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                      Frost's Business News digest
Thursday 25th October 2012
Foreign firms face tax crackdown in UK and Europe
US sues Bank of America for $1bn over 'hustle' mortgage fraud scheme
Ex-Goldman Sachs director Rajat Gupta gets 2-year sentence and $5m fine
Credit card giant ditches pens for PINs
China SOEs report surge in profits
Ford set to axe British plant after dire sales in eurozone
China becomes largest TV series producer
UK economy: Stuck in low gear
Trade between Italy and Russia rises by 5% in 2012
Tougher income checks if you want a mortgage
North Sea tax break expected to create thousands of jobs
Admiralty Arch sold to Spanish investor
Former Stock Exchange chairman joins calls for end to free banking
On East Asian Regional Integration From The Perspective Of Economic Security
CBI: UK Manufacturing trends survey at lowest level since October 2009

Foreign firms face tax crackdown in UK and Europe
Foreign companies face a tax crackdown as David Cameron demanded an investigation into claims of large-scale avoidance while Brussels moved to close European VAT loop-holes enjoyed by Amazon, Skype and Netflix.
Louise Armitstead - Telegraph - 24th October 201

The Prime Minister said HM Revenue & Customs should “look carefully” at cases where international corporations have legally been able to pay no corporation tax - or very small amounts - on billions of pounds of UK revenue.

Asked by MPs if it was “morally wrong” for big companies like Starbucks and Apple to avoid paying tax, he said he was “not happy” and companies should pay “fair taxes.”

“This is an international problem that all countries are struggling with, about how to make sure that companies pay tax in an appropriate way,” he told the House of Commons. “I am not happy with the current situation. I think the HMRC needs to look at it very carefully. We do need to make sure we are encouraging these businesses to invest in our country, as they are, but they should be paying fair taxes as well.”

Separately, George Osborne claimed a victory after Brussels reacted to his complaints about low rates of VAT in Luxembourg and France. The European Commission said it had given both France and Luxembourg 30 days to raise the VAT rate on ebooks to 15pc. In January, the rate was cut to 3pc in Luxembourg and 7pc in France amid a scramble to attract and retain international media companies. The EC said the moves were “incompatible with current rules” and were “creating a serious distortion of competition to the disadvantage of operators in the 25 other Member States of the Union.”

It added: “The two Member States have one month in which to bring their legislation into compliance with EU law. Otherwise, the Commission may refer the matter to the European Court of Justice.”

The Commission conceded it had “received complaints from a number of Ministers of Finance highlighting the negative effect on book sales in their domestic markets.”

Amazon, which is based in Luxembourg and owns Kindle, has a big advantage over UK based retailers such as Waterstones which has to charge VAT at 20pc. The company has also been criticised for avoiding corporation tax, despite being Britain’s biggest online retailer with sales of £3.2bn last year. Under UK tax rules, companies whose principal activities are abroad are exempt from paying corporation tax.

Facebook UK, whose parent company is based in Ireland, generated revenues of just £20.4m last year and paid £238,000 in corporation tax. Google paid £6m on £2.53bn of sales.

MPs have called for HMRC to investigate Starbucks after it emerged the company paid just £8.6m in corporation tax in 14 years.

Richard Asquith of the advisors TMF Group said: “Taxes are built nationally but trade is global and online corporations are able to pick the best tax locations so anomalies arise.”

A spokesman for HMRC said: “We make sure that multinationals pay the right tax to the UK in accordance with UK tax law.”


US sues Bank of America for $1bn over 'hustle' mortgage fraud scheme
Civil suit accuses bank of selling dodgy mortgages to government-controlled financiers
Fannie Mae and Freddie Mac

Dominic Rushe - The Guardian - 25th October 2012

Bank of America defrauded the US government in a scheme called "the hustle", federal prosecutors alleged on Wednesday as they sued the bank $1bn in compensation.

The justice department filed a civil complaint in New York seeking recompense for some of the massive losses suffered by quasi-government controlled mortgage finance firms Freddie Mac and Fannie Mae following the collapse of the ill-fated housing boom.

In a scheme that was "spectacularly brazen in scope" Preet Bharara, US attorney for the southern district of New York, said the bank "made disastrously bad loans and stuck taxpayers with the bill".

The charges relate to Countrywide Financial, once the largest seller of sub-prime home loans. Countrywide was bought by Bank of America for $2.5bn in 2008 as the loan firm headed toward collapse. It has since cost the bank tens of billions of dollars in write-offs for bad loans, legal costs and settlements with government agencies.

Bharara charges that the Bank of America continued Countrywide's abusive practices even after the purchase. "Countrywide and Bank of America systematically removed every check in favor of its own balance – they cast aside underwriters, eliminated quality controls, incentivized unqualified personnel to cut corners, and concealed the resulting defects," he said.

According to the suit, Countrywide operated a scheme called "the hustle", aimed at boosting the speed at which it originated and sold loans to Fannie Mae and Freddie Mac. Bharara said that between 2007 and 2009 Countrywide and Bank of America axed normal quality control checks on loans and falsely claimed the loans qualified for insurance from Fannie and Freddie.

The two government-backed entities were left with billions of dollars of bad loans after the housing market collapsed. According to top financial watchdog the Securities and Exchange Commission Freddie Mac's sub-prime mortgage holdings had reached $244bn, or 14% of its portfolio, by 30 June 2008.

This is the first time the justice department has gone after a bank suspected of selling bad loans to Fannie and Freddie.

Peter Henning, professor of law at Wayne State University, said Bank of America's Countrywide purchase had secured its place as "the worst deal from hell". But he questioned the decision to pursue a civil rather than criminal action.

"Once again this is a civil suit. Is anyone ever going to be held accountable? It seems that they are charging someone systematically removed the controls here that were meant to protect the mortgage market and Freddie and Fannie. Someone has to be accountable for that," he said.

The suit is the second this month that Bharara has brought against banks over their role in the housing bubble. Earlier this month Bharara sued Wells Fargo, accusing it of deceiving government agency the Federal Housing Administration about the quality of its loans in order to get those loans insured.


Ex-Goldman Sachs director Rajat Gupta gets 2-year sentence and $5m fine
Times of India - 25th October 2012

Indian-American former Goldman Sachs director Rajat Gupta sentenced to two years in jail in insider trading case in the US.

A former Goldman Sachs and Procter & Gamble Co. board member once widely respected worldwide for his business smarts was sentenced Wednesday to 2 years in prison for feeding inside information about board dealings with a billionaire hedge fund owner who was his friend.

The Indian-born Rajat Gupta, 63, of Westport, Connecticut, was sentenced by US District Court Judge Jed Rakoff, who also ordered him to pay a $5 million fine. The Harvard-educated businessman long respected on Wall Street was one of the biggest catches yet for the federal government in its five-year crackdown on insider trading that has so far resulted in 69 convictions.

Gupta, reading from a statement, said: "The last 18 months have been the most challenging period of my life since I lost my parents as a teenager.

"I regret terribly the impact of this matter on my family, my friends and the institutions that are dear to me. I've lost my reputation I built for a lifetime. The verdict was devastating.''

The dealings by Gupta that were highlighted at his spring trial stemmed from his relationship with Sri Lanka-born Raj Rajaratnam. The one-time billionaire hedge fund boss controlled up to $7 billion in accounts, giving him a firm footprint in the financial markets and influence that impressed someone as widely regarded as Gupta.
"He was a role model and icon,'' defense attorney Gary Naftalis said. "He is no more.''

Prosecutors described how Gupta raced to telephone Rajaratnam with stock tips sometimes only seconds after getting them from board conference calls, allowing Rajaratnam to make more than $11 million in illegal profits for him and his investors. Rajaratnam is serving an 11-year prison sentence after his conviction at trial last year.

The narrower insider trading case against Rajaratnam and his co-conspirators resulted in 26 convictions and was described by US Attorney Preet Bharara as the biggest insider trading case in history, successful in part because of unprecedented use of wiretaps more familiar to juries at mob and drug trials.

Prosecutors say Rajaratnam earned up to $75 million illegally through his trades while Gupta's attorneys point out that their client earned no profits.

At trial, Gupta was convicted of three counts of securities fraud and one count of conspiracy, insider trading charges that prosecutors said should result in a prison sentence of up to 10 years in prison.

"This is a crime easy to commit, hard to catch,'' the judge said at sentencing. "Therefore the need for general deterrence is strong.''

Prosecutors accused Gupta, a former chief of the global consulting firm McKinsey & Co. and a onetime director of the huge consumer products company Procter & Gamble, of "above-the-law arrogance'' in feeding Rajaratnam inside tips between March 2007 and January 2009.

Goldman Sachs chairman Lloyd Blankfein testified at trial that Gupta appeared to have violated the investment bank's confidentiality policies.

"Gupta's crimes are shocking,'' the government wrote. "Gupta's crimes are extraordinarily serious and damaging to the capital markets. ... It understandably fuels cynicism among the investing public that Wall Street is rigged and that Wall Street professionals unfairly exploit privileged access to information. This is particularly troubling at a time when there is widespread concern about corruption, greed and recklessness at the highest levels of the financial services industry.''

In their presentencing brief, defense lawyers cited Gupta's many good deeds worldwide, saying they were unusual enough to warrant a sentence of probation with instructions to perform community service.

Naftalis told the judge that Gupta had "one of the best reputations on the planet. His loss of reputation is severely strong punishment.''

The defense noted that the Rwandan government supported a program in which Gupta would work with rural districts to fight HIV, malaria and extreme poverty and to help provide food security. The lawyers said the Rwandan government would join with a US-based organization already working in the country to ensure effective supervision of Gupta's service.

They also said prison would spoil the efforts by Gupta, who was born in Kolkata, India, to develop new initiatives, including the Urban Institute of India, meant to bring the private sector, academia and the Indian government together to address accelerating migration to India's cities. The more than 400 letters written to the judge on Gupta's behalf included documents signed by Microsoft co-founder Bill Gates and former United Nations Secretary-General Kofi Annan.

"The conduct for which he was convicted represents an isolated aberration and a stark departure from this personal history,'' the lawyers wrote.

At Gupta's trial, which began in May, the government highlighted a Sept. 23, 2008, phone call it said was made from Gupta to Rajaratnam only minutes after Gupta had learned during a confidential conference call about Warren Buffett's planned investment through Berkshire Hathaway of $5 billion in Goldman.

Moments after the phone call ended at 3:55 p.m., Rajaratnam purchased $40 million in Goldman stock _ an 11th hour trade that ended up making him nearly $1 million _ at the height of the financial crisis that had engulfed the country.

In another recorded phone call in 2008, Rajaratnam told one of his traders that he had got a tip "from someone who's on the board of Goldman Sachs'' that Goldman was facing an unexpected quarterly loss.

Gupta, prosecutors said, was motivated to help Rajaratnam because he had a financial stake in some of the hedge fund manager's business ventures.


Credit card giant ditches pens for PINs
Chris Zappone - The Age - 25th October 2012

The nation's credit card debt has now been declining since June, after it eclipsed $50 billion for the first time in February this year.

Visa is abandoning signatures in favour of PINs in a bid to boost credit card security. Photo: Justin McManus

The days of signing your name to verify your identify when shopping with a credit card could be numbered, with credit giant Visa deciding to phase out pens in favour of PINs.

From April 1, 2013, all Visa card transactions will be approved by customers using personal identification numbers instead of signatures.

The move is expected to reduce signature-based credit card fraud which has been on the rise over the last two years - from 38 out of 100,000 transactions in 2010 to 52 out of 100,000 transactions in 2011.

Visa spokeswoman Judy Shaw said the change was part of a comprehensive security plan to phase out the use of signatures in favour of PIN and card chips, which are already widely used by customers in stores and ATMs.

"At the moment we're working with financial institutions and other card schemes to discuss a uniform approach to chip and PIN use across the industry," she said.

"It will include a communication program so that cardholders are aware of their PINs and know how to use them," she said.

But rival American Express will still allow customers to confirm purchases with signatures although cards are issued with chips.

‘‘We’re giving our members both options as we understand that every person has their own preferred way of using their credit card at the point of purchase," said a spokeswoman for the company. The spokeswoman noted that American Express has one of the lowest instances of fraud in the industry.

MasterCard has been contacted for comment.

The change by Visa will also affect 14,000 cafes and restaurants, where customers will no longer be able to sign their bills at the table.

"Right now you're used to putting your credit card into the black folder and then expecting the waiter to take it and process it," said Garry Duursma, vice president at eftpos services company Tyro.

"By the time this mandate comes in, you're going to have to get up and go to the cashier and make the payment or the cashier armed with a payment terminal has to come to you."

Australia's banking and payments industry is expanding the choice in payments methods, as customers embrace more digital banking options. At the same time, banks are racing to upgrade their processing abilities, while working to ensure the overall security of the system. Australian Payments Clearing Association showed that fraud losses reached a record $278 million in 2011.

Mr Duursma said abandoning signatures will reduce the incidence of card-based fraud, although it could potentially open a new risk if the restaurant's eftpos system isn't properly integrated with the restaurant's bank account system.


China SOEs report surge in profits
Xinhua - 24th October 2012

The net profits of China's state-owned enterprises (SOEs) witnessed an average annual growth of 25.2 percent from 2003 to 2011, the country's chief supervisor of state-owned assets announced on Wednesday.

Wang Yong, head of the State-owned Assets Supervision and Administration Commission (SASAC), said during a briefing at the ongoing bimonthly session of the national legislature that SOEs' net profits increased from 320 billion yuan ($51.2 billion) to 1.9 trillion yuan during the period.

According to Wang, China had 144,700 SOEs and state-controlled enterprises by the end of 2011, and their total assets topped 85.37 trillion yuan, 3.3 times larger than that of 2003.

In 2011, the total revenue of SOEs was 39.25 trillion yuan, which had brought them net profits of 2.58 trillion yuan and contributed 3.45 trillion yuan in tax. In the year, SOEs took 35 percent of the total revenue of the country's industrial and commercial sectors, 43 percent of net profits and 40 percent of tax contributions, said Wang.

The figures do not include SOEs in the financial sector, the SASAC head added.

Wang attributed the progresses to the country's dedication in reforming SOEs in recent decades, work which has greatly improved their performances.

In 2012, 54 Chinese SOEs made it into the Fortune 500, pointed out Wang.

He also highlighted SOEs' achievements in science and technology innovations, as they had obtained over 214,000 original patents by 2011 and had carried out cutting-edge tasks such as a manned space program, moon probe, off-shore drilling and work with deep-sea research submersibles.

In terms of international operations, Wang noted that SOEs directly administered by the central government held overseas assets of some 3.1 trillion yuan and net profits of some 103.5 billion yuan by the end of 2011.

In addition, SOEs had transferred shares of 211.9 billion yuan to the country's social security funds as of last December, accounting for about 43.1 of the country's financial input into the funds.

These achievements amply demonstrated the successful combination of public ownership and market economy, said Wang, calling for China to stick to the path of reforming SOEs with its unique characteristics.


Ford set to axe British plant after dire sales in eurozone
After closure of Belgian plant, Transit van site in Southampton awaits fate
Tom Bawden - The Independent - 25th October 2012

Ford is expected to announce the closure of its Southampton van factory today, with the loss of more than 500 jobs, as the US car giant overhauls its European operations.

Ford sent shockwaves through Europe's car industry yesterday, after it said it would shut its "underutilised" 48-year-old Genk plant in Belgium by 2014, with the loss of 4,300 jobs, as the first part of a far-reaching restructuring programme.

The car maker also summoned British shop stewards to an emergency meeting at its Basildon headquarters at 10am today in a move that fuelled speculation that the axe is also set to fall in the UK.

The Swaythling factory on the outskirts of Southampton, which has built more than 2.2 million Ford Transit vans since 1972, is thought to be the victim, and could potentially cease production as early as next year. The plant, which once employed thousands, now employs 530 staff.

Belgian trade union leaders were told of the Genk plant's closure at a meeting yesterday morning before Ford announced the move, a pattern that Caroline Nokes, MP for Romsey and Southampton North, expects to be repeated in her constituency today. "I've always had concerns about the factory and it now looks like there will be an announcement tomorrow indicating that it's going to close," Ms Nokes said.

In a statement that did nothing to quell speculation, a Ford spokesman said: "We are reviewing all areas of the business to address the near-term challenges while ensuring a strong business for the future.

"We will communicate with all stakeholders at the appropriate time," he added, ahead of a teleconference this afternoon at which the chief executive, Alan Mulally, will provide more details of the overhaul.

Ford refused to discuss plans for its UK operations, where the company employs 11,400 at sites including Dagenham, in Essex; Halewood on Merseyside and Bridgend in South Wales, as well as Southampton, ahead of today's meetings.

Ford's European restructuring underlines just how weak demand for cars has become as the eurozone crisis refuses to subside. Gent is the first assembly plant Ford has closed in Europe for 10 years. The announcement comes after the company warned it will lose about $1bn (£600m) on the Continent this year after a 20 per cent drop in total industry vehicle demand in the region since 2007.

It is the third European plant closure to be announced by a major car maker this year, after PSA Peugeot Citroë*'s Aulnay site near Paris and General Motors' Opel factory in Bochum, Germany.

Production of Ford's Mondeo, S-Max and Galaxy vehicles, presently carried out in Genk, will move to Valencia in Spain following the plant's closure.

Car demand across Europe is at a 20-year low, with forecasts it will remain below pre-crisis levels until at least 2017. In a further development, Peugeot Citroë* said it was close to agreement with creditor banks on €11.5bn (£9.3bn) of financing, and had won state guarantees on €7bn in further borrowing for its finance arm.


China becomes largest TV series producer
chinadaily.com.cn - 24th October 2012

China has become the world's largest television series producer after making 15,000 episodes in 2011.

The country is also the world's third biggest film producer, Culture Minister Cai Wu said on Wednesday.

While briefing national lawmakers at a the bi-monthly session (scheduled from October 23 to 26) of the Standing Committee of the National People's Congress (NPC), the country's top legislature, Cai said, in 2011 China produced 15,000 television series episodes and 558 movies.

It also made 260,000 minutes of animations and 4,000 hours of documentaries.

Circulation of daily newspapers also ranked number one in the world, with 1,928 newspapers and 9,849 journals competing in the press market.

Cai said in 2011, more than 3,000 novels were published, 1,000 new operas debuted and 1.55 million performances by a domestic cast were staged.

A total of 370,000 books, amounting to 7.71 billion copies, were published.


UK economy: Stuck in low gear
Chris Giles - The Financial Times - 23rd October 2012

Britain’s pound has not allowed it to escape the doldrums in which the eurozone is caught

Just as Britain appears to be seeking some distance from the rest of Europe, its economic performance looks remarkably similar to that of its neighbours. Despite the freedom of having its own currency and the ability to set monetary policy, Britain is growing at about the same rate as a middling performer in the eurozone.

Such a mediocre showing hides many superlatives – and a few sins. Although growth tallies almost exactly with the eurozone, proving Britain is far from an economic island, the country is at the mercy of a peculiarly British set of economic circumstances.

Its banks are more important to its economy than those in the single European currency and are now better capitalised. Its labour market is stronger, with unemployment falling to 7.9 per cent instead of rising to 11.4 per cent. But the total UK debt burden is higher: public sector deficits at 8.2 per cent of national income compare unfavourably with the 3.3 per cent eurozone average and British inflation has stayed stubbornly high since 2008, eroding household and corporate incomes.

The British economy slid into a double-dip recession this year, with output in the second quarter 1 per cent lower than last autumn. Government ministers, mired in midterm blues, hope that a turnround will start this week with much more positive gross domestic product for the third quarter expected on Thursday.

Barring an unseen disaster, their prayers are likely to be answered. Economists expect the figures to show third-quarter growth of about 0.6 per cent. But this growth, which at an annualised rate would be above 2 per cent, would exaggerate the strength of the renewed recovery. Much of that growth is likely to represent a one-off bounce from second-quarter output artificially depressed by an additional public holiday to celebrate the Queen’s diamond jubilee. The third-quarter figures will also benefit from ticket sales and television rights for the Olympics, which accrued in August even though the money was spent much earlier.

“The big picture,” as repeated last night by Sir Mervyn King, the outgoing Bank of England governor, “is that GDP is barely higher than two years ago.”

For the two years of the coalition government led by Conservative David Cameron, efforts at consolidating the budget deficit have been accompanied by disappointing household consumption, business investment and exports.

The combination has sparked a furious debate. Ed Balls, the Labour party’s shadow chancellor, blames spending cuts and tax increases for what he calls a “flatlining” economy. Calling for looser fiscal policy, he says: “There can be no question that action to kick-start the economy is urgently needed.”

George Osborne, the chancellor, shows no signs of performing a U-turn, insisting that his deficit reduction strategy is a necessary condition for market confidence and any recovery.

Influential independent voices are hedging their bets. Fretting that the effects of austerity were larger than thought, the International Monetary Fund has called on Britain, among others, to “smooth their planned adjustment over 2013 and beyond” if growth again fell short of forecasts.

Domestically, the Office for Budget Responsibility saw things differently, explaining low growth as the result of “stubborn inflation hitting consumption and export markets hitting net trade”, but was not willing to exclude the “possibility that fiscal consolidation hit growth harder than thought”.

Significantly, forecasters are more pessimistic about the UK’s scope for rapid medium-term growth. Strong employment growth accompanied by weakness in output has shifted productivity growth far from its long-term trend, implying Britain’s economy is stuck in low gear.

The hope is that the worst is over. Incomes are again growing and GDP will start a gradual jobs-light recovery that will, in itself, repair some of the damage to productivity. That has been the government’s ambition for almost two years, without any clear sign it will come to fruition.

Amid a torrent of bad economic news over the past four years, Britain’s labour market has stood out as a beacon.

The total number of people in work is at a record high. In the three months from June to August, it surpassed the previous 2008 peak to reach 29.59m. This performance puts the US, France and peripheral European economies in the shade. The employment rate hit 71.3 per cent, just below the pre-crisis high of 73 per cent.

With more than 1m net new private sector jobs created since the start of 2010, a growth of 4.5 per cent, there has been a transformation in Britain’s labour market compared with the recessions in the 1980s and 1990s. Then, much milder downturns were accompanied by depressed employment for almost a decade.

Three features stand out. First, wage moderation has been crucial to the strong performance. Cheaper labour has helped struggling companies to minimise redundancies and encouraged companies to boost jobs quickly as the economy stabilised.

Second, new employment is not a perfect substitute for lost jobs. Full-time employment remains well below the peak and is offset by a sharp rise in part-time, self-employed and temporary workers. Employment may be back to its peak but the total hours worked remain 1.3 per cent below it and income security is lower.

Third, it matters who you are. Employment is rising fastest for groups above 50 years old. Employment for the under 25s still has some way to go before it regains its peak, while the skill requirements of jobs is also more demanding. Bank of England figures show that growth in private sector jobs is almost exclusively in high-skill occupations.

Stagnant output plus rapidly growing employment are an unusual combination.

The simple implication is Britain’s ability to convert human toil into marketable products has taken a dive. Since the second world war, Britain’s labour productivity growth has been a constant at roughly 2 per cent a year, during periods of stop-go, inflation, high unemployment, and boom and bust.

Just at the moment everyone took underlying productivity growth to be a constant in the British economy, the past relationship broke down. Output per worker has not budged since the start of 2007, leaving the level 11 per cent lower than the previous trend would imply.

The cause of this structural shift is not known; many explanations fit the facts but few appear sufficiently powerful to be the single cause.

One important reason has been the dwindling of North Sea oil production, which still requires a sizeable workforce. Another is the 16 per cent fall in the measured output of banks and insurance companies over the past five years without a significant decline in employment.

While manufacturing productivity has resumed a steady rate of growth since the depth of the crisis, there have been huge drops in productivity growth in information, communication and professional services since the crisis.

Small companies, perhaps kept alive in zombie form by banks fearing further losses, are also at the epicentre of the productivity dive, according to the Bank of England, also suggesting specific locations of the productivity malaise rather than a general cause.

But the productivity puzzle has not been solved to anyone’s satisfaction and remains a crucial uncertainty regarding Britain’s economic future.

Deficit Reduction
Nothing is more important to the British government than reducing the budget deficit. It is willing to suffer prolonged stagnation and huge unpopularity if it can demonstrate it has cut borrowing successfully.

So far, the Conservative-Liberal Democrat coalition has lopped 30 per cent off the deficit since it blew out to 11.2 per cent of national income in 2009-10 as tax revenues plummeted.

Things were going relatively well until a year ago when the coalition’s independent fiscal watchdog declared that the government had blown its chance to eliminate the underlying deficit by the time of the next election in 2015. The Office for Budget Responsibility’s more pessimistic medium-term growth outlook left the government having to tell the public that austerity measures would last seven years, not five, and that the hole would not be filled until 2017.

More recent bad news on tax revenues as the economy has stagnated makes it likely the OBR will have even worse news for the Treasury in its December forecasts. It is likely another year of fierce spending control will be needed to bring the books back into the black and debt as a share of national income will not start falling until 2016-17 at the earliest.

But not all the news has been bad recently. Unlike in Spain, the government has found local authorities have been squirrelling money away rather than spending it, leading to large downward revisions in borrowing over the past few months. And tax revenue growth has been strong in social security and value added taxation. Corporation tax receipts are very disappointing but the public finances are much stronger than would have been expected with the double-dip recession this year.

While minds have been focused on persistent over-optimism in UK growth forecasts since the crisis started five years ago, Britain’s sticky inflation problem has been overlooked.

Of the past 60 monthly inflation publications, the annual rate has exceeded the Bank of England’s 2 per cent target 54 times and has averaged 3.2 per cent. Last week, the central bank admitted its most recent inflation forecast was again too optimistic and inflation would stick at a higher level than hoped for the rest of the year.

Next year does not look much better, according to Barclays Capital, with higher oil prices, new student tuition fees, and higher gas and electricity prices likely to keep inflation stubbornly above target and hovering close to 3 per cent for the whole of 2013.

The stickiness of inflation has hit household and corporate incomes and explains why many forecasters accurately predicted how much British households would spend but were over-optimistic about the real purchasing power of the currency.

Stubborn inflation has come as a nasty shock to the UK’s central bank, which has predicted that economic weakness will limit companies’ pricing power from 2007.

Unless inflation has become much less responsive to unemployment and economic woes, the persistent disappointment over the past five years, not matched to the same extent in other countries, suggests that the British economy’s potential for non-inflationary growth has deteriorated.

No one knows exactly by how much or whether this is a temporary hangover from the global financial crisis, but the BoE’s ability to take corrective measures has been severely hampered by stagflation.


Trade between Italy and Russia rises by 5% in 2012
Ascoli Piceno - agi.it - 24th October 2012

Trade between Italy and Russia has increased by 5% between January and August 2012, reaching 18.576 billion, against last year's 17.670 billion.

Data has been released by the economy watch of the Italian Economic Development Ministry, during the Italy-Russia Summit on SMEs and the Industrial Sector, opening today at San Benedetto del Tronto (Ascoli Piceno). Organizers supporting the Regione Marche include the Russian Federation's mission to Italy and the 21st Session of the Italo-Russian Task Force for SMEs and the Industrial Sector.

In the first 8 months of the current year, Italian exports to Russia accounted for EUR 6.472 billion, with a 7.3% yearly growth rate. Italian imports to the Russian Federation went up by 4%, amounting to EUR 12.104 billion.
The trade balance, therefore, strikes Italy negatively by 5.632 billion (5.607 billion in August 2011).

Ministry of Economic Development data (updated in June 2012) highlight that the major Italian products exported to Russia include clothing ( 10.8% of the total amounting to 499 million), machinery for special purposes (10.6%), general usage machinery (8.5%), footwear (6.1%) and furniture (6.1%). Italy imports from the Russian Federation 37.7% of natural gas (3,367 million), 25.5% of crude oil and 19.3% of refined oil products.


Tougher income checks if you want a mortgage
Tim Wallace - Cityam.com - 25th October 2012

Interest only mortgages will not be banned under new proposals published by the regulator today, but banks will have to be more careful to ensure borrowers can pay back the loans.

The richest borrowers will not need to go through extensive affordability checks under the new mortgage market review (MMR), while small changes to contracts will no longer need to go through the full advisory process, the Financial Services Authority (FSA) has announced.

And borrowers whose house price has fallen – so called “mortgage prisoners” – will now be able to move home as long as they take on no extra debt, in an exception to the wider responsible lending guidance.

Lenders praised the changes to the proposals, made after a lengthy consultation, as they remove some of the toughest restrictions which the FSA had initially planned.

“We recognise that many lenders are now using a far more sensible set of lending criteria than before, but it is important that these common sense principles are hard-wired into the system to protect borrowers,” said FSA managing director Martin Wheatley.

“We want borrowers to feel confident that poor practices of the past, which led to hardship and anxiety, are not repeated. At the heart of the new measures is an affordability test to check borrowers can meet the repayments of the mortgage they want.”

The Council of Mortgage Lenders praised the “extensive” consultation, and welcomed “the FSA’s responsiveness in moderating a number of rules as originally drafted that would have been difficult to implement in practice, or unduly restrictive.”

However, some analysts warned that the proposals come too late for customers who already have an interest-only mortgage.

“The problem with the FSA’s interest-only proposals is they just close the door after the horse has bolted. They don’t solve the real problem, which is the outstanding balances of existing interest-only mortgages, not assessment criteria for new ones,” said e.surv chartered surveyors’ Richard Sexton.

“Swathes of borrowers were granted interest-only mortgages when they couldn’t afford them. Now house prices have fallen sharply, lenders and borrowers are up the proverbial creek without a paddle.”


North Sea tax break expected to create thousands of jobs
Canadian-based Talisman Energy among operators expected to spend billions
investing in North Sea oil projects

Terry Macalister - The Guardian - 24th October 2012

Talisman Energy has unveiled plans to spend £1.6bn on a new North Sea project that it says will create 2,000 jobs on the back of government tax breaks to the oil industry.

Further billion-pound schemes are in the pipeline by other operators, according to the lobby group Oil & Gas UK, although some of the spending is likely to go to foreign contractors.

Canadian-based Talisman said the investment in the Montrose field was by far the biggest it had made in its near 20-year history although it declined to say how much the tax arrangements were worth. Nor would the company say exactly how many contracts would go to British firms as opposed to Dutch and Spanish contractors that are queueing up to bid.

"We have to abide by competition laws and our own rigorous internal vetting procedures but we are mindful of UK suppliers and will use them wherever possible," said Geoff Holmes, senior vice president of Talisman.

He said that a first major contract for a UK company worth more than £50m has been awarded to Tyneside-based Offshore Group Newcastle for engineering work.

Talisman previously said that it could not go ahead with Montrose without extra tax breaks on top of the small fields allowance. It referred questions on tax to the Treasury.

A spokesman at the government department said it was not in a position to reveal these details although sources there said the tax allowances were carefully calibrated to ensure tax payers ultimately benefited from higher oil revenues.

Treasury minister Sajid Javid said the news is further evidence that the government's efforts to stimulate investment in the North Sea are paying dividends. "By creating tax allowances that allow us to get the most out of this vital national resource, we are supporting skilled job creation – including more than 2,000 new posts as a result of the Talisman project. This is good news not just for the north east of Scotland, but the whole of the UK."

The Montrose Area Redevelopment (MAR) will bring two smaller fields, Cayley and Shaw, on stream to eventually produce 36,000 barrels a day. The new output will start in 2016 from reservoirs containing 100m barrels of extra reserves and the crude will be pumped ashore via the Montrose platform which was originally put in place over 35 years ago.

The government unveiled a "brown field" tax allowance last month after a long period of lobbying from an industry that has seen drilling levels plunge despite high oil prices.

John Hayes, the energy minister, said the Talisman move marked the start of a new wave of interest in North Sea oil.


Admiralty Arch sold to Spanish investor
Ed Hammond, Jim Pickard and Sally Gainsbury - The Financial Times - 24th October 2012

One of Whitehall’s most distinctive buildings is poised to be turned into a luxury hotel as the government pushes ahead with a programme to sell off parts of its multibillion-pound property portfolio.
Admiralty Arch, the 100-year-old landmark at the eastern end of the Mall, has been sold to Rafael Serrano, a Spanish investor, for a figure near £60m, according to insiders.

The deal, to be confirmed on Thursday morning, is the latest property disposal by the government.
Mr Serrano, who recently built the Bulgari Hotel in Knightsbridge, is understood to have acquired Admiralty Arch on a 125-year lease with an explicit condition that it cannot be converted into apartments or a single house.

The Grade I-listed building, which has three arches, was commissioned by Edward VII in memory of his mother, Queen Victoria, and was completed in 1912.

The building was, until recently, used by the Cabinet Office, the policy engine room of Whitehall.

The sale is part of a wider attempt by Francis Maude, the Cabinet Office minister, to force government departments to rationalise their property estates to save money.

The efficiency drive has included a sell-off of unnecessary buildings and a ban on departments signing new property leases or extensions, unless approved centrally.

Mr Maude has tried to set an example by moving a thousand Cabinet Office civil servants into the Treasury while vacating both Admiralty Arch and the nearby 22 Whitehall.

Other bidders said to have been interested in the building include a Qatari sovereign wealth fund, an Abu Dhabi sovereign wealth fund, the billionaire Reuben brothers and Mountgrange, the private property company.

The depth of demand underlines the appetite among international investors for London property.

Foreign investors have spent almost £30bn buying UK commercial property in 2012, according to data from CBRE, the property services group. The extent of London’s dominance is shown by the capital accounting for roughly three-quarters of UK transactions by value.

Savills, which is acting as agent on the sale, declined to comment.

The building has a gross internal area of 147,300 sq ft. Two of its eight storeys, about a third of its floor area, are underground.


Former Stock Exchange chairman joins calls for end to free banking
James Moore - The Independent - 24th October 2012

A former chairman of the London Stock Exchange who authored an influential report on business banking for the Blair government has joined the growing chorus of voices calling for an end to free banking in the Britain.

Speaking to the Parliamentary Inquiry into Banking Standards, Don Cruickshank said free banking relied on subsidies from those who do not keep their accounts in credit.

He said this distorted the banking market and made it uncompetitive. Its end, he said, "would be good for the economy and almost all consumers".

Mr Cruickshank also claimed it would be easier for the one million or so people who do not have a bank account to get one.

"A competitive market cannot sustain cross subsidies from one market to another," he said.

Pat McFadden, a Labour member of the inquiry, pointed out it might be hard for members to recommend an end to a service that most Britons value as a result of the activities of traders who offered "bottles of Bollinger" for fixing Libor interest rates.

But Mr Cruickshank said that the inquiry might not have to make such a controversial proposal because the same effect could be achieved by other means.

His report into business banking for the Blair government recommended wholesale changes to the way the market functioned, but was effectively neutered by the Treasury under Gordon Brown.

He urged the inquiry not to allow any similar dilution of the report by Sir John Vickers' Independent Commission on Banking, which called for retail banking operations to be "ring-fenced" from more risky investment banking.

And he called for all regulatory functions – such as compiling Libor and overseeing pricing in commodities markets such as oil or gold – to be stripped from banks.

But Mr Cruickshank none the less urged MPs not to do anything that might damage London's position as one of the world's leading financial centres.


On East Asian Regional Integration From The Perspective Of Economic Security
Chin-Ming Lin - eurasiareview.com - 24th October 2012

A decade can make a great difference. The 1997-98 Asian financial crisis seemed to spell the end of the “Asian miracle”, while now, a little more than 10 years later, the region is one of the few bright spots in the global economy. The Asian crisis was also claimed to be the catalyst for increasing integration in the region. However, the issue of whether economic growth, as a presumed consequence of further regional integration, can be separated from the discussion of security has been raised, especially in the aftermath of the crisis.

East Asia
This essay will look at the process and prospect of regional integration, especially from the point of economic security. It is crucial to look at monetary regionalism, which has raised several initiatives along with other cooperative regimes in real sector.

Monetary Regionalism In East Asia
Viewed from the point of cooperation in the financial sector of East Asia, potential crisis faced by the region is related to its specific geopolitical situation. The key issue here is that globalization not only presents threats as well as opportunities, but also was driven by the United States and powerful international institutions created under the auspices of American hegemony. The creation and operation of the Bretton Woods Institutions—the IMF, the World Bank and the World Trade Organization—was intentionally designed to maintain an “open”, liberal, and increasingly integrated world economy (Beeson, 2006). It is not deniable that the remarkable transformation in East Asia owes much to the opportunities this open economic order presented. The rapid rise of China is a typical evidence of this potential benefit from the above-mentioned economic order (see, e.g., Lardy, 2002).

And, notwithstanding the undoubted benefits from greater interdependence, it also carries potential dangers. East Asia’s vulnerability to destabilizing forces, especially coming from highly mobile capital that caused such an enormous turmoil in the 1997-98 financial crisis, signals a warning to governments and peoples of the region. The significant response of the region collectively is not only to redesign its financial architecture as advised by the IMF, but also to expand the process of “monetary regionalism”, in which cooperation between Asian states is becoming more institutionalized. The currency swap arrangements, e.g., the Chiang Mai Initiative (CMI), have received the most attention. Not only such arrangements could provide a degree of insulation and autonomy for the region in the event of any future crisis, but East Asia as a whole has the economic capacity to underwrite such arrangements. In other words, the financial sector provides a rationale for greater regional cooperation.

Even though cooperation within East Asia remained limited in the aftermath of the crisis, the response of Asian states was in part responsible for the present global crisis. The increased production and renewed exports of the region helped create the massive foreign exchange reserves which have become a feature of the region’s defensive economic posture. These reserves were recycled to the United States, which would become such an integral part of the current crisis (Vasudevan, 2009). Paradoxically, the U.S.’ massive liabilities actually become a source of leverage as other states became dependent on it as an absorptive market and apparently safe investment haven. In the short term, it was a relationship which the United States appeared to benefit and which U.S. policymakers had little incentive to change. As a result, little has changed despite the rhetoric about the need to reform the financial architecture after the Asian crisis (Soederberg, 2001).

Now, however, the entire international economic landscape has changed and the potential of fundamental reform is much more prominent. A number of things have happened since the Asian crisis that has fundamentally changed the dynamics of the current crisis. First, it is a truly global crisis and one centred on the United States rather than East Asia. Nevertheless, Asian economies, thus far, have emerged relatively unscathed. And the second feature of the current crisis is that China has become a much more important and assertive power. China’s rapidly growing economic significance and a greater willingness to play some sort of international role have necessarily given its policymakers a focus that transcends the region. China’s leadership is becoming increasingly outspoken and critical of the United States. For example, Premier Wen Jiabao directly repudiated the idea that China contributed to the crisis (Tett and Edgecliffe-Johnson, 2009). Given this growing assertiveness, the widely noted remark of Zhou Xiaochuan, Governor of the People’s Bank of China, was quite noteworthy. He argued that the international monetary system needed to be reformed and an international reserve currency should be created that was “disconnected from individual nations” (Zhou, 2009).

Although Zhou did not mention the United States directly, the implication is clear: China wants to be one of the driving forces shaping any post-crisis international order. Significantly, Wen suggested that the G7 could be an appropriate forum for discussing about the new order, and Zhou argued for a greater role for the IMF—an institution over which China is keen to enhance its influence. Neither Wen nor Zhou mentioned East Asian institutions. And some observers think that ultimately a “G2” composed of China and the United States will be the defining party of any institutional architecture emerging in the aftermath of the crisis (Brzezinski, 2009).

Is Economic Security In Asian Regionalism Secure?
In this era of globalization, an emphasis on economic security is necessary not only because of the globalised world, but also because of the fast pace of technological change: to fall behind will mean relegation and being kicked out of the race. As Buzan et al. pointed out, in a capitalist system “the actors in a market are supposed to feel insecure” (Buzan et al., 1998: 95, emphasis in original).

What are the characteristics of monetary and financial integration in a region? Within the process, attention is focused on four goals: the facilitation of trade in goods and services by providing stable monetary conditions, the provision of efficient, well-functioning financial markets, the prevention of financial crisis and finally, the regional management of credit and currency crises (Dieter, 2008: 490-91).

Nevertheless, until today, steps toward monetary integration in Asia have been rather limited. After the Asian crisis, governments have pursued a two-track strategy. The first and most obvious is the build-up of enormous currency reserves. Countries have significantly strengthened this first line of defence. The second has been a somewhat novel concerted effort to strengthen monetary regionalism. One dimension is the above-mentioned Chiang Mai process, established in 2000 and aimed at creating a regional liquidity reserve. Despite its useful appeal, the goals of this process remain largely undefined. Is it aiming at providing liquidity in the event of an unexpected credit crunch, i.e., the simultaneous retreat of the majority of international lenders? Or is the stabilization of exchange rates the goal? Further, conflict between Japan and China, which is mainly about leadership in Asia, may have hampered a further deepening of the CMI (Jiang, 2010). Today, the lack of progress in monetary regionalism can partly be explained by the willingness of either China or Japan to block any initiative that would improve the competitor’s position in the region.

This essay has looked at the East Asian regional integration from the perspective of economic security. Economic security first became important for some who explored the effects of the Asian financial crisis, and, by extension, of economic globalization, as being as significant as those of traditional (military) conflicts. While most of the countries in the region emerged largely unscathed from the current global crisis, the structural weakness of its financial architecture and the challenges that its economy faces from the more globalised and more interdependent trade regimes have compelled policymakers to continually reassess economic-security relevance in the region.

For students of regionalism, perhaps the biggest lesson is that crises can have centrifugal as well as centripetal effects (Beeson, 2011: 371). It seems that leaders of East Asia were not as responsible for the economic fates of their neighbours as their European counterparts. Therefore, the expectations about East Asian regionalism are rather modest. The preliminary conclusion of this essay on Asian monetary regionalism is that it will be a complex endeavour and will only be achieved in the long run. In view of putative conflict for leadership in the region between China and Japan, and barriers in various initiatives for deepening and stabilizing regional financial markets, the economic-security discourse in East Asia is still facing an uncertain prospect and should be continually monitored.

Beeson, Mark (2006). “American Hegemony and Regionalism: The Rise of East Asia and the End of the Asia-Pacific”. Geopolitics, 11(4): 541-60.

(2011). “Crisis Dynamics and Regionalism: East Asia in Comparative Perspective.” The Pacific Review, 24(3): 357-74.

Brzezinski, Zbigniew (2009). “The Group of Two that could change the world”. Financial Times, 13 January (http://www.ft.com/intl/cms/s/0/d99369b8-e178-11dd-afa0-0000779fd2ac.html…).

Buzan, Barry, Ole Waever and Jaap de Wilde (1998). Security: A New Framework for Analysis. London: Lynne Rienner.

Dieter, Heribert (2008). “ASEAN and the Emerging Monetary Regionalism: A Case of Limited Contribution.” The Pacific Review, 21(4), December: 489-506.

Jiang, Yang (2010). “Response and Responsibility: China in East Asian Financial Cooperation.” Pacific Review, 23(5), December: 603-23.

Lardy, Nicholas R. (2002). Integrating China into the Global Economy. Washington, D.C.: Brookings Institution Press.

Soederberg, Susanne (2001). “The Emperor’s New Suit: The New International Financial Architecture as a Reinvention of the Washington Consensus”. Global Governance, 7(4), October-December: 453–67.

Tett, Gillian and Andrew Edgecliffe-Johnson (2009). “Wen blames crisis on policy mistakes”. Financial Times, 28 January (http://www.ft.com/intl/cms/s/0/07631fa2-ed61-11dd-bd60-0000779fd2ac.html…).

Vasudevan, Ramaa (2009). “Dollar Hegemony, Financialization, and the Credit Crisis.” Review of Radical Political Economics, 41(3), September: 291-304.

Zhou Xiaochuan (2009). “Reform the International Monetary System”. People’s Bank of China, 23 March (http://www.pbc.gov.cn/publish/english/956/2009/20091229104425550619706/2…).

Originally published by Institute for Defence Studies and Analyses (www.idsa.in) at http://www.idsa.in/idsacomments/OnEastAsianRegionalIntegration_cmlin_231012


CBI: UK Manufacturing trends survey at lowest level since October 2009
Thomas Paterson - goldmadesimplenews.com - 24th October 2012

We must be reading a different set of data than the mainstream media because according to them the UK economy is picking up, but from what we’ve been seeing there actually seems to be a noted slowdown of late:

Osborne is running a bigger budget deficit this year compared to last year – Tories ADD 40% to national debt

UK CPI running at 5.4% for the past two months

IMF revises UK GDP down (again) – is the Bank of England gearing up to print more money in response?

UK Production and Manufacturing both fall 1.2% for the year – hardly an economy ‘slowly healing’ is it Mr Cameron?

UK services PMI doesn’t bode well for UK unemployment or the CPI

UK PMI: Manufacturing falls to lowest level since Q2 2009 whilst prices surge

And today’s manufacturing orders report from the CBI seems to be supporting our view.

From the report:

Manufacturing orders fell in the three months to October, while output was flat, the CBI said today.

However, expectations for both orders and output over the next three months are for moderate growth, while the employment and investment picture remains relatively positive.

Of the 395 manufacturers responding to the latest CBI quarterly Industrial Trends Survey, 25% said output rose, while 28% said it fell. The resulting balance of -3% is the lowest since October 2009 (-8%), and disappointed expectations of growth (+11%).

However, over the next three months, manufacturers do expect a moderate recovery in output, with a balance of +12%, which, if realised, would be the strongest growth since the three months to January 2011.

There’s that ‘hopium’ again.

The volume of total orders fell unexpectedly over the last three months, with both domestic orders (-10%) and export orders (-17%) dropping below their long-run averages (balances of -7% and -8% respectively). Nonetheless, expectations for the coming three months have not been dented by these results: expectations for domestic orders growth remain unchanged relative to the previous quarter (+4%), while export orders are once again expected to be broadly flat (+2%).

Why is it always ‘unexpected’?

However, the survey suggests that concerns about political and economic conditions abroad have risen. The proportion of firms citing this as the factor most likely to limit export orders increased from 25% in the three months to July to 34%, well-above the long-run average of 22%.

In line with somewhat softer activity, optimism regarding the business situation and export prospects for the year ahead both deteriorated (-12% and -19%). Furthermore, concern grew over orders and sales acting as a constraint on output in the coming three months (cited by 74% of firms, compared to 62% in the three months to July).

All-in-all the report supports the view that the economy in the UK is still very much in the doldrums, not that you would know that from reading the BBC (it would seem their quality of financial reporting is just as much in question as their reporting of activities of certain children TV presenters).

Tomorrow we get the Q3 GDP figures for the UK – which is expected to show a positive print of  0.6%. It will no doubt be met with cheers of ‘the UK has turned a corner’ and ‘recession ends’. When the reality couldn’t be further from the truth.

The UK has been in one be long recession that started in 2008 from which it hasn’t pulled itself out of because the debt, which is the source of the malaise, has got bigger rather than being liquidated. In short the UK is actually in far worse shape than it was in 2008.

And here’s what we wrote at the start of October about what positive print in GDP tomorrow really means:

We agree that Q3 GDP might come in positive, but so what? Go look at what the UK’s GDP has been doing since 2008 – it’s still down some 4 years later and is clearly one big-long recession that the politicians and bureaucrats at the central bank are hell bent on turning into a depression (which is exactly what they did in the US in the 30s).

What matters is sustainable growth not just minor up-ticks in the GDP every-now-and-then. And the UK is never going to achieve that whilst all the debt is still in the system (and exponentially getting bigger each year).

The UK is just papering over deep rooted fundamental flaws in its economy and making that debt liquidation when it comes, which it always does, way more painful than it needed to be.

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