One In 20 Households Rely On Payday Loans

The Telegraph reports that the Aviva Family Finances Report published today notes that one in 20 households is "relying" on payday loans to get by.

Two weeks ago the Office of Fair Trading referred the £2BN industry to the Competition Commission, after uncovering evidence of "widespread irresponsible lending".

Last week the Financial Conduct Authority warned that it was considering a total advertising ban on payday loan companies as one of the options when it takes over regulation of the sector next April.

Controls and increased regulation are all very well. However, if hard pressed families who are not well served by mainstream lenders are unable to raise loans from payday loan companies their only other resort will be loan sharks.

Retire At 70

Tom McPhail of Hargreaves Lansdown has said that, wealthy footballers and celebs aside, in 10 years’ time 70 will be the normal retirement age.

This should hardly come as a surprise, given that people are living longer and that pensions (both state and private) cannot keep pace with the increase in longevity.

However, the Times quotes a report from Scottish Widows that says that households are prioritising living expenses, paying off debts and mortgage repayments over saving for retirement in the current uncertain economic climate.

At this point I would ask exactly what it is that Scottish Widows expect people to do?

Defaulting on mortgage payments or increasing debts (in order to save for the future) will simply add to the financial burden of people in later years as they grow older.

How Banks and Finance Companies Work

The £60BN Banking Black Hole

The shareholder group PIRC has done a calculation that warns of a potential black hole in the accounts of British banks, relating to bad debts the banks may have to write off in coming years but have yet to subtract from profits, together with other items such as deferred bonuses not booked.

Amongst those with potential black holes are HSBC with £10.4BN of hidden losses, the Royal Bank of Scotland with £9.4BN and Barclays with £7.3BN.

PIRC applied old-style UK GAAP accounting rules, which applied for 100 years until 2005, to the figures released in the 2012 banks’ accounts.

Basel rules require banks to declare half the expected losses over a year. However, bad loans and expected losses do not appear in the banks’ accounts under International Financial Reporting Standards (IFRS).

The Telegraph reports that the Bank of England has suggested the total could amount to £60BN.

This needless to say means that those politicians who hope that banks will increase lending are pissing in the wind, as banks are scrambling to build up their balance sheets in preparation for the next self inflicted financial disaster (such as PPI mis-selling).

Payday Loan Companies Drinking In The Last Chance Saloon

The Office of Fair Trading (OFT) has come up with the unremarkable conclusion that there is evidence of widespread irresponsible lending by payday lenders.

The OFT has targeted the leading 50 payday lenders (which account for 90% of the market), and has proposed to refer the payday lending market to the Competition Commission.

Clive Maxwell, OFT chief executive, is quoted by the Telegraph:

"We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers. 

Payday lenders are earning up to half their revenue not from one-off loans, but from rolled over or refinanced deals where unexpected costs can rapidly mount up."

The review carried out by the OFT noted that particular problem areas included; lenders failing to adequately assess affordability before lending, failing to explain properly how payments will be collected and aggressive debt collection practices.

The OFT noted that:

"Payday lenders' revenues are heavily reliant on those customers who fail to repay their original loan on time."

The OFT have now presented the 50 with the "last chance saloon option", namely that they must take "rapid action" to address the OFT's concerns and show within 12 weeks that they are fully compliant.

Any firms which fail to cooperate will face enforcement action.

Whilst the action will, to some extent, rein in the mainstream payday lenders there still remains those who operate outwith the law; namely loan sharks. Unfortunately those people, so desperate that they will borrow from payday lenders that charge extortionate rates of interest, who are denied credit from payday lenders in the future will be forced to go to loan sharks.

The fundamental problem is not that of extortionate interest rates, but of a large swathe of society that has run out of credit, cash and options.

Spain Requests Bailout That Is Not A Bailout

Spain has requested a €39.5bn bailout for its banks, which is likely to be approved later today at a meeting of eurozone finance ministers in Brussels.

However, this is not a "bailout" in the Greek sense of the word. Spain will use this money only for its banks, it will not use it to prop up its ailing economy.

The request for a full bailout, in the Greek sense of the word, has yet to come. However, be patient it will come!

Banks Trouser Taxpayers' Money

The Telegraph reports that banks drew down £4.36BN from the Bank of England's Funding for Lending Scheme in its first two months and increased net lending by £496M.

The scheme does not help firms access credit (it should be noted that banks are in fact tightening their lending criteria), it only makes credit cheaper to those successful in their loan applications.

Of Mice and Men - Samaras Cancels Begging Bowl Qatar Trip

Lats Friday I wrote of  a begging bowl trip by Greek PM to Qatar (and possibly Asia Pacific and Russia) that was "definitely" going ahead:

"In the meantime, hoping to delay the arrival of the fat lady, Antonis Samaras Greece's PM is to go on a tour of the Middle East, China and Russia to try to attract investment.

However, whilst the trip to Qatar is definitely going ahead the other ports of call have yet to be confirmed; not everyone likes people turning up on their doorstep begging for money."

Less than a week later and it seems that the "definite" trip has been cancelled.

As per Zerohedge:

"Greek Premier Cancels Planned Visit to Qatar on Nov. 26: Office. So much for that bailout plan."

As I noted last Friday, not everyone likes people turning up on their doorstep begging for money.

The Troika's Stark Choice

Despite Greece's doom laden warnings that it would run out of cash by 16 November,  as at the time of writing this article it hasn't.

In other unsurprising news Eurozone finance ministers, the IMF and the ECB (aka the Troika) have failed, for the second week running, to reach an agreement as to how/whether to bail Greece out again.

The bottom line is that Greece's debt is unsustainable.

The Troika face a stark choice, either the debt is written off or Greece is written off.

Legs Kicked From Under Property Market

New rules to be announced tomorrow by the FSA wrt conditions on which mortgages can be granted will kick the legs out from under the struggling property market and, by definition (since the British economy is underpinned by the property market), the economy.

The new rules will make it much harder for the following to take out a mortgage:

- those over 50
- the self employed
- those wishing to use an interest only mortgage

Thus, at a stroke, the tenuous recovery that might be occurring within the economy has been stymied.

Barclays Rigs Libor

Advice from Zerohedge to anyone with a Barclays variable rate mortgage between 2005 and now:

"Our advice to anyone who had an adjustable rate mortgage in the period between 2005 and today: sue the living feces out of Barclays, and all other banks who crawl out of the woodwork with purported settlements. 

Because due to their undisputed mark manipulation, it is absolutely safe to say that ARMs, which rely on Libor for interest rate formation, were grossly manipulated by the same idiot traders who left written evidence of their manipulation year after year. 

Now it is their turn to pay."

Whither Project Merlin? - Osborne's Maxed Out Plan A

Kudos to Mervyn King and George Osborne for gamely trying to shore up the British economy, against the oncoming Eurozone tsunami, with a £100BN support programme.

The FT reports that:

"the chancellor told a City audience on Thursday night that he was working with Sir Mervyn King, the Bank of England governor, to “deploy new firepower” amid fears that turmoil in the Eurozone could lead to a severe credit crunch and higher interest rates in Britain.

Mr Osborne’s aides spoke of a “maxing out of Plan A” – taking advantage of the country’s record of fiscal discipline and credibility with the markets to unleash an aggressive monetary policy offering cheaper loans to businesses and households."

The markets have reacted favourably (as they always do) to "hopeful" news.

This is all very well, if one could trust the banks to lend the money on to companies and individuals. However, all that the banks will do it use the £100BN to shore up their own balance sheets.

Not one penny of this will reach the business or individuals who need it, and would be the engines of growth for the British economy.

It would be better of Osborne took the £100BN and simply dropped it from a helicopter over the UK, that way he could be sure that it will have some positive effect on the economy.

Am I being too cynical?

I don't think so, have you all forgotten the hopes and hype wrt Project Merlin?

Whatever happened to that then?

Wonga To Offer Business Loans

Wonga, which specialises in short-term personal loans, is launching a new product aimed at businesses.

It will, subject to checks, offer businesses loans of between £3,000 and £10,000 for up to a year with APR's rising from between 16.6% to 180%.

Whatever happened to Project Merlin (that was meant to make £190BN available to SME's) then?

Barclays Accused of "Reckless Disregard"

An independent report prepared for Guardian Care Homes (GCH), which operates 30 care homes, by derivatives experts at JC Rathbone Associates accuses Barclays of "reckless disregard" over its sale of a set of complex derivatives to GCH.

GCH are suing Barclays for £36M, and the report will be used in its case against the bank.

The Telegraph notes that the report alleges that the terms of the loan posed "a risk of breach of covenant", while also claiming that the hedges sold to GCH were never likely to have protected it against rising interest rates.

Barclays in a statement last week said:

"This action is completely without merit and we will contest it vigorously. Barclays is satisfied that it provides sufficient information to enable a client to make an informed, commercial decision about the products it offers."

On Friday, Bob Diamond, CEO of Barclays, said the number of complaints was "very small", but admitted "mistakes" were likely to have been made.

The banks marketed these products as protection against potential higher future costs, the products do not do this. It would have been in the hapless purchasers' interests to take out a simple to understand fixed rate loan. Unfortunately, for the hapless customer, the commission earned by the banks on these complex financial products were higher.

I will leave you with the thoughts of Bob Diamond, 3rd November 2011:

"The only way that banks will win back the public's trust is to become better citizens. That starts with how we behave, and in demonstrating we act with trust and integrity. 

At banks this means the interests of customers and clients must be at the very heart of every decision made."

How very true!  

Shackled To Debt

Britain (like every other significant national economy) is shackled to debt.

The UK public sector net debt has risen to £1.022 Trillion, that is the equivalent to 66% of GDP and the highest since records began.

Some are questioning how this can happen, given that the politicians have launched an austerity programme designed to cut back on on debt.

The answer is simple.

The "planned" cuts and austerity drive will never cut the actual level of debt, at best the cuts will reduce the rate of increase of debt.

We are destined to be shackled to debt for the rest of our lives!

Kicking The Can Down The Road

In a clear sign that the financial crisis is far from over, Joerg Asmussen, a member of the executive board at the ECB, has backed calls from the IMF to consider targeted debt relief for homeowners in financial trouble.

The IMF report, published earlier this week, outlined evidence from a number of countries where mechanisms have been put in place to cut household debt levels; thereby boosting personal spending and helping economic growth.

Quote:

"Bold household debt restructuring programmes can significantly reduce the number of mortgage defaults and foreclosures and substantially reduce debt repayment burdens."

That is all very well as a short term palliative to keep us afloat. However, at some stage we will have to significantly boost our earnings (from hard real productive value adding work, not by printing money) if we are to ever get ourselves out of this mess!

Greece Is A Busted Flush - Greece Printing Its Own Euros

I have written on this site before that Greece is a busted flush. However, those of you who still doubt this, and cling to the hype spewed forth by the Eurozone that the second bailout will fix Greece may care to consider the following:

1 Greece is now printing its own Euros, because it has nothing left of value to offer the ECB as collateral for Emergency Liquidity Assistance (ELA)

2 Greece's unemployment rate rose to 20.7% percent in the last three months of 2011. Youth unemployment now stands at a staggering 40%.

3 Evangelos Venizelos (a rat leaving the sinking ship) has resigned as finance minister, thus undermining any attempts by Greece to push through the financial reforms it agreed to in exchange for the second bailout.

Greece is a busted flush!

The Second Economic Adjustment Programme for Greece - Deconstructed

Andrew Tyrie, chairman of the Treasury Select Committee, has called for Greece to exit the Euro and for the resources of the International Monetary Fund (IMF) to be significantly boosted to tackle future financial crises.

He is talking sense, based on the report "The Second Economic Adjustment Programme for Greece" issued today by the European Commission, Greece doesn't have a cat's chance in hell of recovering whilst it remains a prisoner of the Eurozone.

Here are a few choice cuts from the report, together with my deconstruction of what they mean for Greece:

"Greece made mixed progress towards the ambitious objectives of the first adjustment programme. Several factors hampered implementation: political instability, social unrest and issues of administrative capacity and, more fundamentally, a recession that was much deeper than previously projected."

In other words, the figures on which rescue "plans" are based are wrong and consistently unreliable.

"..insufficient progress was made in modernising revenue administration and expenditure control, and steps taken in the fight against tax evasion and the prompt settlement of payments to suppliers have remained far too timid."

Until Greece actually develops a tax system that does what it says on the box, it will not be able to fund itself. This of course won't happen, as the political system is corrupt.

"Greece has been unable to return to the markets so far."

As a result of the debt swap Greece will never be able to return to the markets for funding, as the markets will never trust it enough to lend it money again.

"The economy continues to contract and short-term growth rates have been further revised downwards. In 2011, the economy is estimated to have contracted by 6.9 percent."
The economy is screwed!

"Greece's medium-term economic performance will crucially depend on the implementation of structural reforms. These reforms, particularly those in the labour market, the liberalisation of several sectors and a number of measures to improve the business environment should help promote competition, spur productivity and employment growth and reduce production costs."

Based on "progress" so far, these reforms simply will not happen.

"Greece has to restore competitiveness through an ambitious internal devaluation, i.e., a reduction in prices and production costs relative to its competitors, as well as a shift from a consumption-led to an export-led economy. Since a strong increase in productivity takes time, an upfront reduction in nominal wage and non-wage costs is necessary."

Things are going to become a lot worse for the ordinary working/unemployed Greek citizen.

"Current projections reveal large fiscal gaps in 2013-14. Current projections reveal a cumulated fiscal gap in 2013-14 of 5½ percent of GDP. Therefore, substantial additional expenditure cuts will have to be announced and adopted by Greece in the coming months, in particular when Greece updates its medium-term budget (medium-term fiscal strategy or MTFS) in May 2012."

As noted, things are going to become a lot worse!

"Progress in privatisation has been slower than planned."

Another pipe dream that will never materialise!

"In a moderately optimistic but realistic scenario, if Greece meets the programme targets, the debt-to-GDP ratio will decline to about 117 percent in 2020. However, it will remain high for many years and, therefore, be susceptible to adverse domestic and global developments."

In eight years, what could possibly go wrong?

"Implementation risks will remain very high. The success of the second programme depends chiefly on Greece. It crucially hinges on the full and timely implementation of fiscal consolidation and  growth-enhancing structural reforms agreed under the programme. "

Not a cat's chance in hell of succeeding!

Preliminary Greek Deliverable Obligations

In case anyone thought that the $3BN or so credit event was the end of the matter for Greece, I recommend that you take a look at ISDA's list of Preliminary Greek Deliverable Obligations.

ISDA list Greek guarantees/debts (over and above the Euro130BN bailout) that exceeds $100BN, and are technically repayable immediately now that Greece has defaulted on its bonds.

Happy LTRO Day II

Well my earlier bet on LTRO as being around Euro650BN was wide of the mark!

The ECB's 3 year LTRO has just been announced as being Euro529BN, given to the 800 banks which have come forward with their begging bowls.