he gambles for stakes high enough to be painful if he doesn't win. "It has to hurt you a little bit when you lose," he said, declining to say how much someone with his finances might actually bet. "And I don't like to lose, period."

This time, with the ante at £1.7bn, you can bet that losing would cause Lowy considerable pain.

    Mega-mall: Is this the future of shopping?, I, 23.10.2008, http://www.independent.co.uk/news/uk/this-britain/megamall-is-this-the-future-of-shopping-969624.html

Financial crisis

Pound falls to five-year low

as Bank head admits recession is here

• Sterling drops 4% against the US dollar
• King says banking turmoil 'almost unimaginable'
• FTSE 100 drops 2% in early trading

Wednesday October 22 2008
10.15 BST
Guardian.co.uk
Graeme Wearden and Ashley Seager
This article was first published on guardian.co.uk
on Wednesday October 22 2008.
It was last updated at 10.18 on October 22 2008.

Sterling was hammered down to a five-year low against the dollar this morning after Mervyn King admitted for the first time that the UK is entering a recession.

The pound began tumbling last night as the Bank of England governor told business leaders in Leeds that the economy is shrinking and hinted at fresh interest rate cuts.

By this morning it had fallen by seven cents to $1.6209, a drop of more than 4%. Traders reported frantic selling as investors rushed to cut their losses by selling the UK currency.

Sterling also fell against the euro, losing around 2% to a low of €1.2636 this morning. The euro itself fell sharply against other currencies, hitting a four-and-a-half-year low against the yen, and its lowest value against the dollar since November 2006.

Shares fell sharply in London this morning, with the FTSE 100 shedding over 100 points, or 2.3%, in early trading to 4127.29.

The pound had already been hit yesterday by unexpectedly gloomy manufacturing data showing that confidence has collapsed, and King's comments appear to have added to concern over quite how weak the British economy now is.

Describing the banking system turmoil of recent weeks as "extraordinary, almost unimaginable," he said the financial system had come closer to collapse two weeks ago than at any time in the past 90 years.

"The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand. Indeed, it now seems likely that the UK economy is entering a recession," King said.

"It is surely probable that the drama of the banking crisis, which is unprecedented in the lifetime of almost all of us, will damage business and consumer confidence more generally."

His fears were confirmed yesterday as the CBI reported that confidence among British manufacturers had tumbled to its lowest since July 1980, with output and orders also collapsing.

The thinktank the National Institute for Economic and Social Research said today that Britain entered a recession in the third quarter of the year and warns the slump will probably last for a year or more, making it every bit as painful as the recessions of the early 1990s or early 1980s.

City commentator David Buik said that King's speech has "put sterling to the sword for the time being".

The Bank of England cut the cost of borrowing by half a point to 4.5% earlier this month, as part of coordinated global action, and King hinted that rates may come down again soon.

"During the past month, the balance of risks to inflation in the medium-term shifted decisively to the downside," he said.

CMC Markets analyst James Hughes said that the possibility of interest rate cuts across Europe have made the greenback more attractive - after months in which traders bet against the dollar.

"Investors continue to flock to the dollar as speculation mounts that central banks elsewhere will continue with aggressive rate cuts in an attempt to stimulate growth in the near term," said Hughes.

Official data out on Friday will almost certainly show that the economy contracted in the July to September period, having not grown at all in the second quarter. A "technical" recession is defined as two consecutive quarters of contraction, which experts say is the least Britain can expect this time round.

    Pound falls to five-year low as Bank head admits recession is here, G, 22.10.2008, http://www.guardian.co.uk/business/2008/oct/22/pound-recession-interest-rates

Economics:

Public finances slump to record deficit

Analysts described the figures
as 'dreadful' and predict worse to come
as the economy deteriorates

Monday October 20 2008
10.36 BST
Ashley Seager, economics correspondent
Guardian.co.uk
This article was first published on guardian.co.uk
on Monday October 20 2008.
It was last updated at 11.03 on October 20 2008.

The public finances lurched to a record deficit last month driven by a weakening economy and overspending by the government, and analysts say much worse is yet to come as the economy tips into recession.

The Office for National Statistics said that public sector net borrowing came in higher than expected at £8.1bn, a record for a September and way above the £4.8bn shortfall seen in September last year.

That left the cumulative PSNB for the first half of the 2008/09 fiscal year at £37.6bn versus £21.5bn in the same period a year ago and the highest since records began in 1946.

"The September public finances were dreadful, deteriorating even more than expected. This highlight the extremely poor state of the public finances as they are hit by past largesse, the marked economic slowdown, markedly weak housing market activity and prices, rising unemployment and government policy concessions since the March budget," said Howard Archer, economist at consultancy Global Insight.

The cash-based measure known as the public sector net cash requirement also hit a record high for the month of September, of £12.6bn compared with a deficit of £8.7bn in the same month last year.

"It confirms what we pretty much all know now, that borrowing is set to surge and rise dramatically in the current financial year," said Paul Dales, an economist at Capital Economics.

In his budget in March, the chancellor, Alistair Darling, forecast a shortfall for the full 2008/09 year to next March of £43bn. But today's figures show that figure has nearly been reached at the half-way stage of the year, meaning he will have to revise that figure sharply higher in next month's pre-budget report.

Darling said over the weekend that the government would bring forward some infrastructure projects intended for future years to give a boost to the economy during the downturn. Treasury officials denied that this meant extra spending would result, however.

The Ernst & Young Item Club thinktank today became the latest in a line of forecasters to predict a savage widening of the deficit over the next couple of years as recession crimps tax receipts and boosts government spending on welfare payments.

Item's chief economist Peter Spencer has pencilled in a deficit of £60bn this year - a record - and £92bn in 2009/10 - equivalent to 6% of gross domestic product.

Separately, the Council of Mortgage Lenders (CML) today reported that gross mortgage lending fell by a further 10.0% to just £17.7bn in September from £19.7bn in August and £24.7bn in July. Gross lending was down 41.7% year on year from £30.4bn in September 2007.

    Economics: Public finances slump to record deficit, G, 20.10.2008, http://www.guardian.co.uk/business/2008/oct/20/governmentborrowing-economics

Still confused by the credit crisis?

Then, read on ...

Bemused by the banking crisis
and the stock market madness of recent weeks?
Business Editor Margareta Pagano
answers the key questions

Sunday, 19 October 2008
The Independent

Is the worst of the worldwide crisis in banking now over?

Governments have committed a total of $2 trillion to be injected into the banking system. Here in the UK, for example, the Government is pumping £39bn into three of the our biggest banks – Royal Bank of Scotland, Lloyds TSB and HBOS – by buying shares in them to provide new capital.

The aim is to strengthen the banks' balance sheets so that they can start lending to each other again, and to their customers. But the most important objective is restoring confidence in the financial markets. It's too early to tell whether this has been achieved. But the way the world's leaders took such committed action last weekend to put together this co-ordinated action appears to have gone far to prevent a systemic collapse. Don't take too much notice of the volatile reaction of the stock markets last week after the news was announced. The markets are now looking forward to the next crises – the unwinding of the derivatives market and recession.

Who is to blame?

We all are, to some extent. Over the past decade the US and UK governments allowed people and companies to borrow too much and too cheaply. In the US, mortgage companies were offering "teaser" mortgages at only 1 per cent, so when interest rates were raised, many could not afford to meet the new mortgage payments – leading to the so-called sub-prime market. In the UK, banks were lending money to people to buy mortgages at 100 per cent. They were also encouraged to take on more credit. With house prices rising, everyone felt wealthy and so they replaced equity in their house for debt to fund the next holiday. Savings ratios crashed. But then last year Northern Rock collapsed, sending shivers through the financial system because it could not raise enough money to meet the demands of its depositors. So you could say governments were to blame for allowing the debt mountain to grow, the financial regulators for not keeping a tighter control over the banks who lent beyond their means too, and the public for indulging in their debt addiction.
 

Why won't the banks lend to each other?

They have been too scared. They have been nervous about lending because none of them had confidence in each other. This was because none of them knew exactly what sort of exposures they had to the US sub-prime market and other securitised loans.

Who controls the half-nationalised banks? Their shareholders or taxpayers?

Details of the UK bailout are still being worked on. At the moment it looks as though the Government may end up owning some 60 per cent of the shares in Royal Bank of Scotland because it is investing about £20bn in the bank. The Government will put directors on the board and will take part in the bank's everyday decision-making; just as it is doing with Northern Rock and Bradford & Bingley. But in reality this means the taxpayer indirectly owns those shares because the Government is raising the money going into the banks by raising new gilt-edged bonds – in other words, the public debt which we all own as citizens. The case of Lloyds and HBOS, which are merging, is different because the Government will be a minority shareholder. But it will still put a representative on the board. The rest of the shares in the banks are owned by the City's big investors, the pension funds, and insurance companies. They are angry at the Treasury's decision not to pay out dividends for at least a year until the Government's preference shares are paid. But the Government's plan is to return the banks to the private sector as soon as it can.

What is moving the markets up and down at the moment?

Stock markets move with events, but they also try to take account and predict the future. So the equity markets are volatile and fragile at the moment because now that they have been assured that the banking system is not going to collapse, they are looking ahead to what will happen to companies' profits as we head into recession. That's why the UK FTSE 100 index and the US Dow Jones index saw hairy trading last week: the big institutional investors, the hedge funds and retail investors were busy selling shares in companies which they think will suffer from the economic downturn. On the commodity markets investors were also selling natural resources such as metals and oil, because if the world goes into recession there will be less demand for these products. Only gold shot up again last week because it is seen as the safest commodity of all.

If the markets are going down, what has that got to do with me?

Everything. The markets work together like a great big machine and we are all connected. If you have a pension, then this is invested in the companies that are listed on the market and your pension comes from the dividends earned by those companies. For example, the big pension funds and insurance companies such as the Prudential or Standard Life are some of the biggest investors in the UK stock market as well as in those overseas. They also own government bonds. So if those prices fall, the value of your pension falls along with them. Those people who are retiring this year or next will have been severely hit by this bear market.

Why are some people predicting the FTSE will be at record levels in 18 months ?

Some economists reckon that's when we will be coming out of recession. It's based on forecasts that the world's big economies – the US, China, India, Russia and the growing markets of the Middle East – will by then be recovering and trade gets going again. That means British companies, particularly those with big overseas exposure, will do well and so will their share prices.
 

How will we know when the worst of this banking crisis is over?

If only we knew. If the banks can recapitalise smoothly and start lending again, then this will be an enormous boost of confidence to the "real economy". It means they will start lending money for mortgages again and to the corporate sector. When we hear that companies are having no problems in raising money for new investment, that will be a good sign.
 

How bad is the global economy looking ?

Touch and go. China, the powerhouse of the world, is slowing down, but it's economy is still expect to grow at 9 per cent next year. But it won't prevent us from tipping into recession. Other trouble spots in the world are Ukraine, Hungary, the Baltic states and Turkey – even Switzerland had to save its banks last week. Then, of course, there are fears over the $513bn ticking time bomb of the derivatives market, which may go off at any time.

How much worse is it going to get?

Next year will be tough. Economists reckon we have now officially hit recession in the UK. Unemployment will exceed two million by the end of this year; house repossessions are rising, and investment in business is falling. Retailers are getting ready for the worst Christmas since the late 1980s. But interest rates will be slashed and inflation will come down as oil and food prices drop. And the recession will last only a year.

The downturn in numbers

4.8%

Annual sales fall announced by the John Lewis Group last week

2m

Projected unemployment figure for December. About 1.79 million out of work now

11.5

Average number of sales per estate agent last quarter – a 30-year low

£467

Extra public borrowing per citizen required compared to March forecast

    Still confused by the credit crisis? Then, read on ..., I, 19.10.2008, http://www.independent.co.uk/news/business/analysis-and-features/still-confused-by-the-credit-crisis-then-read-on-966247.html

http://digital.guardian.co.uk/guardian/2008/10/16/pdfs/gdn_081016_ber_1_20951401.pdf

Financial crisis

FTSE 100 hits five-year low

as world stockmarkets slump again

• US manufacturing spark selling
• Oil price slips
• Japan's Nikkei down 11%
in worst performance since 1987

Thursday October 16 2008
17.15 BST
Guardian.co.uk
Graeme Wearden and Dan Milmo

The FTSE hit its lowest point in more than five years today as fears of a global recession sent world stockmarkets falling across Asia, Europe and the US.

Shares in the UK's leading companies closed down 5.35% at 3861, the FTSE 100's lowest point since April 2003, following another wave of selling by investors.

A batch of poor manufacturing figures from the US saw the Dow Jones index fall 2% this evening, as the Federal Reserve reported US industrial production in September suffered its biggest drop since 1974.

The Dow Jones had fallen by 172 points to 8405 by 5pm BST, giving up modest early gains.

An influential regional factory output survey, from the Philadelphia Federal Reserve Bank, compounded the gloom by reporting an 18-year low in factory activity.

"The Philly Fed data provides the first reliable lead into the October numbers and confirms that the meltdown in financial markets is being closely followed by a dramatic slide in real economic activity," said Alan Ruskin, the chief international strategist at RBS Global Banking.

Earlier today, the panic selling that began on Wall Street yesterday evening spread around the globe as investors lost faith that Europe and America's bank rescue packages would stave off an economic downturn.

In London, the FTSE 100 fell by almost 6% in the first few minutes of trading to just 3840.6, its lowest level during the recent crisis. Although it later bounced back, attempts at a more solid rally faltered after the Dow Jones maintained its downward trajectory this afternoon.

The FTSE's performance followed an 11% plunge on Japan's Nikkei, its worst daily fall since 1987.

There was little sign of optimism in the City this morning.

Antonio Borges, a former vice-president of Goldman Sachs, warned that investors are panicking, selling shares in favour of cash. "The markets are very, very volatile because we do have a crisis of confidence, so the slightest piece of bad news throws the markets into disarray," he said.

One analyst warned that shares may have much further to fall. "Unless something remarkable happens, it looks like the FTSE 100 will test the low of 3287 that it hit in March 2003," warned David Buik of BGC Partners.

"Regarding a recession – we are in it."

Earlier today, Jaguar Land Rover cut almost 200 jobs, and Corus slashed steel production for the rest of the year by 20%.

This follows a raft of evidence on Wednesday that the wider economy has been damaged by the financial crisis.

In the UK, the jobless total hit 1.79 million, and is expected to break through 2 million by Christmas.

Across the Atlantic, yesterday's 733 point plunge on the Dow Jones index was prompted by a shock drop in retail sales and a grim warning from Ben Bernanke. The Federal Reserve chairman said that the frozen credit markets posed a big risk to the wider economy.

"By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth," Bernanke told the Economic Club of New York.

The price of oil slipped again today, with a barrel of US crude oil falling another $3 to $71.73 on expectations of lower demand.

Markets had rallied on Monday as the world's governments began taking action to pump capital into their struggling banks.

But in Japan, where the Nikkei fell 11.4% to 8458, the prime minister, Taro Aso, said America's $250bn (£145bn) injection into the banks did not go far enough. "It was insufficient, and so the market is falling rapidly again," Aso said.

Borges agreed that the optimism over the bail-out may have been misplaced. "After the government guarantees, it is fair to expect that the banking sector will go back to a more normal state. The problem is, however, that this may have come a bit too late and, meanwhile, the consequences of the credit crunch are beginning to be felt across the economy," Borges told BBC Radio 4's Today programme.

Hong Kong's Hang Seng index fell by 8.5%, with China's Shanghai Composite down almost 4% in late trading.

    FTSE 100 hits five-year low as world stockmarkets slump again, G, 17.10.2008, http://www.guardian.co.uk/business/2008/oct/16/market-turmoil-recession

Sharp rise in unemployment

as financial crisis hits jobs market

• ILO measure posts largest increase since 1991
• Claimant count up too - but less than City expected
• PM says government will do all it can to help people

Wednesday October 15 2008
12.30 BST
Guardian.co.uk
Julia Kollewe and Ashley Seager
This article was first published on guardian.co.uk on Wednesday October 15 2008.
It was last updated at 12.50 on October 15 2008.

British unemployment today posted its biggest rise since the country's last recession 17 years ago as the financial crisis filtered through to the jobs market.

Official figures showed unemployment measured by International Labour Organisation (ILO) standards rose by 164,000 in the three months to August from the previous quarter to stand at 1.79million. The rise took the jobless rate up half a percentage point to 5.7%, also the biggest jump since July 1991.

"These numbers are truly horrendous and much worse than I had feared," said David Blanchflower, a labour market expert and member of the Bank of England's monetary policy committee.

He told the Guardian his earlier prediction that unemployment would rise to two million by Christmas now looked conservative. "Unemployment will be above two million by Christmas. I am particularly worried at the 56,000 rise in the number of young unemployed people. These are school leavers who are unable to get a job or claim benefits, which is why the claimant count has not risen even faster than it has," he said.

The number of Britons out of work and claiming jobless benefits rose by 31,800 last month to 939,000, the eighth monthly increase in a row, and August's rise was revised higher to 35,700. The City had expected a 35,000 increase for September.

This so-called claimant count measure is always lower than the broader, internationally recognised ILO measure which includes people not claiming benefits, because some unemployed people are not entitled to claim benefits, or choose not to do so.

The rise took the claimant count jobless rate up to 2.9%, its highest level since January 2007.

The prime minister, Gordon Brown, responded to the figures this morning by pledging the government would do everything it could to create jobs in the UK economy, which is teetering on the brink of recession.

The government also announced today it was making an extra £100m available to retrain workers who lose their jobs.

The employment minister, Tony McNulty, said the jobs data painted a "bad picture" of the UK economy: "But the job is to look forward and see how we can deal with any dip in employment rather than talking about the causes."

The number of employed people dropped 122,000 to 29.4million over the three-month period.

The FTSE 100 fell more than 3% this morning, wiping out all of yesterday's gains. The mood darkened after the unemployment figures, and the index of leading shares fell more than 150 points to 4235.6.

The Liberal Democrats' work and pensions spokeswoman, Jenny Willott, urged the government to turn its attention to unemployment and inflation, now the banking rescue package had beeen agreed.

"Real families across Britain are suffering, not just those working in the Square Mile. As the number of vacancies shrink, it will be harder and harder to get people back into work. It will not simply be a case of retraining the unemployed if there are no jobs for them to return to," she said.

The number of job vacancies dropped by 62,000 from a year ago to 608,000 in the three months to September. And 147,000 people faced redundancy in the three months to August, up by 28,000.

For many people, a bleak Christmas lies ahead as the fallout from stockmarket turmoil spreads to the rest of the economy.

Brendan Barber, the general secretary of the TUC, said: "We are now seeing the effect of the credit crunch on the rest of the economy. I fear that the whole economy will soon feel the impact of the problems in the banking sector."

He urged the Bank of England to cut interest rates again to avoid a severe recession.

Derek Simpson, the joint general secretary of the Unite union, said: "Government intervention should not just stop with the banks. Action across the wider economy is necessary to protect jobs and the economy in a recession."

Alan Clarke, UK economist at BNP Paribas, said: "If you look at the claimant count number, it wasn't as bad as expected, but if you look at the ILO, it was simply awful. These numbers are falling off a cliff."

In a sign that consumer price inflation - now at a 16-year high of 5.2% - is not feeding into wages, annual average earnings growth slowed to 3.4% in the three months to August, its weakest in five years.

"As for pay pressures, the average earnings numbers remain very subdued," said Philip Shaw, the chief economist at Investec. "The labour market appears yet again not to be an inflationary threat to the economy which helps to justify the cut in interest rates last week."

Economists believe it is going to get worse. Thousands of jobs are being lost in the City, where banks have merged or collapsed, and on the high street, where growing numbers of retailers are going bust.

Manufacturers laid off 46,000 workers in the three months to August, taking the total number of manufacturing jobs to 2.87million, today's figures from the Office for National Statistics showed.

Job losses are spread across the economy, with Cadbury announcing 580 job cuts this week and ITV cutting about 1,000 jobs. The Centre for Economics and Business Research estimates 62,000 financial jobs will be lost by the end of next year.

Nigel Meager, the director of the Institute for Employment Studies, said: "No part of the country is spared. Much attention has focused on high-end jobs in the City. In an economic downturn, however, the real human cost is likely to hit lower-skilled workers who find it harder to move into another job and have less of a financial cushion to see them through difficult times.

"As vacancies continue to evaporate, competition for any job available will become fierce and the existing long-term unemployed, as well as young people entering the labour market will be particularly disadvantaged."

    Sharp rise in unemployment as financial crisis hits jobs market, G, 15.10.2008, http://www.guardian.co.uk/business/2008/oct/15/unemploymentdata-recession

http://digital.guardian.co.uk/guardian/2008/10/14/pdfs/gdn_081014_ber_1_20938118.pdf

http://digital.guardian.co.uk/guardian/2008/10/13/pdfs/gdn_081013_ber_1_20930804.pdf

Markets surge

on £1,350bn European bank bail-out

Published: October 13 2008
15:18
Last updated: October 13 2008
17:46
The Financial Times
By John Willman, Business Editor

Germany, France and other European countries have unveiled bail-out plans to recapitalise their banks and reopen credit markets, following the British announcement of measures to nationalise parts of the UK banking system.

The world’s stock markets soared as details emerged of the co-ordinated European campaign to spend more than £1,350bn (€1,680bn) on bailing out the continent’s troubled banks.

London’s FTSE 100 closed up 8.3 per cent, its second biggest one-day gain on record, after the British government announced its plans to inject £37bn into three of the country’s biggest banks.

Other European stock markets followed suit as Germany, France and the Netherlands announced their plans, Italy’s cabinet passed a new decree offering more support to the financial sector, and the Spanish government approved a guarantee for issues of new bank debt. Frankfurt’s Xetra Dax closed up 11.4 per cent, while the CAC 40 in Paris rose 11.2 per cent.

Europe’s central banks promised unlimited dollar funding in co-ordinated action with the US Federal Reserve. The European Central Bank, Bank of England and Swiss National Bank said they were ready to inject as much as needed into the markets for dollar funding covering periods of seven days, a month and 84 days.

Confidence in the money markets showed signs of returning as the interbank cost of borrowing in sterling, euros and dollars fell. Three-month euro Libor posted its biggest decline this year and three-month dollar Libor had its steepest fall since March.

US stocks rallied when Wall Street opened, as details began to emerge of the plan to recapitalise US banks and other financial institutions. Neel Kashkari, the Treasury assistant secretary appointed by Hank Paulson, Treasury secretary, to run the US government’s $700bn bail-out fund, said the scheme would be “voluntary” in his first public statements since his appointment.

“The equity purchase programme will be voluntary and designed with attractive terms to encourage participation from healthy institutions.”

Mr Kashkari said Ben Bernanke, Federal Reserve chairman, would lead the oversight board for the troubled asset relief programme. That panel, which met for the first time last week, also includes Mr Paulson and the heads of the Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development.

In other moves, Australia and New Zealand announced guarantees for all bank deposits, as did the United Arab Emirates, while Saudi Arabia cut its interest rates.

The Swedish government said on Monday it would unveil steps to safeguard their financial sector in the next few days, but did not plan to inject capital into the Nordic country’s banks. Norway announced at the weekend it would offer its commercial banks up to $55.4bn in government bonds in exchange for mortgage debt and Portugal said it would make as much as €20bn available in guarantees for its banks’ financing.

Gordon Brown, the UK prime minister, defended his government’s “unprecedented but essential” £37bn injection that could leave it owning a majority stake in Royal Bank of Scotland, one of the world’s biggest banks, and more than 40 per cent of the combined Lloyds TSB and HBOS, which is set to be the country’s largest mortgage lender.

The German government endorsed measures closely modelled on the British rescue plan unveiled last week, will initially empower the finance ministry provide as much as €500bn in loan guarantees and capital to bolster the banking system.

The French government pledged €360bn to the country’s banks, including €320bn of loan guarantees and €40bn to buy stakes in French banks. The guarantees will run through to the end of 2009.

Dutch banks will be able to draw on €200bn of government guarantees for their loans to each other.

    Markets surge on £1,350bn European bank bail-out, FT, 13.10.2008, http://www.ft.com/cms/s/0/a7eba3fc-992b-11dd-9d48-000077b07658.html

Financial crisis

British government unveils

£37bn banking bail-out plan

• Government to take controlling stake in RBS
• Bank's chief Sir Fred Goodwin stepping down
• Barclays could yet ask for £6.5bn cash

Monday October 13 2008
11.20 BST
Guardian.co.uk
This article was first published on guardian.co.uk
on Monday October 13 2008.
It was last updated
at 12.36 on October 13 2008.

The government's £37bn bail-out of the banking sector will act as a "rock of stability" that other governments will soon copy, Gordon Brown said today.

The prime minister said the dramatic action would help the UK banking industry to survive the turbulence sweeping the world's financial system, and also pledged to end the era of "rewards for failure" for top executives.

"Today's plan is unprecedented but essential for all of us," Brown said at a Downing Street press conference.

The UK government confirmed this morning that it will pump up to £37bn into Royal Bank of Scotland, Lloyds TSB and HBOS in an attempt to prevent the UK's banking sector from melting down.

After a weekend of negotiations which continued through Sunday night, the Treasury announced a wide-ranging rescue plan under which bank bosses face a crackdown on pay and bonuses, and shareholder dividends will be axed.

The government will take a controlling stake of up to 60% in RBS, in return for up to £20bn from the taxpayer. The bank admitted this morning that trading has deteriorated in recent weeks. The chief executive, Sir Fred Goodwin, known as "Fred the Shred" for his cost-cutting reputation, and chairman Sir Tom McKillop are stepping down.

The chancellor, Alistair Darling, said that Goodwin and McKillop have waived their contractual entitlements to payoffs, as have the chief executive and chairman of HBOS who also announced their resignations today.

Lloyds, which renegotiated its takeover of HBOS over the weekend, will receive up to £17bn once the merger goes through. This will leave the government owning up to 43.5% of the enlarged group, with Lloyds shareholders owning 36.5% and HBOS's investors just 20%.

The government could also yet face a £6.5bn cash call from Barclays.

In return for providing fresh liquidity, the government has secured a series of concessions. RBS and Lloyds have both agreed not to pay a dividend this year - and possibly for several more - and to help people who are struggling to pay their mortgages. They will not pay any cash bonuses this year, and have agreed to let the government appoint several board members.

Darling said it was appropriate for the government to take seats on the boards of both companies, but insisted that they would continue to operate commercially at arms length from the government.

"Ministers aren't going to get involved in the day-to-day running," he said.

The government has also insisted that bank directors will no longer walk away with large payoffs. Gordon Brown told a press conference that the government would no longer tolerate "rewards for failure".

Both RBS and Lloyds said today that directors who are dismissed will receive "a severance package which is reasonable and perceived as fair".

The Financial Services Authority added its weight behind the clampdown on executive pay. It wrote to the heads of the UK banks today, warning that "bad" remuneration policies were not acceptable in the current climate and urging them to review their pay policies.

Darling said today's action was necessary in the "extraordinary circumstances" affecting markets worldwide.

"I'm determined to do everything we can to stabilise our banking system and make it stronger," the chancellor said. "And in return for it, of course, there will be restrictions on what happens in boardroom pay and we're also getting guarantees in relation to increased lending to businesses, as well as to mortgages too."

Key points

The bail-out will mean significant changes for the banks who are turning to the taxpayer for funds.

• RBS (£17bn): Chief executive Sir Fred Goodwin is replaced by Stephen Hester; chairman Sir Tom McKillop will leave next year; the government will own around 60% of the business; no executive bonuses this year; no dividend until the government's £5bn of preference shares are repaid; the government will appoint three directors; RBS will maintain mortgage lending at 2007 levels.

• Lloyds TSB (£5.5bn): Takeover of HBOS renegotiated downwards; the government will own up to 43.5% of the combined group, with Lloyds investors holding 36.5%; it will maintain an HQ in Scotland; directors will be asked to receive this year's bonus in shares; no dividend until preference shares are repaid; government will appoint two directors; Lloyds will maintain mortgage lending at 2007 levels for next three years.

• HBOS (£11bn): The chief executive Andy Hornby and chairman Dennis Stevenson will both leave when Lloyds takeover goes through; shareholders will own 20% of the combined Lloyds-TSB/HBOS.

Shares in HBOS and RBS both fell by almost 30% this morning, while Lloyds TSB slipped by 15%.

Barclays goes it alone

The Treasury has also been expected to take a smaller stake in Barclays. However, it hopes to raise up to £9.5bn in fresh capital through other measures.

Barclays today announced that it hopes to raise £6.5bn through a series of new share issues, underwritten by the government.

The bank said that an "existing shareholder" is interested in taking up around £1bn of shares, but if the rest of the issue is not taken up then the burden is likely to fall on the taxpayer.

In a blow to shareholders, Barclays is axing its annual dividend, saving £2bn. It will also save another £1.5bn through "balance sheet management" and "operational efficiencies".

Fears over jobs

With the UK economy facing a protracted slowdown, the Unite union urged the government to avoid any compulsory job losses as part of the rescue.

"The government has shown strong leadership and decisiveness in a time of great uncertainty. The measures announced today must be bound to undertakings by the banks of no job losses, no repossessions and an end to the bonus culture," said the joint general secretary of Unite, Derek Simpson.

"Thatcher buried Keynesian economics and the current crisis shows just how wrong she was. Government intervention is not only necessary in the financial services but intervention on a wider scale is necessary to protect jobs and the economy in a recession," he added.

    British government unveils £37bn banking bail-out plan, G, 13.10.2008, http://www.guardian.co.uk/business/2008/oct/13/marketturmoil-creditcrunch

http://digital.guardian.co.uk/guardian/2008/10/11/pdfs/gdn_081011_ber_1_20916885.pdf

We must lead

the world to financial stability

Strong banks, unfrozen markets,
greater transparency and international supervision
are the four keys to recovery

October 10, 2008
From The Times
Gordon Brown

The banking system is fundamental to everything we do. Every family and every business in Britain depends upon it. That is why, when threatened by the global financial turmoil that started in America and has now spread across the world, we in Britain took action to secure our banks and financial system.

The stability and restructuring programme for Britain that we announced this week is the first to address at one and the same time the three essential components of a modern banking system - sufficient liquidity, funding and capital.

So the Bank of England has pledged to double the amount of liquidity it provides to the banks; we have guaranteed new lending between the banks so that we can get the banks lending to each other again; and at least £50 billion will be made available to recapitalise our banks.

We will take stakes in banks in exchange for a return and will guarantee interbank lending on commercial terms. And at the heart of these reforms are clear principles of transparency, integrity, responsibility, good housekeeping and co-operation across borders.

But because this is a global problem, it requires a global solution. Indeed this now moves to a global stage with a range of international meetings starting this week with the G7 and the IMF and, we propose, culminating in a leaders meeting in which we must lay down the principles and the new policies for restructuring our banking and financial system all around the globe.

When I became Prime Minister I did not expect to make the decision, along with Alistair Darling, for the Government to offer to take stakes in our high street banks, just as nobody could have anticipated the action taken in America. But these new times require new ideas. The old solutions of yesterday will not serve us well for the challenges of today and tomorrow.

So we must leave behind outworn dogmas and embrace new solutions.

Of course, the policies each country pursues will need to be suited to its particular circumstances. But based on the British approach, I believe through wider European co-operation and also co-ordination among the leading economies, there are four broad steps we must now all take to restore our international financial system.

First, every bank in every country must meet capital requirements that ensure confidence. Just as in the UK we have made at least £50 billion of new capital available, so other countries where banks have insufficient capital will need to take measures to address this. Only strong and solid banks will be able to serve the global economy.

Secondly, short-term liquidity is simply a means of keeping the system going. What really matters for the future is to open the money markets that have been closed for medium-term funding from the private sector. Until only a few weeks ago few, if any, appreciated the real significance of the money markets within the wider global financial crisis and the importance of trust in these markets. But the freezing of the market for medium-term funding reflects a total loss of trust between banks.

The potential economic consequences cannot be understated. The role of banks is to circulate the savings from deposits, our pensions and from companies to those that need to spend or invest them. The cost at which banks can borrow this money directly affects the costs of mortgages for homeowners and of lending for business. This paralysis of lending from loss of confidence jeopardises the flow of money to every family and every business in the country.

Our guarantee to restart wholesale money markets in exchange for a fee has, I believe, broken new ground in restarting our financial system.

Thirdly, we must have stronger international rules for transparency, disclosure and the highest standards of conduct. Successful market economies need trust, which can only be built through shared values. So as we reform our financial system we should encourage hard work, effort, enterprise and responsible risk-taking - qualities that markets need to ensure, so that the rewards that flow are seen to be fair. But when risk-taking crosses the line between the responsible entrepreneurship, which we want to celebrate, and irresponsible risk-taking, then we have to take action to see that markets work in the public interest to reflect our shared values.

And fourthly, national systems of supervision are simply inadequate to cope with the huge cross-continental flows of capital in this new, ever more interdependent world. I know that the largest financial institutions will welcome the proposed colleges of cross-border supervisors that should be introduced immediately. The Financial Stability Forum and a reformed International Monetary Fund should play their part not just in crisis resolution but also in crisis prevention.

And action for financial stability should be accompanied by the wider international economic co-operation such as that which began on Wednesday with co-ordinated action on interest rates.

I have said all along that we will do whatever it takes to secure the stability of the financial system. And we have not flinched from taking the bold and far-reaching decisions needed to support British families and businesses through these extraordinary times.

We must now act for the long term with co-ordinated national actions.

The resolve and purposefulness of governments and people across the world is being put to the test. But across the old frontiers we must now redouble our efforts internationally. For it is only through the boldest of co-ordinated actions across the globe that we will adequately support families and businesses in this global age.

    We must lead the world to financial stability, Ts, 10.10.2008, http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article4916344.ece

Staring into the abyss

• Brown risks £500bn of public money in bank rescue package

• Unprecedented coordinated global action to cut interest rates

Thursday October 9 2008
The Guardian
Ashley Seager, Jill Treanor and Patrick Wintour
This article appeared in the Guardian
on Thursday October 09 2008 on p1 of the Top stories section.
It was last updated at 00:37 on October 09 2008.

The most concerted effort yet by global authorities to bring an end to the 14-month credit crunch, using every weapon in their arsenal, failed to restore battered confidence last night. Stockmarkets tumbled despite a £500bn bank rescue package from the British government and unprecedented interest rate cuts from the world's key central banks.

The prime minister, Gordon Brown, put his government's credibility on the line as he risked potentially vast sums of public money to save the UK's banking system. "This is not a time for outdated thinking or conventional dogma. Extraordinary times call for bold and far-reaching solutions," he said, promising that the plan would "show that we have led the world in changing the terms and conditions on which we can help to renew the flow of money in the system."

The plan was generally welcomed by the City, but investors were concerned about the lack of detail, which reflected the speed with which it had been drawn up. Investors fear that if the plan does not work, they are staring into the abyss of a possible collapse of the banking system.

Yesterday's dramatic actions included:

· Britain pledging £50bn to buy stakes in its major banks;

· A further £450bn allocated to underpin banks' finances;

· Unprecedented coordinated rate cuts made by central banks;

· The IMF warning of global recession.

In London, £57bn was wiped off the value of shares after the Bank of England cut its key interest rate by half a point to 4.5%, a move matched by seven other central banks, including the US Federal Reserve and European Central Bank.

The chancellor, Alistair Darling, was last night preparing to fly to Washington for crisis talks with top financial officials from the Group of Seven leading economies, including the US treasury secretary, Henry Paulson, and the Federal Reserve chief, Ben Bernanke, about global efforts to address the credit crunch.

The British government was forced to rush out its bank rescue plan yesterday morning after precipitous share price falls in leading banks on Tuesday. Bank bosses and Darling hammered out the basics of a package overnight, but the details are not yet fully worked out.

The plan was bolder and broader than expected, extending to seven major banks as well as Nationwide building society. In return for taxpayers' money, executives will have to curb bonuses, hold back share dividends and pledge to continue lending to homeowners and small businesses.

Robert Talbut, chief investment officer of Royal London Asset Management, said the announcement was short on detail. "I was hoping there would be more certainty over the capital-raising by the banks. The suspicion is that the authorities got bumped into this announcement."

Stockmarkets, initially buoyed by the authorities' action, later sold off heavily as investors remained worried that the rot had still not been removed from the US banking system, where the toxic sub-prime mortgage crisis originated.

The FTSE 100 dropped 5.2% to finish at 4,366, its lowest close since August 2004 and lower than it stood when Labour came to power in May 1997. It was the 10th biggest percentage fall ever. The Dow Jones industrial average in the US lost another 2%, falling by 189.01 to close at 9258.10.

"The coordinated interest rate cuts got the 'thumbs down' from equity markets, suggesting we have not yet turned the corner in this crisis," said Roger Bootle, a veteran analyst at Capital Economics.

The shadow chancellor, George Osborne, demanded that the government extract promises that City bonuses would be reined in as a condition of the deal. "There should not be rewards for failure - no bonuses for those who took their banks to the edge of bankruptcy," he told a packed House of Commons.

The IMF warned yesterday that Britain would next year suffer its first full year of recession since 1991, as the global economy enters a "major downturn" triggered by the most dangerous financial shock since the 1930s. In a gloomy half-yearly report, the IMF slashed its growth forecasts for the UK for 2009 from 1.7% to -0.1% - a sharper reduction than for any other major economy.

"The major advanced economies are already in, or close to recession, and although a recovery is projected in 2009, the pickup is likely to be unusually gradual," the IMF said.

Germany's finance minister, Peer Steinbrück, wrote to his G7 counterparts saying that the recent market turbulence "underscores the fact that we are not even close to being out of the woods yet".

France's President, Nicolas Sarkozy, who holds the rotating EU presidency, called for more joint European action to quell the turmoil.

There was some relief for homeowners as most commercial banks announced they would cut their base rates by the full half -point from November 1.

Treasury officials said the risk to the taxpayer of the rescue package was minimal and it could even turn a profit. But Robert Chote, head of the Institute for Fiscal Studies, said there could be a "nightmare scenario" for the public finances if several big banks were to collapse.

While most of the participating banks encouraged the government to produce its plan, Michael Geoghegan, chief executive of the UK's biggest bank, HSBC, warned that it set a dangerous precedent. "I don't think it is right that the British taxpayer should need to bail out banks ... It sets a bad precedent, but the government had no alternative," he said.

    Staring into the abyss, G, 9.10.2008, http://www.guardian.co.uk/business/2008/oct/08/creditcrunch.marketturmoil1

http://digital.guardian.co.uk/guardian/2008/10/09/pdfs/gdn_081009_ber_1_20895973.pdf

http://digital.guardian.co.uk/guardian/2008/10/08/pdfs/gdn_081008_ber_1_20887596.pdf

http://digital.guardian.co.uk/guardian/2008/10/07/pdfs/gdn_081007_ber_1_20879556.pdf

The Guardian        Online edition        7.10.2008
http://image.guardian.co.uk/sys-files/Guardian/documents/2008/10/07/BANK_ASSETS_0710.pdf

Darling unveils bank rescue

Published: October 7 2008 18:25
Last updated: October 8 2008 10:38
The Financial Times
By FT Reporters


Britain’s largest banks are to be part-nationalised after the government took the momentous decision to pump tens of billions of pounds of public money into the sector to avert a banking collapse.

The scheme failed to stabilise shares in the UK’s biggest banks and the FTSE 100 fell another 200 points or 4.4 per cent to 4,404.32.

The government is to put up to £250bn into the banking system in an effort to keep banks lending. It will also offer a guarantee to banks issuing medium term debt, which could mean backing a further £250bn of bank borrowings. But it is likely to demand dividend cuts and the end of big bonuses at the banks in return.

Under the plan, announced by the Treasury on Wednesday, seven leading banks and the Nationwide Building Society will initially apply for £25bn in permanent capital to raise their Tier One capital ratios, with a further £25bn available as a stand-by and for other eligible institutions. The banks have agreed to conclude their recapitalisation by the end of the year.

The banks involved are Abbey, now part of Santander of Spain, Barclays, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland and Standard Chartered as well as Nationwide. Other UK banks and building societies are invited to apply for the scheme as well.

HBOS, which is being taken over by Lloyds TSB in a government brokered deal and had seen its shares dive earlier in the week, rebounded 50 per cent to 139p.

The Royal Bank of Scotland, which plunged on Tuesday, rose nearly 10 per cent on Wednesday to 98.8p.

But Lloyds TSB slumped 6 per cent to 212p and Barclays lost 8.3 per cent to 261 ½p. HSBC and Standard Chartered, which are also part of the government’s scheme shed nearly 4 per cent at 866¾p and Standard Chartered slumped almost 12 per cent to £11.57.

Referring to “extraordinary market conditions”, the Treasury said the Bank of England would provide at least £200bn under its special liquidity scheme – under which banks can swap illiquid loans for risk-free government securities – “until markets stabilise”.

”The Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity,” the Bank said. ”In its provision of short-term liquidity the Bank will extend and widen its facilities in whatever way is necessary to ensure the stability of the system.”

The Bank added that until markets stabilise, it would continue to conduct auctions to lend sterling for three months and also to lend US dollars for one-week periods against a wider range of collateral. It it will review the size and frequency of those auctions as necessary.

The government will also, for a fee, guarantee new short and medium term debt issues by the banks to help them refinance wholesale funding obligations as they fall due. It said it expected the take up of this guarantee to be of the order of £250bn.

In return for the new permanent capital the banks will be required to provide “full commitment to support lending to small businesses and home buyers”, the Treasury said.

In talks with the banks, the government insisted that the terms and conditions of the new funding would “appropriately reflect the financial commitment being made by the taxpayer.” The government will also take into account “dividend policies and executive compensation schemes”.

The extra capital will probably come in the form of preference shares or other permanent interest bearing shares. However, the Treasury said it would also assist in the raising of ordinary capital if requested to do so.

The government said the measures were designed to “ensure the stability of the financial system” as well as protecting savers, borrowers and businesses.

The massive public bail-out comes after a day of turmoil on the London stock exchange on Tuesday, where shares in RBS fell 39 per cent to add to a 20 per cent tumble the day before. HBOS fell 41 per cent.

Faced with an intensifying banking crisis, prime minister Gordon Brown sanctioned moves for the taxpayer to recapitalise Britain’s leading banks in an effort to restore confidence in the system and to allow them to start lending again.

The rescue is being presented as part of a wider attempt to reform markets and is expected to include a call to the banks to show responsibility over remuneration for bosses, now that the taxpayer has a direct stake.

Alistair Darling, chancellor of the exchequer, said the rescue package was the start of a solution to the logjam in the bank lending system, and did not rule out further action.

”We will do whatever it takes,” he told Sky television on Wednesday. ”I think it is very important that governments across the world do that. It’s a crucial part of what we need to do here. It’s not the only thing, but it’s a crucial step forward.”

Mr Darling, who will make a Commons statement later on Wednesday, wanted more time to form a full package but was forced to act by the market chaos and by circulated reports that banks wanted an injection of public money.

Officials apparently worked through the night to finalise the scheme so that an announcement could be made before the London stock market opened on Wednesday morning. Even so, many of the details have yet to be thrashed out, and banks will have to engage in negotiations with the government to agree how much capital they require.

At £50bn – roughly equal to £2,000 per taxpayer – the recapitalisation of the banks would more than double Britain’s planned public borrowing this year, pushing public sector net borrowing close to £100bn and more than 6 per cent of national income, worse than any year since 1994-95.

The recapitalisation will deliver a huge boost to the banks’ core Tier One capital – the preferred measure of balance-sheet strength. This is expected to give the market greater confidence about the banks’ ability to absorb future losses.

However, the government’s move has a broader significance because it will also send a strong signal to the banks’ creditors that they are, in effect, protected from future losses.

Concerns about losses among creditors, triggered by the collapse of Lehman Brothers, the Wall Street bank, are the main reason why banks have recently struggled to access the funding markets.

The government said it had informed the European Commission of the plan, and was in talks with the governments of other countries about extending the proposals internationally.

Although HSBC is included in the list of eligible institutions, this refers to its UK subsidiary, not its holding company. HSBC said its UK unit would observe the requirements on Tier 1 capital but would do so from its own resources and had “no current plans” to participate in the scheme.

HBOS, the UK's largest mortgage lender which is currently being taken over by Lloyds, said: “The government’s announcement represents a very real and serious intention on the part of the authorities, following consultation with the banking industry, to bring stability and certainty to the UK banking system. HBOS believes that this initiative is very much in the interests of its shareholders and customers.”

Summary of Treasury plan

• Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland and Standard Chartered and Nationwide Building Society apply for government funding

• Injection of £25bn preferrence shares to improve capital ratios

• Further £25bn of capital available to UK registered banks

• Bank of England to double size of special liquidity scheme to £200bn

• Government to offer a £250bn guarantee to banks issuing medium term debt


Reporting by Chris Giles, George Parker, Peter Thal Larsen, Maggie Urry, Norma Cohen and Michael Hunter in London

    Darling unveils bank rescue, FT, 8.10.2008, http://www.ft.com/cms/s/0/e5b767d2-948c-11dd-953e-000077b07658.html

Britain Announces

Bank Bailout

Worth Hundreds of Billions

October 9, 2008
The New York Times
By LANDON THOMAS Jr.
and CARTER DOUGHERTY

LONDON — As European leaders continued to clash over measures to ease the financial crisis, Britain announced a three-part multibillion-dollar bailout for its beleaguered banks, and Spain moved to mount a separate rescue of its own banking sector.

A statement from the British Treasury said at least $350 billion “will be made available to banks under the special liquidity scheme,” doubling the size of a credit line from the Bank of England established as the financial crisis began and designed to unlock frozen lending between banks.

Additionally, the British government pledged $87 billion in direct support for eight major banks.

The move amounted to a partial nationalization of some of those institutions. Minutes after the announcement, the British stock market opened 93.5 points down at 4511.7 and continued to fall by up to 5 percent.

At a news conference, Prime Minister Gordon Brown said there would be “strings attached and conditions to be met” by the banks. “We expect to be rewarded for the support we provide,” he said.

“Our stability and restructuring program is comprehensive, specific and breaks new ground,” Mr. Brown said. “This is not the American plan. Our plan is to buy shares in the banks themselves and therefore we will have a stake in the banks.”

“We are not simply giving money,” he said. He depicted the British measures as far more radical than had been forecast. “We have led the world today.”

Alastair Darling, the chancellor of the Exchequer said the government would continue to do “whatever is necessary” to combat the financial crisis. “The reason we are doing this now is because it is necessary to stabilize the banking system.”

The Treasury announcement promised support for the banks in two overall tranches of $43.5 billion to be drawn as preference share capital. The banks were named as Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.

It said the amount to be issued to each of the eight banks remained to be finalized but would take into account issues such as the executive compensation packages offered by British banks and would require “a full commitment to support lending to small businesses and home buyers.”

The statement also promised a “ government guarantee of new short- and medium-term debt issuance to assist in refinancing maturing, wholesale funding obligations as they fall due.”

The guarantee _ separate from the independent Bank of England’s credit line _ would be offered for an interim period and on “appropriate commercial terms,” the statement said. “The government expects the take-up of the guarantee to be of the order of” $435 billion, the Treasury said.

The initiative came as signs of European economic weakness deepened, and as Iceland, whose troubles are mounting from the global credit crisis, warned that it was working to avoid tumbling into all-out bankruptcy.

Earlier this week, the chief executives of Barclays, Lloyds and Royal Bank of Scotland met with Mr. Darling and pressed him to move quickly to announce a program. Investors also increasingly expect the Bank of England to cut interest rates when it meets on Thursday in a bid to support the ailing economy.

“There is no such thing as a safe bank now,” said Willem H. Buiter, a political economist at the London School of Economics. “They are only as safe as the authorities make them.”

Shares in the Royal Bank of Scotland slumped 39 percent Tuesday and Barclays fell 9 percent, reflecting the fear that a government capital injection would dilute existing shareholders. Traders were also alarmed after Standard & Poor’s ratings service downgraded Royal Bank of Scotland, heightening fears that the bank would have trouble securing funds. Since Friday, the shares of R.B.S. have fallen 51 percent and Barclays 22 percent.

The idea behind the British plan is to increase the underlying capital the banks rely upon as a cushion against losses, which most analysts and investors say is no longer sufficient given the combination of a recession-bound economy and the drying up of most forms of short-term liquidity. A poll released Tuesday by the Federation of Small Businesses showed that most now face higher operating and borrowing costs.

In Spain, where a shakeout in the housing market has hit the banking industry hard, Prime Minister José Luis Rodríguez Zapatero announced he would create a 30 billion euro fund to buy assets from the nation’s banks to try to grease the wheels of lending. The fund could be raised to 50 billion euros and will buy only healthy, not impaired, assets, he said, raising questions about how useful it would be for banks laden with subprime-tainted loans.

At a news conference to reassure the public, he also pledged to raise deposit insurance to 100,000 euros per account.

With the credit crisis deepening by the day across Europe, and the shares of major banks continuing to fall on concerns over their solvency, finance ministers gathered in Luxembourg on Tuesday agreed to temporarily relax accounting rules to help banks avoid fire sales. That move will put European banks and insurers on a level playing field with their American counterparts.

It asks the European Commission, the European Union’s executive arm, to tweak accounting rules that many blame for exaggerating losses on mortgage-linked securities. The rules force banks to book heavy losses immediately because buyers for them are in short supply, even though the expectation is that they will eventually recover much of their value. The Securities and Exchange Commission in the United States made similar changes in September.

The goal, officials said, is to allow European banks and insurers to reflect the change in their third-quarter earnings. “It’s important that European companies don’t suffer competitive disadvantages,” Jörg Asmussen, the deputy German finance minister, said. The change would not be “a suspension of fair value accounting” but a “modification,” he added.

The finance ministers also endorsed a set of principles for recapitalizing hard-hit banks. The principles call for rescue packages to penalize shareholders and management while avoiding aid that would distort competition within Europe, and provide for taxpayers to share in the eventual upside of any bailout. Ireland, Belgium, the Netherlands, Germany and France separately adopted similar guidelines in the last week.

In a theme that ran through the meeting, European ministers promised to avoid a bankruptcy like that of Lehman Brothers, which elevated the crisis on Sept. 15. “We’re not going to tolerate a Lehman Brothers scenario,” said Christine Lagarde, France’s finance minister.

But that was where the efforts at unity appeared to stop.

After debate, ministers rolled back an effort to increase Europe-wide deposit insurance to 100,000 euros after smaller countries, fearing liabilities, successfully lobbied to cap it at 50,000 euros for one year.

That guarantee, however, differed from others of up to 100,000 euros, or even unlimited insurance, already promised by Ireland, Spain and other countries within recent days, as Europe plunged headlong into crisis. Austria also increased its insurance minimum to 100,000 euros Tuesday.

Europe’s piecemeal approach to protecting banks drew a sobering assessment from the German chancellor, Angela Merkel. Speaking in the Bundestag, she singled out what she called “the Irish way — stretching a shield over one’s own financial institutions, not including other international institutions that also have long paid taxes in Ireland, and so producing competitive distortions that, from my point of view are not acceptable” in what is meant to be a common European market.

Mrs. Merkel also reiterated her opposition to paying into a joint Europe fund to rescue banks, a measure favored by Prime Minister Silvio Berlusconi of Italy.

The Europeans have been criticized for showing a limited capacity to unite during the crisis. But on Tuesday, some analysts were giving the nations credit for working around soft spots in its institutional setup.

“The swiftness of the reactions, as illustrated by this weekend’s summit of heads of state, has so far confounded claims that a crisis management response in the European Union would be found lacking,” Pierre Cailleteau, a managing director at Moody’s Investor Service.

Still, the three-month London interbank offered rate, a benchmark borrowing gauge, surged to its highest level ever Tuesday. That reflects worries that political efforts, be they the $700 billion American rescue package or the European plan, might not be enough to repair badly damaged credit markets.

Carter Dougherty reported from Luxembourg and Judy Dempsey from Berlin. Alan Cowell contributed from Paris.

    Britain Announces Bank Bailout Worth Hundreds of Billions, NYT, 9.10.2008, http://www.nytimes.com/2008/10/09/business/worldbusiness/09britain.html?hp

FTSE 100 in biggest fall

since Black Monday

Published: October 6 2008 08:35
Last updated: October 6 2008 19:54
The Financial Times
By Neil Hume and Bryce Elder


The London market was routed on Monday with the FTSE 100 suffering its biggest one day percentage fall since Black Monday in 1987, and biggest points fall ever.

The blue-chip index dropped 391.1 points, or 7.9 per cent, to finish at a four year low of 4,589.2 as investors threw in the towel amid fears that a deep global economic slow down was taking hold in spite of measures to bail out the banking system.

This was reflected by the performance of the mining sector, which led the FTSE 100 lower. Kazakhmys slumped 26.6 per cent to 417¾p, while ENRC, which listed at 540p in December, lost 23.4 per cent to 425p, Fresnillo shed 19.9 per cent to 225p and Xstrata ended 19.2 per cent lower at £13.57.

UBS said it now expected global GDP growth of just 2.2 per cent in 2009, down from 2.8 per cent previously. “This suggests a global recession,” the bank said. “As a result we have cut UK mining sector earnings forecasts for 2009/10 by 38 per cent and 41 per cent,” it continued.

On top of that, traders noted that four Chinese steel companies were considering reducing output by 20 per cent, or 20m tonnes, and benchmark ferrochrome prices for the fourth quarter had been set 10 per cent below the previous quarter.

However, Ferrexpo, the Ukrainian producer of iron ore pellets, managed to outperform, falling just 2.1 per cent to 115p after Czech coal producer New World Resources, down 23.1 per cent to 500p, picked up a 20 per cent stake at just 86p a share from Ferrexpo founder Kostyantin Zhevago.

The Ukrainian billionaire, who retains a 51 per cent holding in Ferrexpo, was forced to sell to meet a margin call on a loan, for which the shares were held as collateral.

Banking stocks also slumped. With money markets still gummed up, HBOS dropped 19.8 per cent to 160.8p while Lloyds TSB fell 10.8 per cent to 259p. Based on last night’s closing price, HBOS is trading at a 25 per cent discount to the implied value of Lloyds’ all stock offer. On Friday, the discount was 17 per cent.

Sandy Chen, banks analyst at Panmure Gordon, advised clients to sell Barclays, off 14.7 per cent to 314p, and Royal Bank of Scotland, down 20.5 per cent at 148.1p, citing their potential exposure to defaults on credit default swaps.

“We broadly estimate there could be $50bn of payouts related to Fannie Mae and Freddie Mac CDS, and $400bn of payouts related to Lehman CDS. We think it highly likely that many counterparties, particularly hedge funds, will not be able to raise the cash to meet their ends of these bargains,” Mr Chen warned.

Land Securities fared rather better, closing just 5.1 per cent lower at £12.25 – after John Whittaker’s Peel Holdings announced a raised holding of 5.5 per cent.

Taylor Wimpey was among the biggest fallers in the FTSE 250, which closed 520.8 points, or 6.5 per cent, lower at 7,474.8. Its shares fell 20.1 per cent to 27¾p as investors reacted to Friday’s late news that Fitch had downgraded its rating on the housebuilder’s senior unsecured debt rating to B from BB-. The move followed Friday’s announcement that Taylor Wimpey’s eurobond creditors would be part of its covenant renegotiation process, in addition to bank and US private placement creditors “This process is progressively moving towards a work-out scenario,” Fitch warned.

Rentokil Initial dipped 3.7 per cent to 65¼p on concerns the support services group might need to raise capital from shareholders to pay back a £250m bond which matures next month.

“If it [Rentokil] is unable to refinance at rates it deems acceptable or it is unwilling to draw down further on its banking facilities it could look to raise cash in the equity markets,” Goldman Sachs warned in a recent note.

In the pub sector, JD Wetherspoon fell 10.3 per cent to 225¾p while Mitchells & Butlers, in which financier Robert Tchenguiz has a 26 per cent stake, slipped 11.1 per cent to 187p.

Traders said pub stocks had been hit by investors being forced to close positions after an Icelandic investment bank increased margin requirements on derivative contracts. This was also a factor in the poor performance of J Sainsbury, down 5 per cent at 313p.

    FTSE 100 in biggest fall since Black Monday, FT, 6.10.2008,
    http://www.ft.com/cms/s/0/8eafcd26-936f-11dd-9a63-0000779fd18c.html