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Rush to safety as worriedinvestors flee periphery
BORROWING costs jumped again yesterday in peripheral Eurozoneas fears grew that Greece is on its way out of the currency union.Investors piled cash into “safehaven” countries, driving down borrowing costs in the UK andGermany and fleeing riskier assets.German backing for bailouts andausterity took a beating as AngelaMerkel’s CDU party lost a majorregional election over the week-end, while Greek politicians againfailed to agree on a new govern-ment, hitting confidence acrossthe continent.Italy’s 10-year borrowing costsrose 18.8 basis points (bp) to 5.697per cent yesterday, while Spain’s jumped 22bp to 6.227 per cent andGreece’s increased by 283.2bp to27.584 per cent.Meanwhile the UK saw 10-yeargilt yields drop to a record low of 1.861 per cent, before rising to1.877 per cent by the end of theday.German yields fell 5.9bp over theday to 1.457 per cent, and 10-yearUS Treasury yields dropped 5.3bpto 1.78 per cent.Stocks also fell hard over the day as investors sought safer locationsfor their cash.“Event risk and political uncer-
GM unveils Europe restructuringplan
The head of General Motors’ Europe armtold anxious German workers on Mondaythat he would have to restructureproduction of a key model in order to helpreturn the European operation toprofitability.
Paul Smith plans fresh move intoChina
British fashion brand Paul Smith plans toopen a 5,000 sq ft flagship store inShanghai as part of its second attempt tocrack the Chinese market, five years afterlosses forced it to retreat from thecountry.
LightSquared files for bankruptcyprotection
LightSquared, the satellite venture ofPhilip Falcone, has filed for bankruptcyprotection after the billionaire investorwas unable to reach agreement withcreditors. The company faced a 5pmdeadline yesterday before a covenantwaiver agreed by holders ofLightSquared’s $1.6bn of debt expired.
Recovery expert charges £6,000 a dayto axe jobs
Turnaround expert Donald Muir stands toearn £470,000 for six months’ part-timework while the accountancy firm he wasbrought in to save cuts a tenth of itsworkforce, it has emerged. Muir wasparachuted in to help RSM Tenon.
New lease of life for bank
The 105-year-old banking name of Singer &Friedlander has returned to the City after itwas bought out of administration by a groupof former staff.
Sir John Peace calls on cavalry to haltbonus cap
Sir John Peace, chairman of StandardChartered, has called on the political“cavalry” to lead the charge againstEuropean plans for a bonus cap that couldcripple Britain's financial services industry.
Banks changes to SME loans“unlawful”
Banks are “unlawfully” changing loanterms and refusing to negotiate with smallbusinesses, a law firm has claimed.
Cash crisis hits aerospace
A Spanish manufacturer of critical aircraftcomponents for major aircraft makersincluding Airbus, Boeing and Embraer isslowing production and struggling to payits bills. Alestis Aerospace is facing a cashcrunch because of Spain’s banking crisis.
Activision reaches into its gamevault to rev up revenue
Activision Blizzard, the world’s biggestvideogame maker, is banking its future ongames that go back more than a decade.
WHAT THE OTHER PAPERS SAY THIS MORNING
CREDIT rating agency Moody’s lastnight downgraded its long-term debtand deposit ratings on 26 Italianfinancial institutions, blaming thecountry’s return to recession andlimited funding opportunities.Unicredit and Intesa Sanpaolo, which together account for almost athird of Italy’s banking market by assets, were among those hit by thedowngrades, three months afterMoody’s put more than 100 banksacross the Eurozone on negativereview due to their exposure to theregion’s economic crisis.“The ratings for Italian banks arenow amongst the lowest withinadvanced European countries,reflecting these banks’ susceptibility to the adverse operatingenvironments in Italy and Europe,”Moody’s said in a statement. The downgrades are expected toherald the start of a fresh round of rating reassessments, with Spain’sstruggling financial institutionsseen as the most likely candidates to be hit next.Unicredit’s standalone creditrating was lowered by one notch to A3, while Intesa Sanpaolo’s wasdowngraded from A3 to A2.Moody’s said that in most cases,the downgrades were not based onchanges to its assumptions aboutsupport available from third-parties,including the Italian government.
Moody’s cutsthe ratings of26 Italian banks
BY ELIZABETH FOURNIERBY TIM WALLACE
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T has long been a theme of thiscolumn that the government andits critics alike have exaggeratedthe extent of the government’s belt-tightening. The coalition is doingthis to try and reassure the bondmarkets while seeking to minimisethe hit to the public sector; theopposition because it wants to blamethe recession on “the cuts.” But thereare two kinds of austerity:governments can either hike taxes orcut spending. Britain is definitely getting plenty of the first kind – but itis getting far less and far too little of the second kind than is usually understood.Millions of people are suffering butthat is because they, rather than thestate, are being forced to tighten their belts – they are being hit by higher Vat, national insurance, capital gainstax, transport taxes, pasty taxes and
It’s austerity all right –but not of the kind we actually need
TUESDAY 15 MAY 2012
the like. On top of that, inflation isgobbling up pay rises and slowly butsurely eroding the purchasing powerof whatever is left in workers’ pocketsonce the state has grabbed its share.Even a cursory analysis of the Treasury’s Budget projections revealsthat state spending is still going up incash terms. After adjusting for infla-tion, it is only falling slightly. Theproblem is that some areas of thepublic sector are suffering heavily –libraries, for example, or infrastruc-ture projects – while the governmentis still spending more and more inother areas, and not only on debtinterest and unemployment benefits.So why all the misleading rhetoric? As an excellent report from TullettPrebon points out, the UK has beentrying to placate (or as it bluntly putsit “dupe”) the bond markets by com- bining maximum spin with mini-mum substance. The report’s author, Tim Morgan, goes as far as to describe what passes for the debate on publicspending in the UK as a “Big Lie”,“phoney austerity”, a “bare-faceddeception”, “mendacious” and muchelse besides. It is good to see an econ-omist at a City firm actually telling ithow it is, rather than buying themainstream, wishy-washy consensus;in fact, I cannot recall ever reading apiece of research from the City thatcontained so many insults. Great fun£161bn (at 2010-11 values) in 2009-10to £123bn in 2011-12. But the infla-tion-adjusted deficit remains higherthan it was in 2008-09 (£100bn), the year before the Labour government’spre-election spending spree. Of the£38bn deficit reduction achievedsince 2009-10, three-quarters hasresulted from higher taxes and only one quarter (£8bn) from spendingcuts. Again using constant (2010-11) values, taxes have increased by £30bnsince 2009-10, absorbing three quar-ters of the entire increase in GDP of £40bn over that period. Astonishingly,therefore, the private sector has kept just one quarter of the already tiny increase in GDP of the past three years. It’s austerity all right – but of the wrong kind.– but also deadly serious.Morgan’s statistics are illuminating.In 2009-10, a combination of automat-ic stabiliser costs and a pre-electionspree sent spending rocketing by 4.6per cent in real terms, equivalent toan extra £31bn. During the coalitiongovernment’s first year in office(2010-11), spending increased again,albeit by just £2.4bn. Public spendingfinally fell in 2011-12, but only by £10.3bn, or 1.5 per cent. Total spend-ing in 2011-12 was £7.9bn (1.1 per cent)lower than in 2009-10 but £22.6bn (3.4per cent) higher than in 2008-09. At best, the supposedly huge cuts inspending delivered by the coalitionamount to only a little more than £1in every £100. Any well-run householdor company would be able to cope; why can’t the British state? The figures make grim reading. Thedeficit has been reduced, fromtainty in Eurozone appear too highto be ignored,” said JP Morgan.“Buying the dips might be tempt-ing, but in the event of a country leaving Eurozone, markets wouldcare about only one question: who isnext?”Even traditional safe haven goldfell another 1.58 per cent to $1563.5. Analysts blamed the increasingly strong US dollar, as the market ispriced in the currency, hittingdemand from other countries. The continued pressure on govern-ments’ debts means leaders areshowing few signs of backing downover austerity measures.Spanish leader Mariano Rajoy yes-terday restated his belief that spend-ing cuts and tax rises are needed toreduce the country’s debts, whichhis economic reforms will helprestore growth in the medium term.However, new French presidentFrancois Hollande takes office today and will meet German chancellorMerkel. The two are expected to seek common ground after Hollande’sprevious rejection of Merkel’s plansfor fiscal discipline for the Eurozone.
Investors ﬂocked to safe German debt