The Financial Services Club's Blog

Is SEPA Happening and Does It Matter?

We had our annual pantomime debate at the Financial Services Club this week, with a classical Oxford style debate about whether SEPA, the Single Euro Payments Area, matters or not.

This year, with the backdrop of the Eurozone implosion, the debate was far livelier than usual, with a lot of spicy discussion about countries defaulting, the euro instability, the lack of political union and more.

In particular, the argument against the Eurozone was stronger than usual and so the pro-SEPA panel was loaded with three speakers:

• Daniel Szmukler, Head of Communications and Corporate Governance at EBA Clearing;
• Ruth Wandhofer, Head of Market Policy and Strategy, EMEA, Global Transaction Services, Citi; and
• Jose Beltran, Director of SEPA, STET.

On the other side was:

• Simon Bailey, Director, Logica
• Johnny Brit, former Chairman, Xenophobank

With the last person being a class act anti-euro plant.

It certainly stirred up the debate a bit.

The Case For SEPA

 On the positive side, the panellists argued that SEPA is good for Europe, European Union, and European business and for European politicians.  In fact, it’s even more critical today than it has ever been as the strains on the Eurozone would fall apart far more easily if SEPA and other aspects of the European Economic & Monetary Union (EMU), the Financial Services Acton Plan (FSAP) and the Directives that go with this were not so firmly established in place.

SEPA has been slow to progress, but it’s a ‘moving target’ and should be seen in context as a complex project that involves 9,000 banks and 27 countries (plus four if you include the Extended Economic Area of Norway, Iceland and Liechtenstein plus Switzerland).

This means that you need to understand that the political complexity in delivering a project like SEPA in banking is just a reflection of the political complexity of getting 27 nations to work together across the Union, and you can see how hard that is from things like the latest EU Treaty, the issues in Greece and the PIIGS and more.

In fact, progress was slowed because you had some countries blocking SEPA whilst others publicly supported the program whilst privately were trying to sabotage it, just as any political issue is dealt with.

The slow progress was also down to the fact that it was seen as a compliance project, which caused issues at the start as the program was given to lawyers rather than infrastructure operators.

This meant it was also seen as threat to banks rather than an opportunity.

Equally, it’s still unfinished and there’s still a lot of work to do, with goal posts changing as more requirements are added each month by regulators and governments, but important steps have been taken in terms of creating:

Good governance, through the European Payments Council (EPC) which took two years (2002-2004);

Good practices, through the development and implementation of the SEPA guidelines (2004-2008); and

Good delivery, by demonstrating that SEPA Credit Transfers are working, with almost a quarter of all credit transfers now in the SCT formats (2008 onwards).

Some countries such as Luxembourg and Cyprus now transact almost all their transfers in SCT format and even large countries, such as France, are seeing migration with 45 million SCT transfers per month today.

Yes, direct debits are more of an issue as everyone claims their direct debit structures are different, but that is also moving.

Eventually, it will be like SCTs with SEPA Direct Debits (SDDs) implemented across all member states.

And look at the benefits.

It now costs virtually nothing to withdraw euros at any Eurozone nation’s ATM network, when just a few years ago it could cost you up to €30 for a simple withdrawal.

And standards are making a difference in all of this.  You cannot underestimate the impact of standardisation through XML for example, which is a foundation for innovation.

The end-dates will also help here, with February 2014 for the Eurozone states and February 2016 for the non-Eurozone nations.

You need to see the end-date as the ‘end of the legacy and start of the new’, which is when SEPA will really kick in.

So it’s going to happen … you just need to be with the programme, recognise it takes time and ‘give us a break’.  After all, Rome wasn’t built in a day, and neither will Europe be.

The Case Against SEPA

The nay-sayers were more vocal, and in some ways backed up what the pro-Europeans were saying.

A key point was that SEPA and the Payment Services Directive (PSD) is no longer important against the backdrop of the Eurozone implosion.

Even if you took that implosion away, it would be less important as regulating the post-crisis world has taken over with things like Basel III, Tier 1 Capital ratios, liquidity risk, the rise of Remnimbi and transaction taxes moving to the top of the agenda.

All of this means that mundane activities like payments infrastructure harmonisation has moved down the table and, for some, completely off the agenda.

Equally, the supporters may say it takes time but it’s already ten years and what do we have?  22.66% of credit transfers in SCT format and just 0.93% of direct debits in SDD format.   That is pathetic.

Then you say it will change with end-dates but what do the end-dates actually mean?

It’s just a political statement again, as there are no threats here.

Where are the sanctions if you don’t meet the end-date?

What’s the threat?

Where’s the punishment?

Is there any reward?

And the real issue is that no-one has mentioned the customer.

Who is bringing the customer along in this dialogue?  The regulators?  The governments?  The banks?

No-one is dealing with the customer aspects or needs, and the benefits are risible rather than visible.

So the euro will be dead by the time we reach an end-date, and that means you can forget about SEPA and move on.

The evening then ended with many questions around the themes outline above and concluded with a vote on two questions:

1. Does SEPA matter? and
2. Is SEPA happening?

The 100-strong audience voted that yes, SEPA matters (65% in support – a stronger showing than in previous years) but it’s not happening (only one hand was raised to say SEPA was progressing well).

Obviously, there’s still a long way to go and, if you’re interested, two members of the audience also blogged about the evening: Ben Poole and Barry Kislingbury.

Thank you to them and to all, particularly our esteemed panellists.

A fun evening all around which, when you think we’re talking about SEPA, the PSD and the Eurozone, is saying something,

 

 Postnote:

This is the third annual "Does SEPA Matter?" debate.  Click on the links for the debates in 2011 and 2010.

 

The future of capitalism

It’s Davos time, as usual.

In the last week of January, the great and the good of the world’s leadership from governments, business, academia and media all gather in Switzerland to debate the future of the world’s economies and the World Economic Forum, #WEF.

In the build-up to this year’s WEF, it seems that all the magazines, media and men are talking about capitalism, what capitalism means post-crisis and what the future of capitalism will be.

David Cameron made a speech about this last week, as did Nick Clegg and Ed Miliband, and much of the debate resonates with the speech of Amartya Sen that I attended last week.

The core of the debate is embodied in the quote by Winston Churchill that “capitalism is the worst form of economics, except for all the others that have been tried.” 

Link: TrogloPundit

True.

The debate is then what form of capitalism you want: state capitalism or liberal capitalism.

A wholly state run economy fails, as demonstrated by communism; whilst a wholly liberalised, free market economy also fails, as demonstrated in 2008.

So there needs to be a middle ground, but how middling is that middle ground?

Somewhere between the extremes of Western and Eastern approaches to commerce.

Some believe that the West is crumbling due to over-excessive free market liberalism.

In a 2011 report, the Organisation for Economic Co-operation and Development figured that the level of income inequality in the 22 member nations it studied increased by 10% since the mid-1980s, with conditions deteriorating in 17 of them.

A recent report  by the Institute for Policy Studies, a Washington-based think tank, found that CEOs at large U.S. firms earned, on average, $10.8 million in 2010, a 28% increase from the year before, while the average worker took home $33,121, a mere 3% more. At that level, CEOs’ paychecks are 325 times bigger than their employees’. In the 1970s, CEO pay rarely topped 30 times more.

Meanwhile, the average income for an American has reduced every year for the past three years.

On the other extreme, Asian markets are rising fast and taking over, using a more state-led capitalistic approach.

“The world’s ten biggest oil-and-gas firms, measured by reserves, are all state-owned …  state-backed companies account for 80% of the value of China’s stockmarket and 62% of Russia’s.”  [The Economist]

“The ten largest economies in Asia now spend roughly $400 billion a year on research and development (R&D)—as much as America, and well ahead of Europe’s $300 billion. China’s investment leapt 28% in a year, propelling it past Japan to become the world’s second-biggest spender … America’s share of global R&D spending is falling. In the decade to 2009, it tumbled from 38% to 31%, whereas Asia’s rose from 24% to 35%. But science is not a zero-sum game.”  [The Economist]

So there is a new model rising which, according to Time Magazine, “is not so much between capitalism and another ideology but between competing forms of capitalism. The financial crisis, growing inequality and faltering economic performance in the U.S. have tarnished American ‘leave it to the markets’ capitalism, which is being challenged by ‘capitalism with Chinese characteristics’, euro­capitalism, ‘democratic development capitalism’ (India and Brazil) and even small-state entrepreneurial capitalism (Singapore, UAE and Israel). All these models favour a more significant role for the state in regulation, ownership and control of assets.”

The Economist furthers this debate, asserting that the winner is ‘state capitalism’.

Link: Ifyouhavetoaskyoudontknow

“The crisis of liberal capitalism has been rendered more serious by the rise of a potent alternative: state capitalism, which tries to meld the powers of the state with the powers of capitalism. It depends on government to pick winners and promote economic growth. But it also uses capitalist tools such as listing state-owned companies on the stockmarket and embracing globalisation.”

Examples of state capitalism include:

“The 13 biggest oil firms, which between them have a grip on more than three-quarters of the world’s oil reserves, are all state-backed including the world’s biggest natural-gas company, Russia’s Gazprom, China Mobile and Saudi Basic Industries Corporation is one of the world’s most profitable chemical companies. Russia’s Sberbank is Europe’s third-largest bank by market capitalisation. Dubai Ports is the world’s third-largest ports operator. The airline Emirates is growing at 20% a year ...  State companies make up 80% of the value of the stockmarket in China, 62% in Russia and 38% in Brazil. They accounted for one-third of the emerging world’s foreign direct investment between 2003 and 2010 and an even higher proportion of its most spectacular acquisitions, as well as a growing proportion of the very largest firms: three Chinese state-owned companies rank among the world’s ten biggest companies by revenue, against only two European ones.” [The Economist]

“State-Owned Enterprises (SOEs) make up most of the market capitalisation of China’s and Russia’s stockmarkets and account for 28 of the emerging world’s 100 biggest companies.” [The Economist]

“France owns 85% of EDF, an energy company; Japan 50% of Japan Tobacco; and Germany 32% of Deutsche Telekom. These numbers add up: across the OECD state-owned enterprises have a combined value of almost $2 trillion and employ 6m people.” [The Economist]

The Economist believes the trend for the next decade will be towards state capitalism based upon the Chinese model, albeit with caveats and issues along the way, and  concludes that “the Chinese no longer see state-directed firms as a way-station on the road to liberal capitalism; rather, they see it as a sustainable model. They think they have redesigned capitalism to make it work better, and a growing number of emerging-world leaders agree with them. The Brazilian government, which embraced privatisation in the 1990s, is now interfering with the likes of Vale and Petrobras, and compelling smaller companies to merge to form national champions. South Africa is also flirting with the model:

• Over the past 30 years China’s GDP has grown at an average rate of 9.5% a year and its international trade by 18% in volume terms. Over the past ten years its GDP has more than trebled to $11 trillion.
• China has taken over from Japan as the world’s second-biggest economy, and from America as the world’s biggest market for many consumer goods.
• The Chinese state is the biggest shareholder in the country’s 150 biggest companies.
• China’s 121 biggest SOEs saw their total assets increase from $360 billion in 2002 to $2.9 trillion in 2010 … in 2009 some 85% of China’s $1.4 trillion in bank loans went to state companies.”

But note that, unlike America where CEOs’ paychecks are 325 times bigger than their employees, state capitalism is fairer in terms of income disparities: “in 2009 the average SOE boss earned $88,000 and the highest-paid, the chairman of China Mobile, $182,000.” [The Economist]  China Mobile has 600 million customers and is one of the largest telecoms in the world.

FYI, I debated these points a couple of years ago, and concluded that the future is one where capitalism is heavily influenced by the influence of the Chinese and Islamic principles.  

Seems to be coming true?

Link: The World Is Not Enough

Postnote:

The main reading behind this blog post is inspired by two cover page stories:

• How to Save Capitalism, Time Magazine
• State Capitalism, Economist supplement

 

Amartya Sen: thoughts on poverty and the global financial crisis

I attended an interesting lecture last night from an economic legend: Professor Amartya Sen of Harvard University.

If you haven’t heard of him, he’s known as the Mother Teresa of economics in his native India, and has spent a lifetime fighting poverty with analysis rather than activism. 

Awarded the Nobel Prize in Economic Sciences in 1998, for his contributions to welfare economics and interest in the problems of society's poorest members, Sen is best known for his work on the causes of famine.

He is currently Professor of Economics and Philosophy at Harvard University, as well as being a senior fellow at the Harvard Society of Fellows, distinguished fellow of All Souls College, Oxford and a Fellow of Trinity College, Cambridge, where he previously served as Master from 1998 to 2004.

An impressive guy.

Amartya delivered his speech as part of the London Stock Exchange Group series of lectures on the future of global finance, and the evening was hosted by LSE Chairman, Chris Gibson-Smith.

Here’s a brief summary of Amartya’s sentiments (I say ‘sentiments’ as this is not a record of his speech and incorporates my own spin on his words).

Some people say we live in interesting times, but I think we live in baffling times.

We live in baffling, rather than interesting, times because it is very hard to get any clarity about the future. 

The only thing that is certain is, in the words of George Bernard Shaw, “the greatest of evils and the worst of crimes is poverty”.

Shaw wrote this in the Preface to his brilliant play, Major Barbara, published in 1907. 

The tragedy of poverty is, of course, obvious to all - whether in Latin America, or in Asia or Africa, or in Europe and the United States. 

The calamity of deprivation and penury can hardly be missed by those who have bothered to think about the subject, no matter whether they are themselves poor or not. 

Lives are battered, happiness stifled, creativity destroyed, freedoms eradicated by the misfortunes of poverty. 

But Bernard Shaw was not talking, on this occasion, about the hardship of poverty, or the misfortune that goes with it. 

He was commenting, in a rather unusual way, about the causation and consequences of poverty - that it is bred through evil and ends up being a crime.

If poverty is indeed an evil, not to mention “the greatest of evils” as Shaw puts it, then there must be some wickedness, or at least some culpability, behind poverty - some wrong-doing that allows such human tragedies to occur and persist. 

This raises the immediate question: who, then, are the wrong-doers?

If you look to protesters today, such as the Occupy Wall Street movement, the wrongdoers are represented by the corporate greed of capitalists and the banks.

You can just as easily take the opposite view however, and look to the Tea Party movement who see the failure being that of government and government policies.

The Tea Party align with Adam Smith, the guru of capitalism, and believe that free markets should rule.

Who is right and who is wrong?

Or is this the right question? 

In thinking about strategic issues, we cannot but go into the question of culpability and the failure of duties and obligations. 

We have to ask: how can things be done differently so that the evil of poverty is ousted? 

We have to identify the nature and genesis of the wrong-doing that is responsible for the affliction. 

That is not, however, the same as trying to identify the wrong-doers?

The identification of wrong-doers is not our task and trying to identify the evil-doers is not the right strategy since the responsibility for creating an evil is very widely dispersed in the society. 

We have to see how the actions - and indeed inactions - of a great many persons together lead to this evil, and how changing our modes of actions - our policies, our institutions, our priorities - can help to eliminate poverty. 

Our focus definitely has to be on removing evil-doing, as part of our strategies and programs, rather than going on the wild-goose chase of catching the hugely dispersed collectivity of evil-doers, who may not even fully understand how their actions can be seen as part of an evil state of affairs.

In fact, we should eliminate the discussion of wrong doers completely, and focus our efforts more on how to stop poverty full stop.

This is why strategies such as closing sweatshop labour factories in poor countries, or arresting those who employ children in the making of carpets, would fail to eliminate the poverty of the victims if such action is separated from a general economic and social program. 

In the vast majority of cases the employees are there in those terrible jobs because they have very few options - none that are particularly good. 

This is because there has been a failure of the state and the society to create opportunities for decent employment, which makes it possible to recruit labour to do terrible jobs as the alternative may be unemployment and starvation.

That is why exploited labourers are led to soul-destroying work today in the poorer countries, and closing down sweated-labour factories without giving the victims alternative opportunities for employment or education - the latter is extremely important in the case of child labour - is not an adequate solution to the problems and predicaments of the precarious poor. 

There is, of course, moral merit in restraining the pursuit of profit of businessmen through exploiting vulnerable and freedom-less labour, but a fuller solution can emerge only through positive opportunities of alternative employment and occupation, and that demands societal action. 

So the first action to address poverty is to expand labour opportunities and assist in education, and not to just shutdown existing sources of income.

My argument so far has been based on seeing poverty as lowness of incomes. 

Is employment with income a full solution to all problems of poverty? 

To believe that would be to underestimate vastly the complexity of poverty, particularly the nature of persistent poverty. 

By way of example, lowliness of income is the primary cause of starvation rather than the lowliness of the availability of food.

Is employment for income in order to buy food the answer to everything therefore?

No, as this misses the point of why there is persistent poverty

Strategic examination about eliminating poverty, or even reducing its burden, has to go more deeply into the nature of poverty. 

Poverty is about the inability to lead a decent, minimally acceptable life, and while low income does make it difficult to lead a life of freedom and well-being, an exclusive concentration on seeing poverty as lowness of income misses out a great many important connections.

What are the other non-income factors that contribute to poverty: a lack of education, availability of work, investment in infrastructure and more, and capitalism addresses these issues by providing an insurance.

For example, all affluent societies have addressed extreme poverty issues through public policy programs, such as the public pension, the provision of school education, the availability of healthcare and more non-market non-commercial arranged facilities.

The economics of these areas are not obvious except that an insurance system run by the state or by some other social support system, not by profit-oriented private firms, may be a necessary part of the elimination of poverty. 

Affluent societies focus upon profit maximisation and the unrestricted search for profit, but if they only relied on profit maximisation they would not function.

As a result, they balance between market mechanisms and state activities.

There is no strategic formula as to the correct balance between market mechanisms and state activities – the contrast between China and Taiwan or America and Sweden are good examples of how approaches differ – but we need to understand these balances in order to create a better world that addresses poverty with finance.

Does this mean arguing against Adam Smith’s principles for free markets?

Not really.

That view is a result of a huge misunderstanding of Adam Smith’s principles, and my position is strongly influenced by his.

Adam Smith clarified how markets work and how they can work exceedingly well.  He believes that you need a well-functioning market economy and clarity of why you want such efficient markets to be.

The task of politicians in managing the economy is then to search for two distinct objectives: first, to provide plentiful revenue to cover the basic subsistence needs of the people before the subsistence needs of the state; and second, to provide the state with enough revenue to finance public services.

The financial focus of public services is a critical part of Smith’s work and Adam Smith had an overwhelmingly clear view about support of the poor and undersupported in his market view.

Within his free market principles, he clearly defended the role of the state to fund public services, such as education and poverty relief.

Adam Smith was deeply concerned about the inequality of society and never used the word capitalism.

The word capitalism does not appear in any of his books or any other writing, and it would be hard to carve out anything in his works on market economies that were based purely upon capital.

For example, he specifically argued about protections from unlimited usury practices.

So how should we think about the wrongdoers that need rectification, and how should we address poverty?

According to Adam Smith and my own thinking, the key is increasing employment.

Increasing employment must remain a worldwide priority and China, Brazil and India are doing much better at this than America and Europe.

As employment and economic welfare rises, the state must use such employment to improve public services for good living and public welfare and, in this respect, India is not doing this as well as China and Brazil.

Finally, for the West in general and Europe in particular, the crisis of 2008 was created by the malfunctioning of market economies – the result was the state had to create support for their economies and this is the reason for rising sovereign debt.

But the cause of this malfunctioning is clearly what was thought of as lack of accountability of governments, but governments are accountable and this is what we are seeing today.

What we are seeing is that, in order to pay back their debts, governments have far more accountability.  However, they are addressing this accountability in the wrong way.

It’s hard to see how massive austerity drives, which cuts demand and growth, can therefore be supported,

Just look at Japan and learn from what happened there over the last 20 years of austerity, which is still biting.

What these governments need is fast economic growth.

Economic growth creates resources to address unemployment and poverty.

This is the key to addressing issues in Europe and the West, and it is the indiscipline of governments that has failed the markets, not the markets themselves.

Europe needs a better form of economic accountability and management of their economies, rather than austerities which decimate human lives and economic growth.

In conclusion, I end by affirming that George Bernard Shaw was right, a hundred years ago today, to point to the connection between poverty and evil and crime.  The fact that this insight came not from an economist but from a dramatist and literary giant fits in well with my general thesis that the economics of poverty involves much more than just economics.  Human lives in society are interlinked through economic, social, political and cultural associations.  The nature, causes and consequences of poverty reflect the richness of those connections.  We have no reason to be surprised by that elementary understanding.

Amartya then took Q&A from the floor and was asked a few interesting questions.

Q: You appear to be saying that in this current crisis, it is the failure of states to regulate markets effectively that failed, rather than the markets themselves. Is this your view?

You cannot separate markets and state, and this crisis was a failure of both, but you also have to be aware of the relationship between free markets and state influence. 

For example, Adam Smith argued against usury, but was convinced to change his thoughts on interest after reading the works of Jeremy Bentham. 

The core of how markets and state should work is that free markets is the most efficient model of economic management, but free markets need states that set efficient regulations to avoid failure in order to be truly workable.

As this shows, free markets and the state are two separate entities that are interdependent.

A key question in the last crisis however is whether globalisation killed that interdependency to cause the spiral of crisis we see today.

Globalisation may have undermined national states, as government can no longer effectively regulate the free markets?

There may be some truth in this statement, and this is why the G20, G8 and other global activities – the World Bank and IMF included – are key to solving these issues this time around.

Q: Do you think the euro will survive?

No.

When the euro was created, I didn’t see why it was needed and didn’t believe it made sense.  I am a fan of Europe, don’t get me wrong there as my late wife was Italian, but to start a European integration without a fiscal foundation meant that it was never going to work.

You can see this today as many parts of the EU are not served well by a Europe that has no fiscal union.   Greece is a good example.

Now however the loss of a country would be very destabilising for this European Union.

This is why Germany is being forced to bailout Europe.

Could they retreat out of it? Yes.

Is that the right thing to do? I think so.

 

Postnote: some of Amartya’s speech is taken from a write up of an earlier presentation he made in 2007.  These words of wisdom are integrated in parts of this article to ensure more accuracy of content.

 

How will the world look post-crisis?

I’ve been debating some future presentations with various folks today, and a little ray of light went off in my head.

The light was triggered by a comment: “can you talk about what impact regulatory change may have on bank to corporate relationships using examples historically?”

The question was really asking about the unintended impact of regulatory change in the past and what it might mean for their future, but it made me think about something else.

Each time we have seen a major bubble burst, the cause has been a coagulation of several forces of change.

Forces for change come from four major directions: Political, Economic, Social and Technological (PEST).

These forces for change are used in many ways, and can be seen in my banking history discussions (and soon to be published book) which talks about many historical periods including the Italian Renaissance, the Great Depression and the Credit Crisis.

In each of these, we can see Political, Economic, Social and Technological forces working together at the same time to drive change.

In the fall of the Renaissance Italians, it was a mixture of change between the break from the Catholic Church with the Protestant and other movements (Political), mixed with the ruin of the Italian banks due to over-extension of credit to overseas Royal Houses (Economic), along with expansion of merchant shipping and colonisation (Technological).

In the Great Depression, we saw the end of the Industrial Revolution (Technological) combined with post-war wrangling over the gold standard (Political and Economic).

Right now, we see a major world of change too.

We have the rebalancing of power between America and Asia/China (Economic) combined with an internet revolution that is connecting everyone on the planet (Technological), leading to changes in society, where a Molly Katchpole can reverse a bank’s policy and an #Occupy movement can change global thinking (Social).

The Political outcome of all of this is what is driving bank regulations right now.

And the outcome of all of this will be a massive change.

A New World Order?

Probably not.

We already have a New World Order as China is expected to be the world’s largest economy by 2018 (ten years ago, it was estimated to be 2047).

But we will see a restructured playing field and one that is not level.

We can see this already as one major economy (America) bans prop trading whilst another (UK) just separates prop trading from retail bank operations.

Even more pronounced are the differences between the US and EU on OTC Derivatives regulations and how to define and regulate Systemically Important Financial Institutions (SiFi).

From CME Group in October 2011:

“In an ideal world, global financial regulators would function something like a team of horses, with policymakers in the United States, Europe, Asia and elsewhere all pulling at once in the same direction, and moving toward a common goal.

“Reality is turning out be far more chaotic, however. Regulators and lawmakers are having a tough time forming a consensus even within their own national borders, let alone across international boundaries. The result is turning out be a patchwork of overlapping and often inconsistent approaches to regulation in the aftermath of the financial crisis that gripped global markets in 2008 and 2009. Many financial experts fear that the inconsistent global regulatory framework will alter the flow of capital around the world, as trades are directed to the cheapest jurisdiction, a process known as regulatory arbitrage.”

So we end up with a world where the politicians are trying to react to the implosion of markets at the end of another revolution – Globalisation – and find that they are seriously lacking consistency, vision, leadership or agreement.

The Eurozone is one of the best illustrations of this, although America and China aren’t guaranteed to come out of this stainless as the American elections will change ground again, as will China’s challenges of a property market bubble and inflationary pressures.

All in all, the PEST approach to the world today says that we are going through a momentous change from all angles – Political, Economic, Social and Technological.

Where will it end up?

Probably in a place no-one expects and one which, on this blog, I’m going to avoid predicting decisively.

From Reuters:

“By 2020, the workforce in western Europe will shrink by 2.4 percent, including a 4.2 percent contraction in Germany, according to a Boston Consulting Group study.

Looking further ahead, HSBC projects that Germany's working population will shrivel by 29 percent by 2050, Russia's by 31 percent and Japan's by 37 percent.

Over the same period, the population of many African countries will double. Nigeria will log a rise of 3 percent a year in its workforce - in contrast to a 1 percent decline in Russia and Japan - and will have as many people as the United States by 2050.

On current projections, Pakistan will be the sixth most-populous nation by the middle of the century. And the Philippines could be the world's 16th-biggest economy, HSBC reckons.”

 

The euro will go on, and on, and on ...

Over the weekend, Standard & Poor’s downgraded nine Eurzone countries, calling into question the viability of the Eurozone for the long term.

France was downgraded to a level not seen since 1975. Italy is now considered the same credit risk as Kazakhstan. Portugal’s credit has now reached junk status.

“This is not a catastrophe”, the French Finance Minister told his people. “But it's not good news”.

I’d say that’s a mild understatement, although the markets reacted mildly because it’s not wholly unexpected.

It’s just a reflection of the lack of confidence in Eurozone leadership.  A situation that’s been going on for a long time now.

What needs to be done?

The ECB needs to start acting like a fully backed central bank, offering long-term debt and bond support along with Quantitative Easing for the Eurozone.

It’s doing some of those things, but not enough.

What does it mean for the Eurozone itself?

I guess it means that, after a decade of jockeying for jurisdiction, vying for victory and debating for directives, the Eurozone is now hitting its hardest year in its history.

Will it survive or will it fail, and what does it mean for the changes to the banking system that have been implemented to date?

To be truthful, the changes to the banking system will stay in play.

We’ve made European financial markets a little bit more transparent and open thanks to directives such as the MiFID and the PSD.

Cross-border Euro payments can now be made at the same price as domestic payments, and pan-European trading through electronic algorithms is now as easy as pie.

Even clearing and settlement has been adapted a little bit, although there’s still a long way to go as illustrated by the fact that we are forming the new Clearing & Settlement Working Group, CAS-WG.

But if the whole thing does fall apart and the Germans adopt the Deutschemark once more, the Greek the Drachma and the French the Franc, will it mean that all of this work goes away?

Will we go back to charging €’s for a withdrawal from a neighbouring country’s ATM?

Will we return to London market trading without any reference to Frankfurt or Paris, let alone Amsterdam, Madrid, Stockholm, Copenhagen and others?

I don’t think so.

The efficiencies of pan-European infrastructures will remain in play, as they are today, and the banks that offer and leverage the opportunity for pan-European coverage will continue to reap benefits by being more competitive through scale advantages.

So the investment to date whilst not being justified or even worthwhile for some, will continue to deliver the benefits originally anticipated by others.

It is for these reasons that I propose we have a new European anthem that goes something like this (to the tune of Celine Dion’s Titanic song, My Heart Will Go On):

Every nightmare for Merkel,
Sarkozy and Draghi,
Is how the euro goes on, and on.
Dragging on forever,
There’s no agreement,
And yet debate about the euro, goes on.

Yes, no, maybe and then nein,
They hope the euro will go on.
Once more, they meet zut alors,
But don’t agree what to do,
And hope the euro will go on and on.

From Maastricht to crisis
They wish it a lifetime,
And don’t want to let go till it’s gone.
EU and EMU,
Let the whole thing pooh-pooh,
And still want it to then go on.

Yes, no, maybe and then nein,
They hope the euro will go on.
Once more, they meet zut alors,
But don’t agree what to do,
And hope the euro will go on and on.

They’re here, there’s nothing they fear,
Until the bears bite too hard.
They’ll stay forever this way,
With a currency fail,
And hope the euro will go on and on.

I guess you get the idea.

Meantime, this blog entry is inpired by Eurocrash! The Musical.  Go see it!

 

 

 

Eurocrash! The Musical

One of the good friends of the Financial Services Club is David Shirreff, European Business Correspondent for the Economist.

David’s written a few amusements outside work, including a couple of musicals.  The last one was Broke Brittania, a musical all about our wonderful Gordon Brown and his attempts to destroy Britain’s economy (Ed: did I say ‘attempts’ … thought he succeeded?).

Now David and his compatriots Russell Sarre (music) and Ross Livingstone (direction) have come up with another timely piece of fun: Eurocrash! The Musical. 

Meet Mark and Gilda – the Hansel and Gretel of Euroland – as they discover the fantasy world of European monetary union.

Meet Papa Kohl and Madame Mitterrand, the charming couple who hold it all together; meet the Snake, a clanky prototype; Jean-Claude Trichet, the last great eurocrat; the PIIGS, paying for past profligacy; the dark eminence of the mighty Bundesbank; and the wild, exotic currencies of central Europe.

All this melds together into a musical that sits somewhere between Gilbert & Sullivan and Berthold Brecht, with hard-hitting lyrics and great songs.

David promises me that it is a thoroughly entertaining show around an hour long, which will appeal to experts and laymen alike. No previous experience of the single currency is needed.

EuroCrash! made its debut in Barnes, West London, in September 2011, and will run there for two more days in January (updated to take in the latest antics of Cameron, Merkel and Sarkozy). Then, by kind invitation, the musical is coming to Berlin and Frankfurt, before continuing for a short spell at the Cockpit Theatre in London.

 

Performances at:

The Old Sorting Office, Barnes, London (January 20th and 21st) 8pm

Tickets from the box office +44 20 8876 9885

Prime Time Theater, Berlin (January 24th to 26th) 8.15pm

Tickets at http://www.primetimetheater.de/spielplan.html 

The House of Finance, Campus Westend, 60323 Frankfurt (January 27th to 29th) 8pm

Tickets from the Campus Shop, Campus Westend, 069 798 34553 and Frankfurt Ticket

http://www.frankfurtticket.de/eventshows.SHOWS.musical.46332

The Cockpit Theatre, London (February 8th to 11th) 8pm

Tickets at http://www.thecockpit.org.uk/show/eurocrash_the_musical

 

2012: an economic outlook

2012 is here and we all hope it’s better than 2011.  Sure, some of you may have had a very good last year, but most thought it pretty dire with job losses, austerity measures, civil uprisings, protests, a second financial crisis in the Eurozone and more being the name of the day.

Time Magazine named their Person of the Year as a collective Protestor, rather than an individual …

And the Times named Mohamed Bouazizi - the young market trader who set fire to himself outside the government offices in Tunisia as a martyrdom act that fuelled the Arab Spring - as their Person of the Year.

Is this a time when societies worldwide change their world or will media, finance and government, continue to control and direct?

Probably a mixture of both.

Thanks to this internet age, the individual can change things and change things fast – the Arab Spring, Occupy Wall Street, Anonymous and Wikileaks prove this – but those in power will still direct, as far as they can.

The question may be who is in power, as demonstrated by the Eurozone issues of 2011.

Where are we going in 2012, is therefore a key question.

To put this question in context, I said three years ago that the next resurgence in the economy would be in 2014, after plateauing in 2012. 

I still believe that.

This year is going to be a tough one, as things haven’t finished yet, but things are stabilising. 

Europe’s going to a have a mild recession, America is going to revive and Asia is going to wonder where it’s going.

So here are the four key things that reflect the economic times of 2012:

1. Asia’s light continues to shine, but not quite as bright
2. American equities is the place to invest
3. There will be a major European bank failure
4. A country will leave the Eurozone

Asia’s light continues to shine, but not quite as bright

Asia, particularly China, continues to astound. 

 

From Urban Times, 2010 

Ten years ago, China had more mobile phone users than America, and last year it manufacturer more and registered more patents.  In 2014, its retailers will sell more too and the day that China becomes bigger than America is getting ever nearer.

In 2003 – when Jim O’Neill coined the term the BRICs for Brazil, Russia, India and China – he estimated that China’s economy would overtake America’s by 2041.  Last year, that estimate had moved fourteen years nearer, to 2027, thanks to the economic crisis.  As the crisis has continued, the estimate is now that 2018 will be the year China gets to be bigger than the USA, according to Emma Duncan in the Times.

Nevertheless, with the American and European market demands contracting, China is not sailing a static sea.  For example, Reuters Breaking Views blog states that China’s growth may dip under the magical 9% this year – even falling under 8% – as multiple challenges hit: falling house prices, a slump in property investment, and slowing exports.  Add to this that salaries surged 40% last year – admittedly to just $160 per month – and we can see that global growth and stability will not be plain sailing at all in 2012. 

 

Source: PhilSTAR / Bloomberg

So where should you invest?

American equities is the place to invest

In a bout of good news for Barack Obama, in the year where he fights for his political future against Mitt Romney, the US looks to be a safe bet for investments in 2012.

Terry Ewing, head of US equities at Ignis Asset Management, believes the US can continue to surge, as its economy has differentiating growth characteristics that will underpin both earnings growth and the stock market.

Mr. Euwing has expectations of 2% GDP growth, compared with the 'inevitable European recession' this year. By way of history, US industrial production rose by 8% between 1993 to 1995 whereas Europe's shrank by 5% and he believes a similar divergence could well happen again.

He lives with good company, with Jim O’Neill of Goldman Sachs saying that American equities could rise by as much as 20% this year, and Paul Frank agrees.  John Paulson promotes buying US stocks over US government bonds, whilst James Paulsen sees this year as the ‘gear year’.

Source: PhilSTAR / Bloomberg

With all those “Pauls” behind it, something’s gotta be right and so yes, invest in America is the message in 2012.

Unfortunately, that means don’t in Europe.

There will be a major European bank failure

In July 2011, the European Banking Authority (EBA) issued its summary of how fragile the European bank system was after stress tests on 90 European banks.  Eight failed that test – nine if you include the German Helaba Bank that dodged it – and a further 16 were in the danger zone.

However, the tests did not include a sovereign debt default, such as the issues we now see in Greece.

And with the ECB lending €500 billion it should stabilise the system, except that the ECB is receiving a similar amount back in overnight deposits and European banks still have to face almost €2 trillion of toxic assets on their balance sheets.

Add on to this that European banks also face a major capital shortfall – at least €115 billion and more like €350 billion – and we are bound to see more European banks failing this year.

I said a third of European banks would fail two years ago.  It won’t be that many, due to the €440 billion European Financial Stability Facility, but there will still be some major failures with Commerzbank already in the frame.

It should be noted that this is not unique to Europe however, as 92 banks failed in the USA in 2011.  It’s slightly down on 2010 (157 failed) and 2009 (140) but it’s still high and will continue as an analysis by The Wall Street Journal suggests that failures are down because troubled banks aren't failing as quickly.

A country will leave the Eurozone

Due to fragility in the European banking system continuing, along with a lack of confidence in Europe’s leadership, one or more countries will be forced to leave the euro.

There’s already been lots of speculation that a Eurozone member will need to breakout of the euro.  Greece is the usual one cited, but Italy and others are also regularly debated.  There has been lots of simulation and planning for such an event and so, when it does, it won’t cause any major ripple in the markets at all.

It will be a disaster for the country concerned of course, but the idea of continuing the Eurozone where a third of the members – Portugal, Italy, Greece, Ireland, Spain and more – are being propped up by Germany, and to a lesser extent France, is just not workable long-term.

And I’m not the only one saying this.

The Wall Street Journal is charting its demise, whilst the Guardian is talking about it every day, as are many people in the countries affected themselves, such as Greece and Ireland.

The UK Treasury is planning for it to fail; as are most bank analysts, banks and companies.

In fact, the only ones saying it won’t happen are the ECB, obviously, and Wolfgang Schäuble, the German Finance Minister.

But what does it mean if it happens?

Well, it ain’t good, but it doesn't mean the end of the Eurozone.  Just that Europe has to rethink a lot of the Maastricht Treaty, and come up with a new Economic & Monetary Union approach.

Peter Sands, CEO of Standard Chartered, puts it succinctly:

“I think the probability of countries leaving the Eurozone has increased because we have had several successive plans announced to solve the problem of the Eurozone which simply haven't convinced the market.

“Nobody should underestimate what a big deal that would be, because it would be very difficult to manage the contagion risk, even if it was only Greece. The disruption from that would really be quite significant.

“That will have ramifications all over the world . . . because the simple maths is that the Eurozone is a very large part of the global economy and if it is going slower, then economic trade will be slower around the world.”

So there’s a short guide to the 2012 economic outlook:

• Asia’s light continues to shine, but not quite as bright
• American equities is the place to invest
• There will be a major European bank failure
• A country will leave the Eurozone

This is one of three 2012 outlook pieces:

• 2012: an economic outlook
• 2012: a banking outlook
• 2012: a bank technology outlook

 

UK banks pay £53.4 billion in taxes

Just got a press release that I would usually ignore ... but this one's interesting.  It's from Open Europe, a think tank, and says that the UK banking sector not only pays over £50 billion in taxes, but that the whole sector is in danger of being squashed by the EU.

Here it is for those interested:

UK Government should use EU Treaty negotiations to secure “emergency brake” on financial laws

Monday, December 05, 2011

Open Europe has today published a new briefing arguing that, at this week's EU summit and moving forward, the Government must seek to safeguard the economic benefits to Europe and the UK offered by the financial services sector. These benefits include a tax contribution to the Exchequer of £53.4bn and a £35.2bn trade surplus last year.

The briefing notes that while Britain has benefitted from EU financial regulation in the past through greater trading opportunities, over the next decade, as Europe enters a period of profound political and economic change, further benefits could be limited and previous gains are even at risk of being reversed. There are three reasons for this:

• EU financial rules are no longer primarily geared towards trade facilitation but are now more likely to restrict financial activity. There are currently no less than 49 EU proposals in the pipeline affecting the finance sector. Some of these are justified in the wake of the crisis, but very few of them are designed to facilitate growth and greater trade in financial services.

• As a result of the financial and eurozone crisis, the UK is increasingly losing influence over the shape and thrust of EU financial law, reinforced by EU voting rules which grossly under-represent Britain relative to the size of its finance industry.

• The EU market is likely to offer limited new growth opportunities for UK financial sector firms, at a time when opportunities elsewhere in the world are on the rise. Between 2005 and 2050, the BRIC countries' share of global banking assets is estimated to increase from 8% to 33%, while the EU will see its corresponding share drop radically.

Open Europe argues that to counter these trends, David Cameron should use future EU Treaty changes – which he may have a veto over – to, at the very least, insert a 'single market protocol' committing the EU to growth, trade and proportional financial rules. However, the option with the most certainty of safeguarding Britain's economic interests would be to seek a UK 'emergency brake', giving London the right to block disproportionate or protectionist EU financial regulation.

To read the full report, click here.

Key points:

The financial services industry is vital to the UK economy. In the 2009/10 tax year, the UK financial services sector as a whole made a total tax contribution of £53.4bn, 11.2% of the Government's total tax receipts for that year. Financial services accounted for a £35.2bn trade surplus in 2010 - the only industry sector in Britain that generated a substantial surplus apart from 'other business services', many of which are closely linked to financial services.

In the 1990s and 2000s, the benefits to the UK of EU financial regulation rested on two premises. Firstly, while EU-wide financial rules have often increased compliance costs for firms in Britain, they generally allowed the Government to influence regulation across Europe in line with UK thinking, serving to reduce barriers to trade and creating opportunities for UK-based firms.

Secondly, London was and is seen as an entry point to the EU's single market in financial services - a market which experienced significant growth in the 2000s as financial services developed rapidly. For example, between 2000 and 2008, France and Italy's financial sectors grew substantially and in the process contributed additional GDP growth in both countries of around half a per cent.

However, as a result of institutional changes in the EU, the financial crash and the continuing eurozone crisis, the economic and political weather has changed. The premises from which the benefits of EU financial regulation to the UK have traditionally derived could alter fundamentally in the 2010s and onwards:

Firstly, the UK's level of influence on new European financial rules has decreased; regulation is now less geared to financial services growth but more towards curtailing financial market activity, irrespective of whether such activity is good or bad. There are at least 49 new EU regulatory proposals potentially affecting the City either in the pipeline or being discussed at the EU-level – while some are justified, very few of these are aimed at promoting financial services trade.

Not entirely without reason, the perception in many Continental capitals and in the European Parliament is that 'Anglo-Saxon' light-touch capitalism needs to be reined in. Therefore, whereas in the 1990s and early 2000s, EU politicians and policymakers generally (but not always) felt constrained from imposing financial regulation on the UK this has now ceased to be the case.

In the wake of the regulatory failures that led up to the crisis, more effective supervision of financial markets is needed. But while UK regulation has also shifted away from the "light-touch" concept to some extent, its new focus on regulatory 'judgement' looks set to clash with the prevailing ‘rules-based’ culture at the EU level. Similarly, the apparent conflict between the Vickers Commission's recommendations to impose higher capital requirements on banks and the European Commission’s proposed approach of imposing maximum EU-wide standards is another example of differing approaches.

In addition, the eurozone crisis is increasingly likely to create exceptional needs and political incentives for the euro countries to act in the interests of the eurozone 17 rather than the EU-27, with UK concerns seen as peripheral at best. This new dynamic has already been expressed in a series of new proposals, including an EU-wide financial transaction tax, possible short-selling bans and the European Central Bank's insistence that transactions in euro-denominated financial products are cleared by central counterparties within the eurozone rather than in London. These proposals not only represent a challenge to UK concepts of financial regulation but also the UK's access to the single market.

These political pressures are reinforced by the structural bias in the EU's voting system against the UK's financial industry, which was more or less acceptable so long as UK influence over financial services regulation was sufficiently high and rules were broadly pro-competition. The UK accounts for 36% of the EU's wholesale finance industry and a 61% share of the EU's net exports of international transactions in financial services. However, under new voting rules coming into force in 2014, it will only possess 12% of the votes in the Council of Ministers and 10% of the votes in the European Parliament. In contrast, France accounts for 20% of the EU's market in agriculture, but enjoys a veto over the EU's long-term budget and therefore retains substantial control over the sizeable EU subsidises received by its farmers.

Equally important, over the next decade, growth opportunities for financial services within the EU are likely to be more limited than elsewhere in the world. Many European countries are likely to undergo economic stagnation and deleveraging. In 2005, the five largest EU economies accounted for 27% of global banking assets. In 2050, that will have decreased to 12.5%. Meanwhile, the BRIC countries' share of these assets will have increased from 7.9% in 2005 to 32.9% in 2050. Therefore, the benefits to London of acting as the gateway to Europe are becoming less convincing and the need to keep the door open to emerging markets elsewhere across the globe far more important.

The UK has two broad strategies it can pursue in response to its decreasing influence over the direction of EU regulation and the need to keep the City open for business in the global marketplace:

1) Work with likeminded countries to seek assurances that Britain's influence over EU financial services law will be safeguarded. This could be codified in a new 'single market protocol', inserted via the first available EU Treaty change. Such a protocol could commit the EU to a pro-growth, outward looking and proportionate regulatory regime while safeguarding the UK from decisions taken solely by the eurozone for all 27 member states.

2) Seek UK-specific, legally watertight safeguards that will ensure that the UK is not overruled on a vital financial measure and cement London's ability to do business and compete in global markets. Though it will be resisted by EU partner, met with resistance from EU partners, this could include a 'double lock', acknowledging Britain's prominence in this sector and giving the Government the right to refer any disproportionate or discriminatory laws to the European Council, where it has an effective veto over regulatory proposals.

In the list of priorities in the on-going EU negotiations that are inevitable in the wake of the eurozone crisis, safeguarding financial services should be at the very top. While the EU policies governing fishing and agriculture, for example, are in need of fundamental reform, these two industries together only account for 0.7% of UK GDP. In contrast, financial services account for at least 10% of UK GDP. It is therefore clear where the UK should concentrate its political capital.

 

As my SEPA gently weeps ...

I hosted a dinner last night with a focus upon developments with SEPA and innovation.

What innovations has SEPA introduced?

Long silence.

To be honest, there are some – the ability to cash concentrate direct debits into the most efficient countries using SDDs (SEPA Direct Debits) for example –but the list is real short.

We found the reasons why are multiple.

First, there’s innovation and change in wholesale versus retail, with the former taking much longer than the latter.

Second, there’s cooperative innovation where countries and operators need to work together to agree change and standards, which is why it takes the time.

Third, there’s delivery of a wholesale change across a wide economic area, which is not just eating an elephant but a humongous great Blue Whale.

Nothing is simple in the SEPA game, or end-game.

And is there an end-game?

Sure, we’re talking about end-dates, with a single end-date now mooted for end of 2014.

If 2014 is achieved, then twelve years after the creation of the European Payments Council we might get something implemented … but it’s still ‘early days’ as someone said.

Twelve years and it’s still early days?

Jeez.

Another banker said that “just as we’ve started to deliver innovation with SEPA, it may never happen”.

Hmmm … life is what happens to you whilst you’re busy making other plans, and twelve years after inception, SEPA might be delivering a stillborn infrastructure if the Eurozone implodes, as many appear to be predicting.

If you don’t think they are, then talk to a few banks around the City here and they’ll tell you that they’re seriously planning for a euro breakup, and modelling what that means to their systems, structures and processes.

No wonder when most respected media are now saying we’ve reached crunch time.  From this morning’s Washington Post:

“After two years of failed efforts that world markets have swept aside as inadequate, Europe’s politicians face an increasingly sharp divide in combating their financial crisis: either take the sort of politically difficult steps that would tie their economies more closely together, or prepare for the breakup of the euro currency zone.”

So where are we in reality with SEPA?

The EPC’s latest numbers show that, “as of August 2011, the share of SEPA Credit Transfers (SCTs), as a percentage of the total volume of credit transfers generated by bank customers, amounts to 20.12 percent in the euro area”, whilst “the share of SEPA Direct Debit (SDD), as a percentage of the total volume of direct debits generated by bank customers, amounts to 0.13 percent (ECB SEPA Indicators)”.

SCTs have been around since January 2008 (that’s four years near enough) and SDDs since November 2009 (two years).

The reason for the slow take-up of SDDs is down to incompatibilities between country implementations of SDD, and specifically repudiation and revocation rights which have been compromised due to country opt-outs allowed under the rules (derogations).

So we don’t really have any innovation here yet.

Just a slow-burn.

Oh, one thing that was viewed as innovation in this wholesale space however is ISO20022.

“The ISO 20022 standard provides the financial industry with a common platform for the development of messages using:

• a modelling methodology (based on UML) to capture in a syntax-independent way financial business areas, business transactions and associated message flows;
• a central dictionary of business items used in financial communications;
• a set of XML design rules to convert the messages described in UML into XML schemas, whenever the use of the ISO 20022 XML-based syntax is preferred.”

Yea.

ISO20022.

The Nirvana of financial messaging.

And yes, if SEPA delivers a compliance and move to ISO20022 across the Eurozone’s corporations and banks, then yes, that’s good.

According to those around the room, this has to happen as part of SEPA delivery.

OK.

But I’m not going to place any bets on this happening.

And, as if to prove the point, put “ISO20022 SEPA” into Google and what you get back is a whole bunch of articles … from 2008.

Finally, about 30 entries down the list, you get a link to the EPC’s website where an article from October 2011 states: “the existence already of multiple interpretations of the ISO 20022 message standards; i.e. multiple domestic SEPA formats, threaten to undermine key objectives of the SEPA initiative.”

Maybe it’s just me but I’m thinking that, after ten years of evolution and little revolution, this thing ain’t working.

Anyone want to argue the toss?

 

 

Reasons to reject the euro

There’s still lots of debate about the euro and Eurozone, with Greece imploding and now Italy et al all going up the Furka Pass, so to speak.

Now I’ve been purposefully avoiding getting into the fray, as it’s not my place, although I’m quite outspoken in media outlets about such matters (checkout this Bloomberg video about European Banking Authority’s stress tests of banks in July 2011, if interested). 

Anyways, we now have David Cameron and Angela Merkel at loggerheads about such matters.  Luckily they came to some agreement, although the bank transaction tax is still causing huge disagreements.

Meanwhile, some believe that Britain will regret not being part of the euro.  This is down to the new controlling stranglehold in Europe of the inner sanctum – those in the euro – and the rest – those not.

This may create a rift in European Union, but is necessary if the Germans are going to keep paying for holding the Eurozone together.

This is why some folks, even those within the Conservative Party, believe the UK must one day join the euro too.

Nevertheless, talks of joining the euro are more divisive in Britain than ever, and is still unlikely in my lifetime. 

One of the reasons why we would never want to join the euro of course, is because we like the Queen and the Pound.

For example, in a survey by Demos published over the weekend – which showed that Muslim Brits are more patriotic than all other Brits! – they itemised what we consider to be ‘national treasures’.

Shakespeare came out tops, closely followed by the National Trust (our ‘green and pleasant land’) and the armed forces (keep our country ours).

Interestingly, the pound came fifth, above the monarchy who came seventh.

BEST OF BRITISH TOP 10

How people rate our cultural icons:

Shakespeare                                    75%

The National Trust                           72%

The armed forces                            72%

The Union Jack                                71%

The pound                                       70%

The NHS                                          69%

The monarchy                                  68%

The BBC                                           63%

British sporting achievements            58%

The Beatles                                      55%

 

Hmmm … this intrigued me and got me thinking.

Then I spotted a remarkable item about a chap in Poland who’s been designing their bank notes all of his lifetime.

He’s a national treasure there, and an artist designing everything from military medals to passport covers, coats of arms to postage stamps; and his name is Andrzej Heidrich.

Now in his 80s, Andrzej Heidrich’s artwork is being celebrated by Poland’s National Bank...

... including many banknote designs ...

Some of which were never actually issued.  For example, this 100 zloty note was never issued:

A better version was demanded by the Central Bank and, a bit like album covers in days of old, we treasure the designs and have rigorous standards.

This is why such designs become treasured and is why it is no wonder that countries who have no euro, and view their banknotes and artwork around those notes as ‘national treasures’, have such resistance to being in the euro.

Maybe the bet should be more on the Germans joining the Deutschmark than Britain, or Poland for that matter, joining the euro?

Ooops, scrub that:

In spite of the continuing crisis in the eurozone, the Polish ambassador says his country still aspires to adopting the currency as its own.

Guess, I should start using Bitcoin instead.

 

That European Joke (Part Two)

I’ve been loathe to talk too much lately about the Eurozone as it’s just too darned depressing.

What with Greece slipping and sliding away, Italy bunga’d out and now France being challenged, it’s just a crazy, crazy moment in history.

There’s even a discussion of the Eurozone disbanding, although officials deny this.

However, in my spirit of fun, I was prompted to find a bunch of European jokes after reading about Silvio Berlusconi:

He became notorious for off-colour jokes, including likening a German member of the European Parliament to a Nazi, accusing communists of boiling children and using them as fertilizer and calling President Barack Obama "suntanned".

While the 75-year-old openly flirted with female heads of state, he showed little talent for diplomacy and left German Chancellor Angela Merkel waiting at a NATO summit in 2009 while he finished a phone-call in front of her.

In a telephone intercept leaked to Italian press earlier this year he described Italy as "a shitty country" and said he could not wait to leave.

His quip to supporters that he should change his party's name to "Go Pussy!" to boost its popularity also fell flat and brought widespread condemnation.

Therefore, keeping up the levity, here are a few more Euro jokes for a frazzled French Friday …

How the European Union works

How the EU works: In Germany, they make the rules, in Britain, they obey the rules, in France, they bend the rules, in Spain, they break the rules, and in Italy they have no rules at all.

Working in Brussels

On a visit to the Headquarters of the European Commission, a visitor noticed that there was a big yellow line painted down the middle of the corridor. "What's that for?" he asked his host.  His host replied: "Oh, that's to keep the staff coming in late from colliding with the ones who are leaving early."

European Union

An Englishman, Frenchman, German, Belgian, Italian and Spaniard walk into a pub... and the landlord says: “Is this some kind of joke?”

European Disunity

An Irishman, Greek, Portuguese, Italian and Spaniard walk into a pub... the German pays.

Don’t take the peace

The EU has decided that the British colloquialism “to spend a penny” is no longer correct and must be replaced by the new expression: “to Euronate”.

Stand up for the Euro

The European Parliament has decided to change the design of the euro when noticing that the first one was a bit boring and sad.   The new design is a stronger and more aggressive one which will make people eager to consume ...

The European Union

A prize was to be awarded for the first person to discover a horse with black and white stripes like a zebra.

A German, a Frenchman, an Englishman and a Spaniard participated hoping to win the prize of €1 million.

The German decided to spend weeks in the National library researching into horses with black and white stripes. The Englishman went straight to a shop in Piccadilly which specialises in hunting gear, bought all the equipment necessary and set off for Africa in his quest for this strange creature. The Frenchman bought himself a horse and painted it black and white . The Spaniard went to the best restaurant he knew in Madrid, ordered an expensive meal for himself with a fine bottle of wine; after the meal he ordered an expensive Havana cigar and a Napoleon brandy, sat in a luxurious arm-chair in the hotel and began to consider what he would do with the 1,000,000 euros once he had found this remarkable horse with black and whte stripes.

The new Euro language

The European Commission has just announced an agreement whereby English will be the official language of the EU rather than German which was the other possibility.

As part of the negotiations, Her Majesty's Government conceded that English spelling had some room for improvement and has accepted a five year phase-in plan that would be known as "Euro-English".

In the first year, "s" will replace the soft "c". Sertainly, this will make the sivil servants jump with joy. The hard "c" will be dropped in favour of the "k". This should klear up konfusion and keyboards kan have 1 less letter.

There will be growing publik enthusiasm in the sekond year, when the troublesome "ph" will be replaced with "f". This will make words like "fotograf" 20% shorter.

In the 3rd year, publik akseptanse of the new spelling kan be ekspekted to reach the stage where more komplikated changes are possible. Governments will enkorage the removal of double letters, which have always ben a deterent to akurate speling. Also, al wil agre that the horible mes of the silent "e"s in the language is disgraseful, and they should go away.

By the fourth year, peopl wil be reseptiv to steps such as replasing "th" with "z" and "w" with "v". During ze fifz year, ze unesesary "o" kan be dropd from vords kontaining "ou" and similar changes vud of kors be aplid to ozer kombinations of leters.

After zis fifz yer, ve vil hav a reli sensibl riten styl. Zer vil be no mor trubl or difikultis and evrivun vil find it ezi to understand ech ozer. Ze drem vil finali kum tru! And zen world!

And one of the oldest jokes …

In Heaven: the cooks are French, the policemen are English, the mechanics are German, the lovers are Italian and the bankers are Swiss.

In Hell: the cooks are English, the policemen are German, the mechanics are French, the lovers are Swiss and the bankers are Italian.

Thanks to the BBC for the unaccredited jokes above.

This is Part Two of a European Joke series.  Part One can be found here.

 

The similarities between banks and landmines

Last night I was presenting to the MAG-net group.

MAG-net is the networking group in the City for the Mines Advisory Group, MAG, a charity supported by the Financial Services Club and others that clears areas of mines so that schools, villages and life can continue as it should in post-war territories.

They invited me to speak about anything I wanted, and so I created a new presentation about the similarities between banks and landmines (see UBS today).

The presentation developed around the idea of banks being mines that explode in economic terms, in a similar way in which landmines explode and blow away people and animals in the real world.

My premise was that just as landmines blow the legs away from humans, banks blow the legs off economies.

It’s obviously the case that this is true today, what with the Lehmans collapse with Credit Default Swaps creating the first financial crisis; and now sovereign debt in the Eurozone is developing the second.

How can such economic landmines exist in a world where we should have cleared them by now?

They exist because we allow innovation in financial instruments in an unregulated form.

That innovation is all around derivatives of derivatives.

Untried and untested weapons of financial destruction are being created every day and planted as hidden potentially unexploded bombs across the financial system.

This has been well documented in many books, with F.I.A.S.C.O. cited by many as a great illustration of the issues in a storybook form or, if you prefer the academic version, Infectious Greed, gives you the lowdown.

These two books by Frank Partnoy document the issues of derivatives, which are both good and bad.

They are good in creating leveraged risk which allows commerce to become more capable.   They are good in hedging risk, allowing trades to take place that otherwise could not.  They are good in bringing together mixed asset classes, so that previously unrelated goods and services can now be traded together.  They are good in offsetting future uncertainty, which is why they are used.

They are bad because they are so complex, most traders don’t understand them.  They are bad because they are called ‘exotics’, and are so exotic that they can explode.   They are bad because they allow firms, such as Goldman Sachs, to create a massively web of interlinkage between risk that ensures those in their world can have huge exposures whilst Goldmans themselves avoid such loss.  They are bad because they allow debt to be leveraged so greatly that it becomes unmanageable.

All of the latter are the landmines of economies, and are no better demonstrated than by Lehmans collapse and Europe’s sovereign debt crisis.

I illustrated these two points with two charts.

The first is from June 2008, and shows the notional exposure of Goldman Sachs’ main counterparties just before the collapse of Lehman Brothers (doubleclick image for larger version):  

Oh what a tangled web we weave, when first we practise to deceive! Sir Walter Scott 

Now don’t think I’m Goldman bashing because, as I said last night, they are the most effective bulge bracket player in the world’s markets in creating risk and therefore alpha returns.  That’s why their clients use them.  However, they are also the most effective institutions in the world’s markets in creating risks that can explode in the face of their clients.  That’s why they sell ‘crap’ to their customers (by their own admittance) and are happy to do it.  

The second chart I used to illustrate the landmines that firms such as Goldman Sachs lay in the world’s economies is the European sovereign debt crisis and a data visualisation of which countries are most exposed to whom:

Again, derivatives were used to package sovereign debt in the same way as mortgage debt, and has created this second loss of confidence in the European economies. 

The whole presentation can be seen here (needs the words to make sense probably) ...

The similarities between landmines and banks

View more presentations from Chris Skinner

... and the only positive note is that we can save human limbs by clearing landmines using mice to sniff the mines out.

Let’s get some more mice in the financial markets.

 

Postnote:

 In researching the presentation, I found large numbers of images of people with limbs missing.  Some were graphic, some were funny, some were moving and many were tragic.  Give MAG five minutes of your time http://www.maginternational.org/ to consider supporting them.  And any MAG-net member gets a 20% discount if they join the Financial Services Club so it’s worth supporting them for that reason alone surely?

 

 

In the bleak mid-summer

It seems like a long bleak summer in the financial markets, as banks are reporting dire results.  It’s a combination of investment banking in the second quarter suffering serious damage across all fixed income desks, along with the Eurozone and American debt crises.

There is no certainty in such times.

For example, banks that usually do well are reporting red.  Goldmans Sachs led the way:

Goldman said its net income in the second quarter of 2011 was $1.05 billion, more than double the figure from the same period last year, but well below analysts' consensus forecasts.  Revenues were $7.28 billion, down 18 per cent from the second quarter of 2010 and 39 per cent lower than in January-March of this year, Goldman said. Analysts had projected revenues of $8.14 billion. Earnings per common share were $1.85, substantially below the consensus analyst forecast of $2.27.

But there is worse. 

After first quarter revenues at:

• JP Morgan were down 1%;
• Goldman Sachs was down 7%;
• UBS investment bank was down 11%;
• Credit Suisse was down 6%;
• Barclays Capital was down 14%; and
• Citigroup was down 25%;

now, in the second quarter, UBS are already in trouble:

UBS Chief Financial Officer John Cryan told analysts, "UBS faces weaker second quarter earnings after capital markets turbulence led to a sharp slowdown at its investment bank and lower activity by rich clients".

Result, they are laying off 5,000 staff whilst Goldmans are laying off 1,000, and several other banks are in trouble:

Credit Suisse is expected to suffer the steepest percentage fall in revenues from its fixed-income, currency and commodities division of the big four European investment banks, with Morgan Stanley forecasting a 41 per cent quarter-on-quarter decline.

A significant rise in mergers and acquisitions activity and underwriting of debt and equity issues will partially plug the gap for European banks, analysts said. Globally, investment banking fees were up 23 per cent year-on-year in the first half, and 26 per cent in Europe, according to Thomson Reuters.

Overall, investment banking revenues at Deutsche Bank, UBS and Credit Suisse will be down by an average of 25 per cent from the seasonally strong first quarter, while net profits are expected to have tumbled by an average of 49 per cent over the same period, according to analysts at Citigroup.

In the UK, investment banking revenues at Barclays and Royal Bank of Scotland Group revenues are expected to be down about 30 per cent from the first six months of 2010, with pre-tax profits falling a similar amount on average.

Meanwhile, there is still a crisis in retail banking due to non-performing loans, as evidenced by AIB’s results this morning:

Allied Irish Banks (AIB) unveiled a 2.6 billion euro($3.7 billion) underlying first-half loss as more loans turned bad, but said it expected 2011 to be the last year of major loan writedowns.

Alongside such news is the challenge banks are experiencing in capital raising in order to shore up their capital reserves to comply with the EBA stress tests announced a week last Friday.

The EBA data showed Europe's banks held €98.2 billion of Greek sovereign bonds at the end of December, with two-thirds of that held by Greece's banks, 9% by German banks and 8% by France's.

Banks' exposure to Irish sovereign debt was €52.7 billion (61% held domestically) and to Portugal it was 43.2 billion (63% held domestically).

This sovereign debt data has been crunched by analysts at big banks over the weekend in tests that were toughened up with default scenarios – something the EBA was barred from doing by nervous EU finance ministers.

Europe's banks would need €41 billion to keep their core capital ratio above 7%, the new global minimum from 2013 under the Basel III accord and already required by markets in practice, according to Reuters' calculations.

This compares with the 5% pass mark in the test.

JPMorgan's Abouhossein said a tougher test of 27 of the bigger banks using EBA data would show 20 are a combined €80 billion short of capital.

His test applied a haircut to sovereign bond holdings in the banking book and required banks hold core capital of 7%.

Credit Suisse analysts said applying larger haircuts on peripheral eurozone bond holdings, including for Italy, as per current market prices, would leave a €45 billion deficit for 49 banks it tested.

But capital raising isn’t simple, as the Bank of Ireland is about to find out. 

Bank of Ireland is trying to raise 1.9 billion euros ($2.7 billion) in a rights offering that closes on July 26 … the government will likely end up controlling as much as 65 percent.

So we have investment bank revenues and profits collapsing, retail banks still finding bad loans on their books, and Europe’s banks seriously challenged in shoring up their already crippled balance sheets.

Combine this with the who-will-chicken-out-first game in the USA over their debt crisis, and times aren’t great.

That's all past and present however.  

Looking forward, add on a few more jitters by thinking about a Q3 that is normally quiet, low M&A activity, more challenges in equities and fixed income, a euro crisis that rolls on and on and on, and you can see why I’m not a happy bunny.

These are a few of the thoughts I shared with Bloomberg this morning.

The only ray of light is JPMorgan and Deutsche Bank who consistently seem to over perform.

Will Deutsche continue to do that as their boardroom battle comes to a head?

Will JPMorgan be the last bank standing?

 

Postnote (26th July 2011, 08:29)

Times change fast.  After writing this yesterday, today Bank of Ireland have sold their rights issue to private investors and avoided state control and Deutsche Bank have confirmed their succession planning.

Bank of Ireland Sells Stake to Investors
Business Week

Deutsche Bank names new chief executives
The Independent

 

But, as expected, UBS report they are going to cut costs heavily in light of bleak trading conditions.

 

UBS expected to cut jobs as it seeks to save $2.5bn

BBC

 

Shocker: Skinner thinks EBA stress tests not worthwhile

In my usual quiet way, I was interviewed by Bloomberg last Thursday in anticipation of the European Banking Authority (EBA), previously the Committee of European Bank Supervisors (CEBS), about the forthcoming stress tests released on Friday.

Last year, these tests were quite laughable and this year I expected more of the same.

Here's the whole ten-minute interview and, for those who missed it, I loved this article in the Telegraph:

Europe's bank stress tests as bad as 1979 Irish driving test

Seeing large numbers of his fellow citizens failing their driving tests, Mr Barrett – in a quick bid for votes – declared that anyone who had taken their test twice and not passed would automatically qualify for a licence.

The consequences were predictable. At any one time, about 40pc of the Irish population were allowed to drive on the roads without ever actually having passed a test. Traffic accidents went up and insurance costs followed.

Andrea Enria, the chairman of the European Banking Authority, may not like the comparison, but the limited bank stress test results he unveiled on Friday are born of a similar motivation that led directly to Ireland’s until only very recently dysfunctional driving test system.

Like the Irish government 32 years ago, the EBA and the European Union are under the impression that their power to pass and fail banks will translate directly into making them better at what they do.

The fallacy of this approach is as obvious as the needlessly ruined lives and extortionate insurance premiums that once-blighted Ireland will attest.

 

The Top 20 Banks of the World, 2011: China hits the Big Time

I’ve enjoyed the Banker’s Top 1000 listings for a long time now and, when last year’s listings came out, looked back over the last twenty years to see how things had changed.

This year’s list has now just been published (get a copy by subscribing) and makes for interesting reading, especially as Chinese banks have finally made the big time (doubleclick image to see large version).

All in all, this list when combined with my reflections in 2010 over the last twenty years, makes for a fascinating story of risk bubbles and bursts.

You had the banks from the rising sun rising up the charts in the early 1990s.

Then, as the Asian crisis nuked most of the region, the Japanese banks disappeared and the Anglo-Saxon banks took over.

The principle-led regulatory regime was rife and the Americans and Brits ruled until 2008 when their “debt whore” approach failed.

Now, everyone is bailing out everyone else, with PIGS, TARPS and QE’s by the shedload.

So last year’s list was interesting, in that we finally saw Chinese banks rising up the list and more diversity as the American and British banks stumbled a little.

I have been saying that China’s banks will dominate global banking since 2005, and certainly there is a growing swagger of China’s banks as they watched the failure of the West.

For example, it used to be that Chinese bankers were desperate to learn how the West did banking and would send troops of managers to European and American conferences to learn their ways, as well as hiring the best talent to import into Chinese territories.

Back then, we all scoffed at Asia for their poor risk management of credit leading up to the 1997 crisis, with debt defaults and NPLs everywhere. 

Now the Asians and Chinese may scoff at the West for the same reasons, although there is still risk in the Chinese system as most enterprise is propped up by financing given through the governmental influence over the banking system.

That aside, the fact that China's market capitalisation will rise to $41 trillion by 2030 from $5 trillion today, according to Goldman Sachs, makes it a market that cannot be ignored.  After all, this would make China's stock market the biggest in the world, as American market capitalisation rises to $34 trillion from $14 trillion over that time.   

This is one of the reasons why this year's Banker list is important as, for the first time, THREE of the TOP TEN banks of the world are Chinese.  Last year, there was just one.

This year, four of the top twenty banks of the world are Chinese, when there were none just a few years ago in 2004’s list.

So, no matter the risks, China’s banks have finally risen to the top ... but at what risk?

The original Asian crisis was created by a higher than expected percentage of Non-Performing Loans (NPLs) and Moody’s has recently downgraded China’s banks on the basis that “8 to 12 percent of all the loans made by Chinese banks could go unpaid.  Moody's had earlier estimated only 5 to 8 percent of the loans would be classified as ‘non-performing’.”

If China has a financial crisis, then we really will all be up the swanee ...

 

 

 

That European Joke

I’m quite pro-European as it goes. 

Roughly translated, as I’m British, this means that as long as the Eurocrats stay in Europe and out of the UK, that’s fine.  It's also because the main benefit is that I enjoy holidays without having to worry about changing currencies.

In truth, I'm quite pro-European because I've been intellectually entertained  by the major regulatory programs, such as the MiFID and the PSD. Both have kept me busy for near a decade, and are valuable examples of widespread banking transformation unseen elsewhere in the world (if you haven’t noticed, we’ve just started another survey about this).

And yet, everything I read these days talks about the end of the euro.  Here are just a few examples:

• Is it the end of the Euro? - The European Courier
• How the euro crisis end game might look - Telegraph
• I told Ken Clarke that the euro project would end in disaster - Telegraph
• Euro end game draws nearer Outside the Box - MarketWatch

Admittedly, many of these headlines are being sparked by the implosion of Greece, and the expectation that they may even need a third bailout.  The fact that Greece has had to get a bailout for a second time, has not only inflamed those in Europe but those in Greece, where the punishment for being tied to a currency they don’t want is mass unemployment and budget cuts.

And the jokes are rife, much to the upset of my Greek friends.

 

Greece – a country that by its very name would make the Union slip-slide away.

Greece – a country where Euro means toilet, and that’s where it’s going.

What's the capital of Greece?  About €3.

 

Mind you, humour is one thing that always crops up during a crisis, as demonstrated recently in Ireland, where they had a whole weekend comic fair dedicated to it:

 

Q: Why is the Irish economy in such a crisis?

A: Because they always think their capital should be Dublin.

 

Ireland’s been downgraded from AAA+ to AA.  Before, they were a battery for the remote control, but now they're only good for a Walkman.

 

It gets worse.

 

A Greek, an Irishman, and a Portuguese go into a bar. The German pays.

 

Hmmm ... how many jokes can we take?

And perhaps some of this is no joke.

After all, the Germans saying that they’re going to holiday in the Greek Islands for the next ten years because they’ve prepaid ... may go down well in Germany, but any German trying that in a Greek hotel, may find themselves out on their arsch.

So what is the reality?

Well, the euro is at breaking point and Greece – along with Portugal, Ireland and Spain – are really testing its mettle. 

And what happens if Greece does default on its debt? 

Well, that’s no good for the country.  They return to the drachma and become a former EU pariah that is Euronated on by everyone?  What does that mean for the SEPA and the MiFID?

Not a great deal in my view, as the infrastructures are built and the remaining countries will continue to process via those infrastructures, including those that now fall away from the euro and back to their old currencies, such as Greece.

Greece will not rip out their EBA connected clearing just because they go back to the drachma.  No.  Instead, the systems continue but now support one less EU member state in the Eurozone.

I’ve blogged about that in more depth before.

Meanwhile, Europe will continue but with the tensions you would expect in any region where every country is radically different. 

For example, the EU plans to have Turin and Lyons joined by a high speed train network have hit the rails in Italy. In riots over the weekend, Italians tried to stop consutruction work starting, as the plans will ruin an area of outstanding national beauty.

Meanwhile, the Brits and Germans continue to throw jokes at each other.

The Sun started it when they talked about a report from biologists at University College, London, who found that a Y chromosome found in nearly all German and Danish men is surprisingly common in Britain. This is due to the invasion of thousands of Anglo-Saxon immigrants in the fifth and sixth centuries, after the Romans left.

As a result, the Sun ran an article that opened with the lines: “do you have a craving for sausage or get upset about bad timekeeping? Then you might actually be German!”

They then set a test for readers to answer A, B or C to find out their “oompah-pah” rating, including questions such as:

 

What is your favourite number?

A. Seven.

B. Eight.

C. Nein!

With members of the opposite sex, are you attracted to their...

A. Bottom.

B. Eyes.

C. Herr.

Ladies, when your armpits are a little hairy do you...

A. Reach for the razor.

B. Wear a long-sleeved top.

C. Take every available opportunity to remove your top and put your hands on your head.

When you see a picture of the late Steve McQueen, do you think...

A. Ah... The Great Escape. What a film. What a hero.

B. Is that the fella who was in that PoW film who almost got away on a motorbike?

C. That sneaky escape artist - get him back in ze Cooler!

All in the worst possible taste, as demonstrated by Der Bild’s response:

 

When you hear the word dentist, do you:

A.           Look it up in a dictionary

B.           Remember your last visit 30 years ago

C.            Open a bottle of beer with your last-remaining teeth

 

How do you like your beer?

A.            Lukewarm

B.            Without a head

C.            By the gallon

Talking about holidays, what do you think of sun block?

A.            It's for Krauts only

B.            Doesn't taste good in gin

C.            My skin is my sun block
 

 

When are English women at their most beautiful?

A.            After 12 beers

B.            After a day in the sun

C.            In complete darkness

This was all accompanied by a photograph of the typical sort of British male we all aspire to be:

All of this is just general jest and fun.

However, one thing that will really hack off every European, whether member state or not, in crisis or not, is the news last week of the European President’s plans to build the Europa, a presidential palace that will cost €300 million to build.

In order to promote the idea, Herman van Rompuy spent €120,000 producing a fancy brochure outlining the plans for the building.

Not surprisingly, as you can see, it is already being nicknamed the E-Uterus for its womb-like central structure.

The building will be completed in 2014 and, knowing how Brussels works, this will go through without a whimper, as demonstrated by blogger, the Reluctant Bruxellois, who posted the true way in which the EU works.

A joke was proposed by a Belgian to be the Official European Joke, in order to improve the relationship between the nations, as well as promote our self humour and our culture. The Joke went as follows:

European paradise is when you are invited to an official lunch. You are welcomed by an Englishman. Food is prepared by a Frenchman and an Italian puts you in the mood and everything is organised by a German. 

European hell is when you are invited to an official lunch. You are welcomed by a Frenchman. Food is prepared by an Englishman, German puts you in the mood but, don't worry, everything is organised by an Italian.  

The European Council met in order to make a decision. Should the joke be the Official European Joke or not? 

The British representative announced, with a very serious face and without moving his jaw, that the joke was absolutely hilarious. 

The French one protested because France was depicted in a bad way in the joke. He explained that a joke cannot be funny if it is against France. 

Poland also protested because they were not depicted in the joke. 

Luxembourg asked who would hold the copyright on the joke. The Swedish representative didn't say a word, but looked at everyone with a twisted smile. 

Denmark asked where the explicit sexual reference was. If it is a joke, there should be one, shouldn't there? 

Holland didn't get the joke, while Portugal didn't understand what a "joke" was. Was it a new concept? 

Spain explained that the joke is funny only if you know that the lunch was at 13h, which is normally breakfast time.    

Greece complained that they were not aware of that lunch, that they missed an occasion to have some free food, that they were always forgotten.  

Romania then asked what a "lunch" was. 

Lithuania et Latvia complained that their translations were inverted, which is unacceptable even if it happens all the time.   

Slovenia told them that its own translation was completely forgotten and that they do not make a fuss.   

Slovakia announced that, unless the joke was about a little duck and a plumber, there was a mistake in their translation.   

The British representative said that the duck and plumber story seemed very funny too. 

Hungary had not finished reading the 120 pages of its own translation yet .

Then, the Belgian representative asked if the Belgian who proposed the joke was a Dutch speaking or a French speaking Belgian. Because, in one case, he would of course support a compatriot but, in the other case, he would have to refuse it, regardless of the quality of the joke. 

To close the meeting, the German representative announced that it was nice to have the debate here in Brussels but that, now, they all had to make the train to Strasbourg in order to take a decision. He asked that someone to wake up the Italian, so as not to miss the train, so they can come back to Brussels and announce the decision to the press before the end of the day .

 "What decision?" asked the Irish representative. 

 And they all agreed it was time for some coffee.

 

Are payments infrastructures fit for purpose?

During the spring, we reached out and asked readers and FSClub members to provide their views, via an online survey, of the world's largest payments infrastructures and whether they are fit for the purpose they are being used for today.

Last night, we released the results of the research at a dinner hosted by survey sponsor, Cognizant, and with a panel discussion of the report's findings with:

• Chris Dunne, Strategy Director, Vocalink;
• Gilbert Lichter, Secretary General, the Euro Banking Association (EBA);
• Arun Aggarwal, Managing Director, SWIFT UK;
• José Beltrán, Director for SEPA at STET; and
• Tony Virdi, Head of Financial Services Division EMEA, Cognizant.

If you would like a copy of the report (3MB PDF) then email our administration and they will send you a copy.

Some of the report's headlines include:

•  96% of retail banks cite the internet and 82% cite mobile technologies as having most important impact on payments infrastructures

• 63% expect significant or major changes to payments infrastructures in complying with regulatory change

• 49% expect Fedwire to face regulatory challenge 

• 40% will be using two to three key payments infrastructures in ten years’ time, compared to the nine used today

• 19% expect VocaLink will be most impacted by developments in mobile payments 

• 27% expect SWIFT and Eurogiro (24%) to be most impacted by Internet developments

 

The key messages from the report are:

• There will be consolidation as well as increased competition. The process of consolidation will be slowed by certain national and domestic interests, with the largest countries of the world – the BRICs and America – protecting their national infrastructures

• There will be fewer payments infrastructures in ten years than there are today and increased competition from both existing and new payment providers

• European Clearing houses for retail payments – such as Equens, VocaLink and STET – will be locked in a competitive battle

• Asian and other clearing services will also be consolidating and some panregional or potentially global players are likely to emerge

• Common standards will drive the process towards renovation and consolidation, as XML and ISO20022 work hand-in-hand to make interoperability easier

• Whilst payments infrastructures were viewed on the whole as being ‘fit for purpose’, Fedwire, Eurogiro and CHIPs scored highest in the ‘out of date’ category

• SWIFT, VocaLink, Equens and EBA are viewed as innovative, although banks and non banks views varied in this regard SWIFT and the EBA have very strong support for the long-term from their banking community advocates, and are likely to remain central to payments for the foreseeable future as standard setters and low-cost processors

• Payments processors need to be on top of rapid developments in mobile, internet and cloud computing to continue to be fit for future purpose. In Retail, changes will be driven by changing customer behaviours relative to social media and the way we pay, with mobile contactless and online payment systems driving real-time connectivity

• As the number of providers and the pace of technology increases there will be greater need for payment risk forecasting, monitoring and the real-time tracking of payments processing by the customer 

If you would like a copy of the report (3MB PDF) then email our administration and they will send you a copy.

2010 Review: Payments

So, there are a lot of things we’re juggling around with in the payments arena, from real-time to TARGET2 to SEPA to SWIFT ISO20022 to mobile to contactless to biometrics and more.

I guess I can summarise this area best by using the results from this year’s payments survey because the last section of the survey asked people what's hot, hot, hot in payments this year.

EUROPEAN PAYMENTS

What was not hot is the world of the Single Euro Payments Area (SEPA) and the Payment Services Directive (PSD).  Interest in these areas due to stagnation and indecisiveness had, to be honest, become flatter than the Flat Earth Society's annual party.  In fact, an indication of how much euro interest exists was articulated well in an insight article on CNBC that claims that: “The European Union Is Over”.

I wouldn’t go that far but, in reviewing the developments of this year, I would say that everything in the Eurozone got a bit tired, tainted and tense.

Thank goodness therefore that the SEPA end-date is in sight, with the European Commission approving the forced migration of national instruments to SEPA credit transfer and direct debit schemes 12 and 24 months after the new regulations for migration are approved.

So that puts SEPA to bed (lol), and leaves me to hone in on other key areas such as mobile and contactless payments.

MOBILE CONTACTLESS

Often breathed in the same breath, these are distinctly different areas even though they are converging as we speak.

For example, Orange has just committed to rollout contactless payments and NFC capabilities across all of their European network next year, whilst Google and Apple are committed to incorporate NFC into Android and iPhones.

 

Picture stolen from Brett King 

So we’re definitely in the era of simple mobile payments.

This was voted the #1 item of interest amongst those responding to the survey this year, and is top of mind with everyone.

What’s surprising is that mobile contactless may be top of mind, but it’s transient.

We’re already into using NFC tags everywhere and the mobile operators’ movements will simply decimate the NFC stick-on tag business (sorry taggo, bling nation et al).

Meanwhile, the fundamental issue is still not addressed: where can you use an NFC chip?

Barclaycard have been pushing Visa Paywave for a couple of years now, and yet I hardly ever get a chance to use it.

Sure, we may now have a few London taxi’s wirelessly enabled, but it’s hardly dense terminal acceptance or usability.

And there’s the rub: we need more terminals.

Maybe they could learn something from Zapa in Ireland, where AIB Merchant Services have worked closely with them to rollout terminals that can use the tags.

Half of all AIB’s merchant terminals are now Zapa ready: that’s 40,000 of their 90,000 terminals, with over 1.5 million contactless transactions in the year to September 2010.

Compare that with Barclaycard who have rolled out just 42,500 merchant terminals to date and processing just over a million transactions by November 2010, and you can see the challenging dimensions they face.

Hmmm ... but there’s no doubt that this will grow ... except that by the time it does, technology will have moved on and direct mobile-to-mobile, or M2M payments, will be the order of the day.

Ah well, we always roll out three-year old technologies to meet three-year ahead needs.

Behind mobile contactless, real-time payments is the next big deal.

REAL-TIME PAYMENTS

Real-time payments are big news because everything is moving into real-time, a point I’ve made often.

What real-time really means is real-time information transfer. Information about money moving worldwide in real-time. Not the money itself, which will still be gated and subject to the laws and barriers required to ensure money moves at the pace of AML, KYC, repudiation and revocation needs.

But real-time is a game changer, as real-time information, risk, cash and enterprise management is delivering real differentiation for corporates and clients worldwide.

That’s why banks need to focus upon it.

For example, in corporate treasury, real-time information that consolidates all the knowledge about a corporation's cash positions across all of their operations, geographies and subsidiaries would be invaluable.  In fact, it amazes me that most companies do not have this capability.  

That is because they are multi-banked and multi-country.

Banks that focus upon aggregation of information in real-time to provide additional knowledge about money will win business.

That's why real-time is important.

OPERATIONAL MANAGEMENT

After these big ticket items, everything becomes a bit more mundane with new pricing models for European payments post-SEPA, SWIFT MX and ISO20022, payments processing hubs, liquidity management and such like being on the ‘must-do’ list.

It’s all about standards, cost reduction and ensuring efficient processing. In other words, good operational management focus.

I could write a lot more about this, but it's covered pretty well elsewhere by SWIFT and other forums, so I'm not going to get all techie today (phew!).

The only point that’s really worth noting on the ‘new for 2010’ model from my side is the fact that there are a lot of new payments institutions appearing out there.

NEW PAYMENTS INSTITUTIONS (PIs)

PIs are new, non-bank payments processors taking out licences across Europe to process payments instead of, or on behalf of, banks.

Funnily enough, when we mention PIs, most people normally think of institutions like PayPal except that PayPal respond by saying: “we are a bank”.

First Data, Western Union, Mobile Telecom firms are also keen PIs, with over 70 licenses registered with EU authorities so far this year to offer payments services in this form.

But the most intriguing new PI for me is Voice Commerce.

Not because they were the first non-bank PI to register with the EU after the implementation of the Payment Services Directive (PSD).

Nor because they were the first PI to become a Visa and, more recently, MasterCard Principle Member.

No, the reason for Voice Commerce being of interest is that they use the idea of the human voice biometric being an identity authentication method.

Bearing in mind that yesterday, all things were moving to mobile and today, all payments are moving to mobile, the idea of using a human voice biometric on mobile seems to be a non-brainer.

And yet, according to our survey, voice biometric fraud management is the least interesting aspect of 2010s innovations.

Amazing how short-sighted we can be when it comes to seeing what may be the most disruptive developments sitting right in front of our eyes or, in this case, right in front of our mouths.

 

What happens if a country leaves the Eurozone?

It’s a funny old world.

One minute we’re all talking about the great European plan, the Lisbon agenda, the Directives are rolled out, SEPA and MTFs are spawned, the level playing field of the Eurozone is harmonised and so on and so forth.

The next is OMG, it’s all doom and gloom.

What about Greece? Ireland? Portugal? Spain? Italy?

This is a disaster!

Meanwhile, the Eurocrats continue to focus upon euro enlargement with Serbia, Macedonia, Montenegro, Albania and Bosnia all in the frame, as well as Turkey of course. In fact, Turkey’s chief negotiator on EU accession believes that: “the European Union needs Turkey more than Turkey needs the European Union”.

Very diplomatic ... and possibly true as Turkey represents the point where West meets East for many.

So what’s the reality?

I was thinking about this the other day, as someone asked me about Ireland’s future.

To be honest, I don’t think there’s a problem if a country has to leave the European Union or the Eurozone.

Think about it.

So far, the reason why we balk at such an idea is because no-one’s ever done it before.

No country has left the European Union so far.

Some have changed and adapted, as in Germany is different today than twenty years ago thanks the Berlin Wall coming down.

The UK is different to what it was twenty years ago, as we now have a Welsh and Scottish Assembly and a more stable Northern Ireland Assembly.

Belgium is breaking apart into Franco-Belgique Wallonia and Dutch-Belgique Flanders (correction).

Yugoslavia exploded into the Serbian-Bosnian war, but it hasn’t stopped Serbia and Bosnia seeking to join the Union.

So what of the future?

Could Portugal leave the euro, as recently implied by their foreign minister, even though just nine months ago there was an emphatic view this could never happen.

And what does it mean if a country leaves?

For the UK, it was a good thing.

The UK left the Eurozone plan in 1992 thanks to George Soros and, ever since, we’ve thanked our lucky stars we did.

UK sterling looks like a good bet in the short-term against the euro, and we have been able to fully engage in actions to halt the slide into depression by printing money through the Quantitative Easing (QE) program and rapidly reducing interest rates to zero.

All of the latter actions are impossible for Eurozone countries to engage in, as they are dependent on the policy across 16 countries controlled by the European Central Bank (ECB).

And there’s the issue.

The UK can issue bonds, t-bills, print money and create more debt because we are a strong country with strong investment yield and credit rating.

Portugal, Ireland, Greece and Spain don’t have any of these capabilities.

First, they are not strong countries with good credit ratings, as demonstrated by the downgrade of Greece in April by Standard & Poors that kicked off this crisis of confidence.

Second, they cannot control any fiscal policy effectively as all interest rates are controlled by Frankfurt, which handcuffs these economies to centralised control.

Even more of an issue for these countries is that they cannot ease their debt burden by priniting money through QE as the UK and USA has done. This is because it would have to be issued through the ECB again, and they have been loath to delve into such areas.

Even if Portugal, Ireland, Greece and Spain could print money, it would need to be substantiated by bonds and government treasury bills that had value to support such an increase in debt ... and these countries do not have the ability to sell such debt due to the downgrade of their credit status.

This is the real issue as Portugal, Ireland, Greece or Spain could leave the Eurozone and EMU ... but to go to what?

If Ireland went back to the punt and Greece the drachma, what does this give them?

It gives them the ability to control interest policies, print more money through QE and issue further debt ... but does anyone believe in or want such burdens from countries already teetering towards junk status?

Maybe ... Argentina survived such a crisis for example.

Others would say that, for the European Union, it’s a good thing to get rid of basket case countries that weaken the Union.

A small few might say that any country leaving the European Union or even the Eurozone is no issue. It may not have been done before, but that’s no reason why it shouldn’t happen and, if it did, it does not signal the end of the Union or the euro.

However, the bottom line is really that any country forced to leave the Eurozone would be an embarrassment to the Grand Plan.

That’s the main raison d’être for bailing out Greece and Ireland, and why Portugal would be bailed out too.

However, with over €1 trillion exposure in Spain, the big question is what happens if their economy tanks?

Mmmm ... we’ll deal with that when it happens I guess.

 

Postscript: the BBC studies the practicalities of a country leaving the euro today.

 

 

An Irishman, a Politician and an Economist walk into a bar

I don’t want to comment too much on the Irish problems, so collected a variety of the best news from around the world to share here.

First, some background on the issue: 

Q: Why is the Irish economy in such a crisis?

A: Because they always think their capital should be Dublin.

And some solutions?  

First, merge with Australia as they “have lots of mineral wealth but no water and no culture, whilst Ireland has no mineral wealth but lots of water and lots of culture.”

Second, even better, get the Corrs to save Ireland.

This is because Ireland has no prenuptial laws, so all that needs to happen is that Corrs sisters Andrea, Sharon and Caroline marry a few folks like Facebook founder Mark Zuckerberg, Mexican billionaire Carlos Slim and the world's wealthiest investor Warren Buffett.

They then immediately divorce them and take half their net worth, which would bring in about $US50 billion.

That's just about enough to bail out the banks.

Both of the solutions above are obviously far better than the Irish government’s best plan, which is to give all of their citizens free cheese.

This created a very negative reaction from some Irish folks, who were heard to say: “Cheese us Christ. They say that cheese can give you nightmares, and now the nightmares are giving us cheese. They’ve all gone em’mental.”

Worse, this week's the Week makes the point strongly with their front cover:

 

This is reinforced by some folks who believe Ireland should rest in peace, with this obituary notice placed in the local news rag:

Ireland, 1922-2010, after a terminal illness bravely borne.  Predeceased by founding fathers Arthur Griffith and Michael Collins. Survived by 4.3 million grieving children. Removal from Cowen and Lenihan’s funeral home to the Church of the IMF.

But it’s not that bad. Ireland’s purely been downgraded from AAA+ to AA.

“What does that mean? Before, we were a battery for the remote control, but now we're only good for a Walkman?”

If you appreciate the humour, most of the above was spawned by the Kilkenny Kilkenomics Festival.

As they say, it must be bad when economics becomes interesting, although economics is far too important to be left to the economists!