Financial crisis: It’s deadline day for the eurozone

Posted on: 30 June 2010 by Mark O'haire

The next stage of the financial big dipper enacts itself in the eurozone today. Tony Page examines the impact it’s likely to have.

A few weeks ago, in one of my doom and gloom mind-sets, I raised the issue of the banking sector ‘hiding duff assets’ like commercial property on their books. Much of this was funded by the banks at the height of the boom and those assets are now worth considerably less.

Sooner or later this issue has to be resolved and the real value declared. The banks and government were hoping a recovery would push the values of these properties back to close of their bought in value. If this happened then the banks balance sheets would be OK. The amount of money runs into hundreds of billions and the premature write off would have a devastating effect on the banks and the world economy.

Now this situation is not unique to the UK. Remember it was the collapse of the US housing market that started the worst financial mess in history. All the banks around the world did much of the same thing - lend money on risky assets! Those of you who owned property in the early 80s will remember people having negative equity. Well this is exactly the same except on an enormous scale.

The next stage of the financial big dipper enacts itself in the eurozone today. Today the euro banks have to repay the 450 billion euros they were lent by the ECB (European Central Bank) a year ago. Now this is not a forced repayment – they can roll over the debt for three months at a time.

What the ECB wants though is for the banks to get their borrowing from the market and today will show whether they have been able to do this. The world’s stock markets have all fallen (the UK Footsie 100 is down again below 5000) in the fear/ belief that the banks will not be able to raise the money in the open market. Mainly because lenders don’t like the collateral (assets) they are being offered.

So what does this mean to the like of you and me? Well if the run on the euro continues, the already slow recovery globally will slow even more. Exports from the UK will falter and production slow down. This will affect jobs and our home market badly. With the cuts from government underway the picture is looking bleak to say the least. Will we fall back into recession? Possibly. Will we get out of it? Yes, but it will take much longer than we were all told.

Even if you are not madly interested in world economics, watch the news over the next couple of days. In Spain, Portugal and Greece they are glued to the television; half on the World Cup and half on their economy. The world is back in ‘serious worry land’! This may be the ‘second coming’!

Why the government is cutting the cloth!

If we need a better example of public sector waste we don’t have to look further than all the government websites that currently exist. There are about a hundred of them and they cost a staggering £120million a year to run.

Each visitor costs the taxpayer £11.87, each visit. If we ran this business in the same way we would have gone bust years ago. The Coalition has just announced it’s  scrapping most of sites and saving the money. Good show! That’s £2 per person in the UK that won’t come from our taxes!

Until tomorrow...

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