The real bombshell that will hit us all

 
Allister Heath
TOMORROW evening, a bombshell will hit the economy. No, I’m not referring to the latest explosion to rock Rupert Murdoch’s empire; that story, while a fascinating tale which could permanently change the face of UK politics and media, doesn’t threaten to plunge the world back into crisis. The real flashpoint will be the release of Europe’s banking stress tests at the bizarre time of 5pm on Friday. The likely failure of at least some players on the continent (unless the tests are a total joke) combined with the abject lack of any plan to deal with the fallout by the authorities could mean serious trouble by Monday. One way or the other, all the signals are flashing red in the Eurozone: several senior sources have expressed concern to me that a 2008-style liquidity and solvency crisis (depending on the country and institution) could be on the cards again. We are not there yet, of course, but only a fool would deny that the Eurozone crisis is now a massive threat to the global economy.

To make matters worse, the US is also on the brink: time is running out for politicians to agree to increase their national debt limit. Last night, Moody’s warned that it was putting the US on downgrade watch, a potentially cataclysmic event. Failure to reach a deal could trigger a default on US bonds; as Citi puts it, “asking what the economy might look like after a possible Treasury default is akin to asking ‘what will you do after you commit suicide’.” While the UK banks will pass the stress tests, a Eurozone implosion or US default will affect everybody. Even if the worst is avoided, the tension and angst already created is starting to have a real effect. Decisions are being put on hold; investments are not happening. And instead of being free to focus on these eventualities, the City’s top firms are spending much of their time talking to regulators and politicians.

While the spotlight has moved away from banking – with tabloid journalists now the latest whipping boy for public opinion – it remains the case than none of the industry’s issues have gone way. Talks are still ongoing between banks and the Independent Commission on Banking; the definition of the ring-fence and of what will be inside and outside remains frustratingly unclear. The discussion will probably end by the end of the month. There remains a deep worry at the very highest level of UK banking about whether the authorities actually want large financial firms to be based in Britain; the idea that no bank will ever leave the UK, which has become the consensus over the past few months, is absolutely wrong. In fact, if the ICB’s rules make it even more disadvantageous to operate a global universal bank from London then I’m more certain than ever that one or more will eventually quit the UK.

To make matters even bleaker, the UK is facing another economic soft patch. The latest (goodish) jobs figures demonstrate this. Total employment increased 50,000 on the quarter (good, but not as good as in the previous three months) and by 309,000 on the year.

But the rate of growth is slowing and the total number of hours worked fell 0.1 per cent year on year, a sign that the demand for labour is weak . Britain is facing a perfect global storm. It’s not as exciting as chronicling the woes of a media baron, for sure, but the next few weeks will be critical for the prosperity of hundreds of millions of people across the Western world.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath