Uk On The Verge Of A Financial Crisis?

[LaoPo]

UK on the Verge of a Financial Crisis?

Monday, 17 September 2007 09:39:56 GMT

Written by Boris Schlossberg, Senior Currency Strategist

Start of the new week and traders eyes are focused squarely on UK, where over the week-end the story of Northern Rock, the troubled mortgage lender, grew progressively worse as the company saw a run on its assets from customers worried about the safety of their funds.

Talking Points

• Japanese Yen: dips into 114’s on UK worries

• Euro: very quiet trading off EURJPY flows

• Pound: Northern Rock problems grow

• Dollar: Awaiting FOMC. Following NK story

Start of the new week and traders eyes are focused squarely on UK, where over the week-end the story of Northern Rock, the troubled mortgage lender, grew progressively worse as the company saw a run on its assets from customers worried about the safety of their funds. In fact the situation has become so serious that US Treasury Paulson, who made an unscheduled trip to London, will - along with UK Chancellor Darling - address reporters at 16:45 GMT today.

The shares of Northern Rock, UK’s fifth largest mortgage lender fell another 34% in London trade today, while the Guardian newspaper reported that customers began to queue outside its branches as early as 3 AM BST in order to withdraw their funds. With the crisis escalating by the moment the GBPUSD finally bucked under the pressure at the start of London open breaking the psychologically important 2.00 level. The pair held steady and actually rose in Tokyo trade on some carry buying in GBPJPY, but as the gravity of the situation became apparent, the last of the pound bulls capitulated and cable quickly fell.

The markets are clearly awaiting news from the regulators regarding the extent of the losses and the future financial status of Northern Rock. At this point, given the run on the bank, NR has no choice but to merge with a stronger competitor. According to Sunday Times, Lloyds TSB as poised to take over Northern Rock PLC (NRK.LN) before the troubled U.K. mortgage lender was forced to go to the Bank of England for an emergency credit line, but the deal was ultimately blocked by the BoE and the U.K. Financial Services Authority.

The UK monetary authorities now find themselves in a very precarious position. While BoE Governor Mervyn King clearly does not want the central bank to become the rescuer of every financial institution that made bad investment decisions, the Northern Rock situation threatens to transform itself into a full fledged financial panic that could bring UK money markets to a grinding halt. G10 policy makers are quickly discovering that tough talk may sound good in theory but in practice the only thing that matters to financial markets is confidence. Once investors lose it, the markets cease to function regardless of the facts. As that cold, stark reality stares Mr. King and company in the face the MPC will be forced to act.

As we noted on Friday, “Even if the current situation in UK lending sector is resolved with minimal loss of capital, the news over the past few days clearly shows the stress fractures in the UK economy and is likely to produce a much more cautious policy path from the BoE. Therefore expectations of a hike in UK rates to 6% before the end of 2007 appear to be less likely with each passing day and that fact should weigh on the pound going forward.”

http://www.dailyfx.com/story/bio2/Pound_Dr...0022072265.html

LaoPo

[lannarebirth]

Hardly a crisis, yet. Wasn't it just a few months ago that these same journalists were hailing the GBP for cracking $2.00 for the first time in 15 years? As my grandfater used to say, "paper never refused ink".

For the record. The GBP vs the $USD is in neutral price territory on short term charts, and bullish territory on intermediate and long term charts. It does not need to fall much further to turn the short term chart bearish. The GBP has bearish chart patterns on all it's charts, ST, IT and LT. While this is cautionary, it is price and price alone that matters.

Disclosure: I'm short the GBP.

Edited September 17, 2007 by lannarebirth

[LaoPo]

(Mervyn) King, BOE Face `Crisis of Confidence' After Rescue

Mervyn King

Sept. 17 (Bloomberg) -- Bank of England Governor Mervyn King has spent the past month trying to stay above the fray as the U.S. subprime-mortgage collapse roiled credit markets. Now he's getting dragged in, whether he likes it or not.

Two days after King, 59, told lawmakers on Sept. 12 that central banks should avoid giving the impression they will help lenders that made bad decisions, the Bank of England provided emergency funds to Northern Rock Plc in the biggest bailout of a British bank in three decades.

``It's a crisis of confidence, and the bank is confused,'' said Patrick Minford, an economics professor at Cardiff University who advised former Prime Minister Margaret Thatcher. ``They want to be hands-off, but in this situation they can't be. I don't think this has done King any good.''

King's credibility is in question for his refusal to emulate other central banks and take early action to help cash-strapped lenders. With Northern Rock's failure, he is finding himself subject to the same charge of excessive caution being leveled at U.S. Federal Reserve Chairman Ben S. Bernanke, whose office adjoined King's at the Massachusetts Institute of Technology in the 1980s.

``There's no doubt that had the Bank of England acted early, Northern Rock would not have had the same problems,'' said Stephen Bell, chief economist at hedge fund GLC Ltd. in London. ``The idea they can't do anything about it is clearly wrong.''

Talking Down

King, a former London School of Economics professor whose five-year term ends June 30, initially underestimated the threat posed by rising defaults on mortgages to U.S. borrowers with poor credit histories. It was ``not an international financial crisis,'' he said Aug. 8; the next day, credit markets seized up as concern about exposure to subprime losses made banks reluctant to lend to each other.

The European Central Bank has loaned cash to banks in seven special auctions since then, and the Fed responded to criticism its response was too slow by cutting the rate at which it lends directly to banks on Aug. 17. Economists predict the Fed will reduce its benchmark rate tomorrow by at least a quarter point.

King held back until markets forced his hand. Last week he said that too much help ``encourages excessive risk-taking, and sows the seeds of a future financial crisis.'' With three-month money-market rates close to a nine-year high, the bank on Sept. 13 made its first additional cash loan to banks. The next day, it rescued Newcastle, England-based Northern Rock after rising credit costs left the U.K.'s third-largest mortgage provider unable to make new loans.

Hard Line

``Is this the right environment to be so sanctimonious and to take such a hard line?'' asked James Knightley, an economist at ING Financial Markets in London. ``If you play this moral high ground, it could backfire.''

Northern Rock's customers have ignored assurances that their deposits are secure. While Chancellor of the Exchequer Alistair Darling said today their deposits are ``backed by the Bank of England,'' customers have removed at least 2 billion pounds ($4 billion) since Sept. 14., the British Broadcasting Corp. reported.

Northern Rock shares fell 29 percent today and have lost half their value in the past two trading sessions.

The criticism of King could hardly come at a worse moment if he wants to be reappointed. The only member of the Bank of England's Monetary Policy Committee to vote on each rate decision since 1997, King has been overruled by his colleagues twice in the past two years and in March was forced to write a letter to Brown after inflation accelerated to a decade-high of 3.1 percent. It has since receded: Consumer prices rose just 1.9 percent in July.

Extended Growth, Surging Debt

Nor is the timing helpful to Prime Minister Gordon Brown, 56, who as chancellor of the exchequer gave the bank rate-setting independence 10 years ago.

While Brown and the Bank of England have overseen Britain's longest period of economic growth in two centuries, consumer debt has also surged over the last decade: Households are now shouldering a record 1.3 trillion pounds in debt. In addition, the Bank of England's benchmark rate of 5.75 percent is the highest among the Group of Seven nations, and London house prices fell the most in three years in September, a report from Rightmove Plc showed on Sept. 14.

Now Brown presides over an economy increasingly vulnerable to rising credit costs just as he considers whether to call an early general election to capitalize on the improved prospects for his Labour Party since he succeeded Tony Blair as prime minister in June. Former Federal Reserve Chairman Alan Greenspan said in an interview with the Daily Telegraph published today that the U.K. ``is more exposed then we are'' to tighter credit conditions and that the housing market is ``going to turn.''

`End of Year'

King said Aug. 8 that the discussion with the government about a second term for him is ``a matter for the end of the year.''

King's defenders say the Bank of England's stance on the credit turmoil, which he outlined in testimony to U.K. lawmakers last week, will be proven wise over time. ``King is an intellectual colossus, and I'd have no qualms about reappointing him,'' said Geoffrey Dicks, chief U.K. economist at Royal Bank of Scotland Group Plc in London. His statement ``was almost a gem.''

King, an architect of the bank's inflation-targeting strategy, has won plaudits for helping end the U.K.'s decades-long fight with rising prices. He became chief economist in 1991 and was named governor in 2003.

``King has faced lots of tests and come out of them very well,'' said Minford. ``He's done a good job. But on this one he's made a wobbly call and will have to retrieve it smartly.''

http://www.bloomberg.com/apps/news?pid=206...yc&refer=uk

LaoPo

[pointofview]

Hardly a crisis, yet. Wasn't it just a few months ago that these same journalists were hailing the GBP for cracking $2.00 for the first time in 15 years? As my grandfater used to say, "paper never refused ink".

For the record. The GBP vs the $USD is in neutral price territory on short term charts, and bullish territory on intermediate and long term charts. It does not need to fall much further to turn the short term chart bearish. The GBP has bearish chart patterns on all it's charts, ST, IT and LT. While this is cautionary, it is price and price alone that matters.

Disclosure: I'm short the GBP.

This is a major crisis in the making - the NR will be finsihed by the weeks end, and this is only the first one to show its hand.

One thing is for sure people seem not to mind trusting suits when it comes to killing innocent people in far of lands - but when it comes to their own pockests, no way. All the assurances in the world fall on deaf ears.

[lannarebirth]

Hardly a crisis, yet. Wasn't it just a few months ago that these same journalists were hailing the GBP for cracking $2.00 for the first time in 15 years? As my grandfater used to say, "paper never refused ink".

For the record. The GBP vs the $USD is in neutral price territory on short term charts, and bullish territory on intermediate and long term charts. It does not need to fall much further to turn the short term chart bearish. The GBP has bearish chart patterns on all it's charts, ST, IT and LT. While this is cautionary, it is price and price alone that matters.

Disclosure: I'm short the GBP.

This is a major crisis in the making - the NR will be finsihed by the weeks end, and this is only the first one to show its hand.

One thing is for sure people seem not to mind trusting suits when it comes to killing innocent people in far of lands - but when it comes to their own pockests, no way. All the assurances in the world fall on deaf ears.

You may be right. The GBP charts have been signalling something amiss for months now. It just depends how proactive (I hate that word) one wants to be about their finances I suppose.

[solo siam]

Something's got to happen in the UK, but I expect it to be started by a housing crisis rather than anything else - many of my friends back in the UK who aren't particularly wealthy all seem to own second houses and are mortgaged to the hilt on both their own home and second home, If interest rates continue to rise or the NR situation affects the ease of getting mortgages then house prices will have to take a dive.

$2 to the pound is just too high, $1.80 seems about right to me.

[lannarebirth]

Something's got to happen in the UK, but I expect it to be started by a housing crisis rather than anything else - many of my friends back in the UK who aren't particularly wealthy all seem to own second houses and are mortgaged to the hilt on both their own home and second home, If interest rates continue to rise or the NR situation affects the ease of getting mortgages then house prices will have to take a dive.

$2 to the pound is just too high, $1.80 seems about right to me.

IMO it is a fallacy that markets are superior pricing mechanisms. They almost always get it wrong from my observations. Usually swinging from overvaluation to undervaluation, depending on liquidity and sentiment. From this activity stem opportunities.

[LaoPo]

Greenspan sees end to house boom

Alan Greenspan has said the turmoil in credit markets was an "accident waiting to happen", and has also warned of much higher UK inflation in future years.

Inflation would rise above 3% on a regular basis, putting pressure on interest rates, and the UK housing boom would soon come to an end, he said.

He said it was too early to say if the current financial crisis would be more damaging than that seen in 1998.

"This has not fully played out," he told the Daily Telegraph.

Inflationary pressures

Bank governor Mervyn King was forced to write a letter to the Treasury earlier this year explaining why inflation had risen above 3%, well above the government's 2% target.

Mr Greenspan said this would become a more regular occurrence as the Bank had to deal with the prospect of higher inflation and higher interest rates.

"There's going to be more correspondence between the Chancellor and Mervyn King," he said. "Markets are going to start turning round and inflationary pressures are going to start to build."

On house prices, Mr Greenspan said the UK market was vulnerable because of the large number of variable-rate mortgage holders.

"The housing thing has not turned yet and the consumer households are more subject to interest rate changes than in the US.

"It is going to turn. It has got to turn because it is not projectable."

Pressure is building on Mr Greenspan's successor, Ben Bernanke, ahead of the Fed's crucial decision on interest rates on Tuesday.

'Weak link'

Most experts believe the Fed will cut rates in an effort to restore confidence to the financial markets as the scale of the current crisis in the sub-prime mortgage market unfolds.

"Sub-prime in the US was the weak link in our system," Mr Greenspan added.

"There was an accident waiting to happen. If it wasn't sub-prime, it would have been something else."

Mr Greenspan reiterated previous remarks that a recession in the US was a possibility while adding that the economy was currently "holding up".

"It is possible the stability in the underlying economy in the US and the world at large is such that ultimately this financial crisis defuses like a hurricane which hits land and all of a sudden runs into the mountains."

http://newsvote.bbc.co.uk/2/hi/business/6998189.stm

LaoPo

[pointofview]

Something's got to happen in the UK, but I expect it to be started by a housing crisis rather than anything else - many of my friends back in the UK who aren't particularly wealthy all seem to own second houses and are mortgaged to the hilt on both their own home and second home, If interest rates continue to rise or the NR situation affects the ease of getting mortgages then house prices will have to take a dive.

$2 to the pound is just too high, $1.80 seems about right to me.

Too many people have involved themselfs in the buy to let market. Seems they have been brainwashed by junk TV (television not thai visa) and tabliod fodder. These types of people probably wouldnt have even had a mortgage 30 years ago. Oh, just get a second mortgage - rent out the property to cover the payments - and cash in when the house doubles in value - easy peasy.

Well as an ex land lord i could have advised many prospective entreprenair landlords that there are othere things to consider. Like: prices go down as well as up, interest rates go up, tennants who rent tend to be transient, so just when you think everything is settled they up and move out. Just a little small print stuff

Edited September 17, 2007 by pointofview

[sonicdragon]

Something's got to happen in the UK, but I expect it to be started by a housing crisis rather than anything else - many of my friends back in the UK who aren't particularly wealthy all seem to own second houses and are mortgaged to the hilt on both their own home and second home, If interest rates continue to rise or the NR situation affects the ease of getting mortgages then house prices will have to take a dive.

$2 to the pound is just too high, $1.80 seems about right to me.

IMO it is a fallacy that markets are superior pricing mechanisms. They almost always get it wrong from my observations. Usually swinging from overvaluation to undervaluation, depending on liquidity and sentiment. From this activity stem opportunities.

I think the issue you refer to boils down to what market mechanisms are superior *to*. Economic literacture is replete with examples of overshooting and undershooting markets, expecially in f/x, from all kinds of perspectives.

[solo siam]

Something's got to happen in the UK, but I expect it to be started by a housing crisis rather than anything else - many of my friends back in the UK who aren't particularly wealthy all seem to own second houses and are mortgaged to the hilt on both their own home and second home, If interest rates continue to rise or the NR situation affects the ease of getting mortgages then house prices will have to take a dive.

$2 to the pound is just too high, $1.80 seems about right to me.

IMO it is a fallacy that markets are superior pricing mechanisms. They almost always get it wrong from my observations. Usually swinging from overvaluation to undervaluation, depending on liquidity and sentiment. From this activity stem opportunities.

Exactly, its the thermostat principle, its never spot on but over time the average is correct.

[BalthazarBeefheart]

I see now Alliance and Leicester's share price fell 31% today.

[Jersey_UK]

I see now Alliance and Leicester's share price fell 31% today.

USD / GBP........Up or down, it's usually going one way or another

UK on the verge of a Financial Crisis? No.

It's a worldwide (albeit "developed market" / Western) thing.........and not limited to Sub Prime on the US market (I simply love the term NINJA loans "No Income, No Job, No Assets" ).......same "principle" applies to many other risks that have been traded........gonna be a lot of folk at the top of the tree trying to understand <deleted> the boys lower down have been doing when trading Risk. And the answer will be that their is simply no "answer" until the risks traded have crystalised (ie they will have to wait and SEE whether the sh#t hits or misses the fan ) further down the chain (in reality land - did Mr Smith from No 43 repay his loan?).........my worry is that what has been happening is that the Banks / Institutiions have effectively been printing money on a collossal scale (you buy from me and add 10%, I buy from you and add another 10% in an ever repeating circle)....and most folk know how physically printing money worked out......but who would be that stupid?.....well, I have met a few..........

In the UK A Long overdue "correction" of the housing market (how painful remains to be seen) and also many / most of the Banks / Financial Institutions will end up with hits for risks they thought had been safely dumped elsewhere - but apart from 1 or 2 minor players (who will end up getting swallowed up) nothing fundamental that will affect the big boys (apart from maybe opening 1 or 2 up to the risk of a bid - but that isn't all bad).........but this is quite "Normal", especially the fact that it affects everyone, it's the herd instinct and the fact that the "market" does not tend to reward folk within an organisation for learning from history. If most of us knew that what we were doing had a good chance down the road of costing others Millions or Billions, but simply taking the risk meant being several Million better off personally then the sensible thing IS to take the risk.

I had a viable (and at least arguably legal) scheme once to get orphans listed on the London Stock Exchange - but that was a long time ago

[Morden]

Well, if the UK is on the verge of a financial crisis, then the US is on the verge of total collapse and about to become a fundamentalist Islamic state! That might help the rest of the world because, whatever is going wrong in the banking world, it results from the US mortgage lenders' failure to do their jobs properly. The sooner that the Western world turns its back on the US the better! We won't then have to suffer from their inadequacies and we won't have to support their wars.

[LaoPo]

The Next Northern Rock?

Alliance & Leicester & Bradford & Bingley

LONDON - When trouble comes, it comes in pairs. News of British lender Northern Rock's free-falling share price may be foremost in investors' minds at the moment, but it wasn't the only U.K. bank to plummet more than 30% on Monday. Alliance & Leicester, which also relies on the wholesale money markets to fund its activities, crashed as shareholders raced for the exits.

Shares in Narborough-based Alliance & Leicester (other-otc: AANCF - news - people ) closed down 31.3%, falling 273 pence ($5.44) to 600 pence ($11.97) in the dying minutes of London trading on Monday. The stock had remained relatively stable at around 750 pence ($14.96) throughout the day, but it plunged dramatically in the last 20 minutes before the market closed.

It is unclear what sparked the last-minute sell-off. But one thing is clear: Alliance & Leicester is being tarred with the same brush as Northern Rock (other-otc: NHRKF - news - people ) the ailing mortgage lender that sought a lifeline from the Bank of England after a crisis in credit confidence meant it could not even borrow from fellow banks.

The bank's official line was strictly "business as usual," though it may be protesting too much.

"Current conditions in the funding and liquidity markets have had no material impact on either profits or franchise growth," said Geoff Seymour, a spokesman for the Alliance & Leicester. "Furthermore, we have not approached the Bank of England for assistance. We have a very different business model from Northern Rock and our funding is not overly reliant on wholesale markets. Our customers need have no concern for market conditions."

Alliance & Leicester receives over 50% of its funding from the inter-bank money markets, though not to the extent of Northern Rock, which closed down 35.5% to 282.75 pence ($5.64) on Monday. Another bank with a similar business model is Bradford & Bingley (other-otc: BDBYF - news - people ), which fell 15.4% to 279 pence ($5.56).

The current climate of investor conservatism in Europe has led to a fear of securities that carry even moderate forms of risk, which in turn has affected banks that previously relied on asset-backed securities funds or short-term commercial paper for credit. The eventual drying up of these lines of credit has meant that banks are far less willing to lend to one another, a problem for institutions that rely heavily on the money markets for funding.

The only ones likely to gain from all the turmoil are short-sellers, who have been steadily building up a portfolio of financial stocks since earlier this year. Canny traders who borrowed shares in Northern Rock when it issued its first profit warning back in June are making a packet out of selling them on during the current free-fall.

http://www.forbes.com/markets/2007/09/17/a...7markets19.html

LaoPo

[lannarebirth]

For the record. The GBP vs the $USD is in neutral price territory on short term charts, and bullish territory on intermediate and long term charts. It does not need to fall much further to turn the short term chart bearish. The GBP has bearish chart patterns on all it's charts, ST, IT and LT. While this is cautionary, it is price and price alone that matters.

Disclosure: I'm short the GBP.

To update:

The GBP short term chart has turned bearish, the intermediate term chart has turned neutral, and the LT chart remains bullish. All three charts have bearish chart patterns. Next support 1.89, then 1.75 (basis $USD)

Edited September 18, 2007 by lannarebirth