Sizewell: another win for French nuclear blackmail

Among the large numbers bandied around by Rachel Reeves was of course well over £10bn of UK money for Sizewell C: and FID is yet to be taken!  Exactly whether this dosh is envisaged as outright cash (as has been the case with the billions already gifted to EDF, even before FID), or dumped straight onto electricity bills, or a combination, I have not yet discerned.  

It's still outrageous - at best a humongous leap of faith, the beneficiary of which is a French concern (and indeed the French state) that has proven itself many, many times over to be unworthy of trust in such matters.  In return for what?  A plant that, even on the most ambitious and optimistic assumptions, could not be generating electricity before the next-Parliament-but-two, and in the meantime will have cost all of us a great deal of non-returnable money.  Who said politicians' horizons extend only as far as the next election at best, and the next headline at worst?

Well of course none of this is to be taken at face value.  They are already pitching for headlines reading "thousands of jobs", although as we know, the hi-tech jobs involved will without doubt be squarely located in France.  The sop of a bit of civil engineering for UK firms - and not even 100% of that, if Hinkley Point C is any guide, which of course it is explicitly meant to be!  If Keynesianism is the guiding theory, you could get a great deal more for your money on vastly more useful civil engineering projects that might actually make some kind of economic return decades sooner than SZC ever could.  Just keeping the money in the UK would be a start. 

And of course there are other short-term considerations, the giveaway being Mr Frog who, on the exact subject of demanding more money for both SZC and HPC (for which, contractually, EDF has sole responsibility) recently stated: "We [UK + France] need to stick together on many subjects - on Ukraine, on all dimensions of our relationship".  We may be sure he really means "cooperation on Small Boats", the carrot of which which the French continually dangle, and then promptly withdraw a couple of weeks later.  Oh, and we must pay for that "cooperation", too.  Such an easy game.

Why are successive UK PMs and Chancellors such soft touches?  Blair, Brown, Cameron, Osborne, May, Hammond, Johnson, Starmer, Reeves ... it's only been Sunak who has ever demurred, and then without any meaningful force.  The rest have all danced to EDF's protracted, staccato jig.  I despair.

ND

Seneca is better than Truss' lame quote might suggest

What have the Romans ever done for us ..?

Predictably, Liz Truss made a spectacle of herself spluttering out an attempted quotation from Seneca (or was that Sennapod?) as she bad farewell to the cruel world of Downing Street with a neat encapsulation of her brainless approach to political decision-making.  Seneca did however write some really interesting stuff - more interesting than the low-grade self-help platitude that Truss seems to like: the T-shirt slogan material that counts as worldly wisdom amongst people like George Osborne who think that Nudge is a work of philosophy.

We turn, then, to Seneca's blood-soaked Medea - probably most famous for its prediction of the discovery of the New World: 

... in later years a time will come when Oceanus shall relax his bars and a vast territory shall appear, and Tiphys shall discover new worlds, and Thule shall be no longer the remotest spot on earth.

Seneca also had something critical to say about the opening up of the world for commerce and multi-culti exchange - an issue we often find being discussed around here, and indeed which exercises a lot of modern political thought: the benefits, or otherwise, of globalism, free trade (and dependency thereon), supra-national government and more-or-less compulsory cultural fusion.  The Loeb translation runs thus

Our forefathers saw bright eras with crime and deceit far distant.  Homely, touching no shores but their own, they grew to old age on their fathers' land, and, rich with little, beyond what their native soil had yielded they knew no wealth. The covenants of this well-separated world were dragged together by Thessaly's pinewood boat, which ... bade the sea, once alien, become part of our fears.

In other words:  our [very distant!] forefathers knew nothing beyond their own shores, but they were happy, and lived well enough on what they had.  All these happily separate nations, each with its own customs, were forcibly wrenched into a single 'unity' when the first merchant-adventurers started stirring things up: and the seas, which nobody ventured upon before, became a source of troubles.  (Apologies if I'm insulting you by offering a precis.)

Now of course ancient Roman imperialists (Seneca's target here) were very much in favour of globalism.  They had every intention of taking their ships everywhere, with no limits as to whom they were willing and indeed eager to embrace in their world-system: all you had to do was subordinate your culture - and of course pay your taxes.  In return, you got, well, whatever it was the Romans did for us.  And, as John Cleese's Reg ruefully acknowledges, that was, errr, quite a lot.

We have more recent versions of globalist imperialism to think about.  We Brits had a good crack at it, spouting the Roman precedent explicitly at every opportunity.  The French would have loved to (and the Spanish).  The Americans are still in that mode, though less confidently than in earlier decades.  The Chinese are itching to have a go.  Somewhat more regionally, Russia thinks everyone across a pretty broad expanse of the planet should offer fealty to Moscow.  And of course the EC is pretty keen on having everyone in (and indeed adjacent to) Europe subordinate their cultures and pay their taxes, with compulsory multi-culti all round.  Which a majority of us Brits are now quite resistant to.

I don't recall Nigel Farage ever quoting Seneca.  But the golden image of a "well-separated world" of yore, everyone happy with their lot, might sometimes be rather attractive - on both right and left of politics; and for Greens, too.

Still, that list of "what the Romans did" is quite impressive ...

ND

Greensill: Actually, The Treasury Done OK (Eventually)

Reading what is, presumably, only the first batch of Cameron messages we're to be regaled with, I'd say his email approaches to various players within Whitehall were succinct, eminently plausible-sounding, and all-in-all really quite adroit, given the mission he was set on to accomplish.  We'd probably expect nothing less.

In all the covid-chaos of the time when really big bad, panicky decisions were being made on an industrial scale, I'd further say that it was a bloody miracle he didn't get his way.  Not least, when you consider the dodgy vehicles that were being ushered into the 'VIP Lanes', left right and centre.

Let us now launch into pure inference.  It seems such a bloody miracle, one then has to suspect the Treasury had already got Greensill's number in no uncertain terms (eventually, after years of over-indulgence).  If that's right, we may be mightily glad of it.  Would that informed official skepticism always thus prevailed.

As regards Cameron, if this account is even vaguely true then he really has prostituted himself.  (To get one over on Osborne and the Blairs ..?)  Plenty of people aren't remotely surprised, but I rather am.  Getting naive in my old age.  

ND

Greensill - and Other Goings-On in the City

It is much to be regretted that CU finds himself unable to write more about Greensill** because it is a story rather up our street.  The DTel has a fairly good piece here, offering the common-sense approach to risk management in circumstances where some newcomer seems to be claiming to have discovered the philosopher's stone in a basic area like supply-chain finance.  Is this likely?  No, it isn't - even if he is fronted by Call-Me-Dave.  (Blair doesn't have the monopoly on ex-PM avarice: and let's see how the financial exploits of Boy Genius stack up ten years from now.)   Not rocket-science at all.

Just once in a while, something new(ish) really does crop up.  Securitisation was one helluva smart innovation in its time, and those quickest onboard the train (Guy Hands / Nomura / Terra Firma and, errrr, Enron) did some very good, sound business in the early days.  By the time we get to sub-prime mortgages however, the whole thing has spiralled right out of control, all rigour and discipline gone.

Which bring me to the next puzzle: the remarkable rise of the brothers Issa and their petrol forecourt 'revolution'.  I understand clearly enough how high-throughput, well-located petrol stations might have an eminently financeable profile - better even than Guy Hands' pubs, maybe.  (I say "maybe" because the margins are notoriously tight, too.) 

What I don't understand is how this rather obvious attraction could have been missed by the pretty sharp operators of big supermarkets, oil companies etc.  "Retail is detail", and they don't miss much.  So if these assets were already sitting on the balance sheets of big, smart players, (a) they would (surely?) already have been effectively leveraged to the full already, even if as part of overall corporate finance; and (b) couldn't be prised away into new ownership at anything other than a full price. 

So who've been the suckers here?  All insights gladly received.

ND

__________

** "I can't write at length about Greensill unfortunately, too much real life conflict. Suffice to say, he is a right twat who has met a fair ending. How people decided such an arrogant bore was worth backing to the tune of billions is beyond me"  - CU, here (BTL)

Deficit not coming down when the sun is shining - no wonder Brexit is off the menu for Osborne

A long time ago, a phrase was used by the Leader of the Opposition, it went along the lines of

"You did not fix the roof when the sun was shining."

And it rang true, because at the time the Labour Government was busy increasing state spending. In 2000, having followed Tory budgets for the first term in office, total UK Government spending was £341 billion.

By 2005 and the second Labour General Election win, Spending had reached £492 billion. A massive 31% increase in state spending in just a five year period. No wonder the Government won the election easily even with the unpopular Iraq war as a key issue.

At the 2010 election, £693 billion was being spent by the Government. More than double what has been spent 10 years earlier in a time of relatively low inflation. However, with GDP growth quite high as a result of the bubble Government spend had only gone up by 4% of GDP so not great but not terrible...except....

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The real issue had come in 2007, with all new fangled benefits galore to hand out, social spending in the Financial Crisis combined with a horrific loss of tax income saw Government spending saw to 50% of GDP. An the deficit and national debt soared with no money to pay for the 'automatic stabilisers.'

So to 2016, the Tory Government has seen a return to GDP growth and cut Government spending back down to 43% of GDP. The real damage though is in the tax base. There has been no recovery of the fake boom Banking tax take. Nor are there any signs it is coming back.

In April 2016 corporate tax receipts are lower than a year ago despite a growing economy. The tax won't come back. And because of that the deficit remains very high by historical standards at 4.4% of GDP.

With little appetite for tax cuts the roof is not fixed, the next recession is pretty close being at most 3 years away and possibly sooner with Brexit, there is no chance of the deficit being fixed in time. The sun has been shining but he damage was too great is what Osborne will argue.

But this alone makes me wonder about a Corbyn Government. By 2019 plenty of people will have forgotten the 2007 mess and who was at fault or not. When the Tories look vulnerable on the economy they generally lose the election. I wonder if it will come to pass. 



Recession predictions post Osborne plans

From various sources:

RBS economists: 2017/18

RBC Capital: 2018

Jones Lang Lasalle: 2017

HSBC Economist forecast: 2018/19

Of course economics forecasts are tomorrow's chip paper. But the UK Government has staked its financial credibility on their being no recession.

With one, the Country's finances will be very quickly back in the mire of 2008/12 in terms of its overall deficit.

Considering the Tory domination of the political stage, why did they make such a bold gamble that could well lose them the next election with the economic credibility in ruins a la 1997?

Osborne scraps tax credit cuts

- Backs off in the face of opposition

- Replaced by heroic forecasting of economic growth in next 5 years

- Huge cuts to transport budget and other non-skollznhozpitals spending

A good political 'budget' shoots all Labour foxes.

I wonder though, if this timidity is shown now, what is going to happen when the economy turns south in the next few years?

Osborne apes Gordon Brown

What a time to go to China. One of the things about having a busy job in life is that you have to plan so far in advance. if you are Chancellor of the Exchequer its likely takes many months to arrange a trip to China with all the flunkies working at it to get the right meetings arranged for you.

This Osborne is reduced, the time now having arrived and at a very in-opportune moment to say this:

"I very deliberately chose to come here, to the epicentre of the volatility in financial markets this summer, to say this: whatever the headlines, regardless of the challenges, we shouldn’t be running away from China.

 

"And so today my message is clear: through the ups and downs, let’s stick together.

 

"Let’s stick together to grow our economies. Let’s stick together and make Britain China’s best partner in the West. Let’s stick together and create a golden decade for both of our countries.

 

"Britain and China: we’ll stick together."

So, just as Chin starts to really suffer from the downsides of the corruption and dystopian effects of the One Party State, Osborne chooses to go and suck up to them. Rather than offering support in building free markets or powerful regulators, we just sign them up to build the most unaffordable powerstation in the world (seriously, for the ludicrous cost we could likely build the as yet uninvented Fusion power station, it will be twice as expensive as using solar, even in the dark UK) for us.

Worse, China is likely experiencing the beginnings of a prolonged downturn in fortunes. It has enough foreign reserves to mask the depths of the crisis for a decade or so and is lucky that it is so tied to commodity prices that would finish the economy off if they rose.

I mention Gordon Brown because of his Jonah status of always backing the wrong horse, but also the habit of our Chancellors to be ill-prepared to deal with the real world and instead seek to shape the world as they see it.

I doubt it will be long before George Osborne becomes unstuck with his own domestic economic policies either.

Summer Budget: Open Thread

Will update later with any details but so far it seems to be the usual,  'not has hard as we are portrayed are we?' attempt along with some fiddling around the edges and finding ways to avoid real cuts where possible...middling...what do you think?

IMF Upgrade for UK

It's always nice to see some real humble pie being consumed. As most readers will be aware, the UK remains in a parlous financial state, as does much of the Western world. The whole recovery will be de-railed sooner or later by the next stage of the Euro crisis and by the sheer unsustainability of the debts accrued across the West by their over-purchase of Chinese goods.

However, austerity is not the cause but offers partial solution. Better still would be the re-structure of the welfare state in the West along more Hobbesian lines, but for now that is incompatible with democracy. So austerity of some sort remains the best approach. The Coalition government at least did apply the brakes to Labour spending and after some time is now reaping the rewards with a more stable growth than has been achieved in say the US. The IMF were very quick to blame Osborne for his crazy (read, un-French) policies and now the UK is prediceted to be the fastest growing Western nation this year.

It must make for a little bit of extra spring in the Chancellor's morning jog today.

The real challenge lays on two fronts though. Firstly that there seems to be no political benefit to the 'hated' Tories for engineering a recovery - after all, it's what they said they would do. Secondly, with interest rates at 0.5% and QE in place, we are still deep in the middle of the woods with no clear path out yet identified.

Will they, won't they split RBS?

Politics and Banking have has an interesting relationship this past 5 years or so. What with the small matter of the Financial Crisis and part-nationalisation of major banks and full nationalisation of some smaller ones. The Poltiicians have been firmly in control, of what they know not.

The latest project to come up is what to do with RBS. Lloyds has been set forth on the road to full privitisation with a sucessful sale of shares the other month. Next year will see the Government holding whittled down to next to nothing, in plenty of time for the election, natch.

RBS presents a more worrisome challenge. The banks historic incompetencie's are vast, with a huge array of mis-selling, rigging and general lending splurge having laid waste to both its management and balance sheet. Stephen Hester did a good job of steering the bank away from the brink and now new management has the job of building for the future. The bank though is still brought low by its bad debts - a sterling job has been done to sell its non-core assets down from £350 million to more like £80 million, but the buffer that was trading profit that allowed it to balance profits and losses (well, sort of, RBS has been the least profitable of the big banks by far since 2008) has been closed down. This leaves a steadier income stream from corporate and SME banking, but a less profitable future.

So clever Mergers and Acquisitions advisors at Blackrock have been telling the Government to split the bank to make the good part easier to put back into the private sector. meanwhile the bad part can sit on government books just like Northern Wreck and slowly lose taxpayers money into the distant future. The split and sale has a positive outcome for those wishing to see deal activity and also for a stock market which likes nice easy bets, like the Royal Mail.

Also a thorny issue for the Government though is that the most under-performing part of RBS is its Ulster Bank - a part of the UK which needs help and does not need a banking crisis of sudden call in of credit lines. This issue is the main one which has driven the Government side of the need to split the bank.

From the bank side a split would be disastrous, the need to split out employees, systems and balance sheet is a hard job. So hard that Santander got bored of waiting to acquire a mere 5% of the bank and walked away from its deal to buy Williams and Glynn after 18 months. To inflict another large change on the bank would surely cripple its market focus and suck in all resources for another 2 years.

So a lot depends on the results on Friday, which should be announced with the decision about whether to make a split into a bad bank. If things have continued to turn around, perhaps the Government will leave it be, with a fig leaf of a faster closure of the investment bank or an 'internal' split of the bank, pushing its restructuring and Non Core units together. if things have nor progressed, then the dealmakers will have their day and RBS will be consigned to the same bin as Northern Rock, having turned our only to have managed to have its suspended for 5 years and then imposed after all.

Osborne: As much fantasy as Milliband when it comes to economic promises

..but of a different kind. It is the most extreme sort of wishful thinking to think the UK is going to balance its budget in the next Parliament, a promise which cannot be delivered upon. Worse is the pure deception that this implies, that somehow when we do this things will improve. Here are 2 charts from the ONS:

What do these tell us? Well thei first one shows how the Public Sector Net Borrowing has changed since 1995. As we can see since the financial crisis in 2008 it has shot up massively. Worse, it is proving to be very stubborn to get down, due in the main due to a lack of will to introduce any drastic cuts or to keep taxes high or raise them further. Or to generate any growth until very recently, of course.

Then the second graph show the total debt and its growth, which is apporaching parabolic. The effect of compound interest is huge as is the garganutan nature of the speed of increase. each month £9 or £10 billion is added to the total bill, costing another £25 million in interest per annum, just to sit still. All this in a low interest environment where gilts are still trading at below 3%. A return to more normal economic conditions, or another euro crisis, could see gilts move up 25% or even 50%. This in an of itself would add something like £20 billion to the PSBR per annum. Drastic cuts would be needed just to stand still.

Also of course, with PSBR this year at £100 billion its hard to see how this gets to zero in say five or six year, especially when the rate of decline has been about £10 billion a year during the Tory 'cuts.' Economic growth and tax receipt increases should help a lot, but still, its not realistically going to come close. Meanwhile total debt is going to arrive at north of 100% of GDP during the next Parliament whoever is in charge; leaving the interest rate time bomb lurking for any incumbent.

The most likely outcome of the election is currently a small Labour majority Government. When the economy enters its post-election downturn, mild, but likely when you look back and see we normally have downturn every 7 years of some sort, the maths will be too hard to beat. Being Labour, they will eschew cuts to NHS, Welfare or Pensions, as even the perhaps Tories would. So instead its going to be really massive tax hikes for the middle and upper income segments or begging to the IMF. Red Ed really will bring back the 1970's. I wonder if George Osborne will be opposition leader then? Somehow I doubt it.