I have been reading press accounts of the GM decision to back out of the Opel/Vauxhall sale to the Magna/Sberbank consortium from various countries. There are a lot of different perspectives on this event in the U.S., Belgium, Spain, Germany, Russia, the U.K and elsewhere, because a lot of players are involved.

The conclusion I come to is that economic nationalism is the driving motivator behind much of what you read. To the degree, we continue to experience a soft global economy, this should be seen as a warning of how individual actors will respond in future.

Easy decision to keep Opel

GM’s decision to keep GM Europe is fairly straightforward in my view. The cars and technology in GM Europe is something General Motors never wanted to part with. They only did so because of the need to raise cash in a weak economic environment. Now, things at GM (and Ford) are looking much better and GM has exited bankruptcy. There is no desperate need to sell.

Moreover, the EU was asking GM a lot of questions about the subsidy deal they struck with the German government in order to effect the sale of Opel. Other European nations, Spain and the U.K. in particular, were livid because they suspected an unfair subsidy of German jobs over Spanish or British jobs. But, it goes far beyond those two nations as GM Europe employs 55,000 people in places like Sweden, Poland and Belgium.

We saw what happened to ING, RBS and Lloyds due to the EU’s rules on competition. One could reasonably expect a similar crack down in the auto sector. Details will emerge at some juncture, but one could conclude that GM did a cost-benefit analysis in which the wrangling with the EU weighed heavily on their decision to back out of the Magna deal.

And, in the end, should we expect the restructuring GM performs to be qualitatively any different than what Magna’s consortium would have done? They too have announced 10,000 job cuts, a figure in line with what was expected under Magna’s control. So, on the surface, this looks like a net benefit for GM, a net loss for the Magna-led group, and a wash for workers and politicians.

Enter economic nationalism

But, unfortunately, that’s not how it is likely to be seen. Let’s look at it from a German perspective.  Germany’s Chancellor Angela Merkel went to bat for the Magna deal, winning what was widely seen as a measure of security for German workers at a critical time during economic weakness. This bolstered her election chances. As a result, the center-left SPD has now been replaced by the Libertarian-minded FDP in a coalition reminiscent of the Helmut Kohl days. Consider this a move to the right in Germany.

Nevertheless, Merkel has stuck with her allegiance to Barack Obama. In fact, as a result of this relationship, she was the first German Chancellor in 50-odd years to deliver an address before Congress just two hours before she learned of GM’s backing out. What’s more is the U.S. Government is the majority owner of General Motors. One would think the Obama Administration had some insight into the decision-making at GM. Either the Administration didn’t know and is being recklessly hands-off in an enterprise where it has sunk tens of billions or it did know and did Angela Merkel a disservice by not informing her of what was to come well before her speech to Congress.

So, you have an American company owned by the American government backing out of a signed agreement and potentially thousands of jobs at risk. Talk of plant closures at Eisenach, Bochum (and Antwerp in Belgium) and the loss of jobs is rampant in the German press. GM Europe’s head John Smith says, "if they like the Magna plan, they will also like the GM plan." That is not an argument likely to gain sway in a period of economic uncertainty.

The Germans are livid.  German workers have gone on strike. Meanwhile, you have the UK Business Secretary Lord Mandelson warning that the division of job cuts must be ‘fair.’ And the Spanish Opel workers had just OK’ed the Magna plans two weeks ago. This is a bit of a zoo, isn’t it?

It is every nation for itself – precisely what one would expect with a shrinking economic pie and a deep downturn.

Going forward

GM has mishandled this affair quite badly I believe. At least with the Magna deal, the Germans were in the driver’s seat. Now, all of the individual European nations are angling for their say in this matter. Yes, GM had little choice given the likely scrutiny it was under via Neelie Kroes, but it certainly could have handled the political aspects of this much better.

However, now that this situation is out, it gives us a bird’s eye view into how nations respond when a division of the spoils becomes an issue.  And what we have seen does not give confidence that a coordinated approach will prevail. I take this affair as a clear indication that economic nationalism is alive and well and very much a threat to our collective well-being.

Related posts:

• Germany gives GM a stiff arm on state aid
• GM board decides to keep European Opel unit
• German Press: Fiat to sign a deal with Opel, not Chrysler
• Germans reject Chinese offer for Opel
• GM considers keeping Opel, raising capital

Nils Pratley’s piece at the Guardian on RBS and Lloyds is very good.  Two quotes sum up the situation quite well.

First, in regards to Lloyds, Pratley says:

Royal Bank of Scotland’s shares down almost 20% in two days; Lloyds’s shares an oasis of tranquillity. Those market reactions tell the story of the banking bailout part 3, or part 2(b) as the government would probably prefer. Lloyds has performed a great escape, but RBS has been clobbered…

Lloyds is being forced by the European commission to surrender 4.6 percentage points of market share but will retain 25%, probably more than any bank has ever enjoyed in the UK.

This is the statistic to remember when Alistair Darling trumpets the government’s commitment to greater competition. When one institution is so big in retail banking, actions like encouraging Virgin and Tesco to enter don’t amount to much.

In regards to the horrors brought to us by Sir Fred Goodwin at RBS, Pratley has this to say:

About 10 months after Lloyds started saying the worst was over, the claim looks semi-credible. It is relatively easy to see how – in time (a critical phrase) – taxpayers could earn a profit on their Lloyds shares.

The same hope is still alive at RBS but Stephen Hester’s task is far trickier. RBS, said Lord Myners today, was the "worst managed bank this country has ever seen," a claim that is supported by the sheer scale of taxpayer support. The capital ratios have had to be inflated to unheard-of levels to absorb the losses that are expected to arrive when the toxic rubbish from the Goodwin era washes up in the next few years.

The difference between the two banks is striking and goes entirely to management of the two firms.

The full article is linked below.

A tale of two banks at RBS and Lloyds – Nils Pratley, Guardian

Related posts:

• Lloyds to raise 21 billion pounds in biggest rights issue ever
• The FDIC to get credit from banks even while banks restrict lending
• Lloyds has a decent first half
• RBS reports a record loss of 24 billion pounds
• UK: Darling confirms government to break up too big to fail banks

Lloyds are looking to avoid the embrace of government by going to existing shareholders to raise capital and sidestep the draconian break-up solution foisted upon RBS by Neelie Kroes. According to Bloomberg, this is the largest rights issue ever for a British company and equates to $34 billion.

All of this must be excruciating for Lloyds shareholders, as Lloyds was not a reckless lender during the bubble years. It was HBOS which nearly went to the wall and was subsequently foisted onto Lloyds.  At the time (late September 2008), I certainly thought the deal was in the best interest of all concerned given how little Lloyds was paying for HBOS:

The fact that government were so involved in the negotiations makes clear how important it was that this deal get done. It appears to have been the best outcome for all parties concerned: HBOS, Lloyds and Labour. The British Government has been pilloried for having squandered the good times and leading the UK into a major downturn with no room for fiscal stimulus. Both Gordon Brown and Alistair Darling should be worried about getting the sack. The last thing either they or the Labour Party needed was a failure of an institution like HBOS. HBOS was too big to fail.

The HBOS crisis was a perfect example of how liquidity concerns become intertwined with solvency issues in a time of panic. With the HBOS crisis now at an end, one wonders whether RBS will come under attack next, or whether we can breathe a sigh of relief until the next round of writedowns or share price losses. We will have to wait and see.

RBS did come under the government umbrella and both RBS and HBOS have proven major sinkholes for the UK taxpayer, with more money still coming.

What Lloyds are looking to dodge is the government’s Asset Protection Scheme, which Bloomberg estimates will cost the bank 15.6 billion pounds in fees and easily raise the government’s stake to a majority at 62 percent.

Below are the defining paragraphs of the scheme:

1.1 Under the Scheme, in return for a fee, the Treasury will provide to each participating institution protection against future credit losses on one or more portfolios of defined assets to the extent that credit losses exceed a “first loss” amount to be borne by the institution.  It is intended that the Scheme will target those asset classes most affected by current economic conditions.

1.2 The Treasury protection will cover the major part but not all of the credit losses which exceed this “first loss” amount.  Each participating institution will be required to retain a further residual exposure, which is expected to be in the region of 10 per cent. of the credit losses which exceed the “first loss” amount.  This residual exposure will provide an appropriate incentive for participating institutions to endeavour to keep losses to a minimum.

1.3 The Treasury currently expects that the fee will usually be satisfied by the issue of capital instruments of the participating institution.  These instruments are not expected to include ordinary shares, but will include a range of alternative capital instruments.  The Treasury will be open to consider other forms of fee, including cash.

Nevertheless, Lloyds are being forced to flog off assets , effectively deleverage, in order to escape the APS. Insight Investment management was sold to Bank of New York Mellon for 235 million pounds on Monday. The Intelligent Finance business, Cheltenham & Gloucester accounts and mortgages, and a number of Lloyds TSB branches in England & Wales will be gone within four years. The TSB brand is also history. No mention of plans concerning the Halifax or Bank of Scotland brand has been made.

It is unclear what kind of reception such a large rights issue will receive. Lloyds is down almost 2% in heavy trading so far today.

Sources

Lloyds to Raise $34 Billion to Avoid Control by U.K. – Bloomberg

Sale announcement of Insight by Lloyds – Lloyds TSB website

Related posts:

• RBS reports a record loss of 24 billion pounds
• Lloyds gets HBOS for a song
• Nils Pratley: A tale of two banks at RBS and Lloyds
• HBOS to raise new capital
• $467 billion in writedowns and counting

At the weekend I wrote about Alistair Darling’s about-face on breaking up to big to fail financial institutions. Apparently, this was not a case of labour changing tack and finding regulatory religion, but rather of the European Union imposing its will on the British government. The EU is also dictating policy in Germany, the Netherlands and elsewhere.

The Telegraph reports:

RBS said in a statement on Monday it was in the final stages of talks with the European Commission about "some divestments not initially contemplated" to get EU approval for the billions of pounds it has received in state aid.

Selling Citizens, which has 26,000 employees, is said to be one of the options raised by Neelie Kroes, the EU competition commissioner.

She is also said to want the sale of the Churchill, Green Flag and Direct Line insurance businesses, more than 312 RBS branches in England, Global Merchant Acquiring, a card payments processing arm, and a reduction of the investment banking operations.

And RBS shares were down as the effects of the EU’s dictates became clear for that institution. Job losses were the most negative storyline and unions are expected to resist these moves vigorously. But asset sales were also part of the equation.

The Guardian reports:

Royal Bank of Scotland’s woes deepened tonight after unions condemned 3,700 branch job cuts as "absolute madness" on the eve of an announcement of a dramatic restructuring of the bank imposed by Brussels.

RBS is tomorrow expected to admit that it is being forced by the EU to make major commitments to cut back the size of its balance sheet and sell off some of its highest profile businesses in return for more than £40bn of state aid.

The bank acknowledged for the first time today that the EU was demanding more draconian measures than it had first envisaged, driving RBS shares down sharply. They closed at 38.65p, down 8%, giving the taxpayer a paper loss on its investment which breaks even at 50.5p share.

Analysts were concerned that the new chief executive, Stephen Hester, would need to redraw his business plan which is only eight months old, and that the profits of the bank could tumble by as much as £1.5bn a result of the EU’s intervention.

As the Treasury prepared to admit it was putting another £25bn into RBS to take the taxpayer’s stake up to 84% to help it participate in the government’s toxic asset protection scheme, unions reacted angrily to the front-line job cuts.

So, far from appearing forward-looking, Labour look quite reactionary here. Not only are they having to bend to the will of Neelie Kroes in Brussels, they also are being forced to top up their stakes in the banking black hole even while job cuts are being made. This is not the sort of thing that is likely to lead to more votes at the ballot box. (By the way, why do the British media insist on always using this picture of Darling in articles. I find it pretty comical.)

The UK is not the only country coming under pressure for state subsidies (a weak form of protectionism). In the Netherlands, ING was forced to break in two and reduce its balance sheet because of the EU’s policy on subsidies. In Germany, Commerzbank (in large part because of sick child Dresdner) is also going to have to reduce the size of its balance sheet. Commerzbank reported more than 1 billion euros in losses today, a sum which was a negative surprise (thinking back to Halloween, it was more trick than treat). Expect asset sales here too. I know that Fortis and Natixis are other institutions with problems. What is the EU doing there?

The situation is very fluid right now and many details are expected to emerge in the coming days.  Expect the EU actions to put pressure on the U.S. which is also subsidizing its banks in an anti-competitive way.

Related posts:

• European banks have hands out for more capital
• European banks: still undercapitalised
• $5 trillion to go on balance sheets again?
• No one gets a bonus at Commerzbank and no dividend either
• The Germans get tough with the state banks

In a clear break with US economic policy, the UK government have decided that too big to fail is too big to exist. As a result, three large financial institutions now owned at least in part by government are to be dismantled. Moreover, talk of Tesco’s or Virgin getting the assets is yet another momentous shift in the British banking landscape.

The BBC reports:

Chancellor Alistair Darling has confirmed that Lloyds, RBS and Northern Rock will be broken up and parts sold to new entrants to the banking sector.

He said there could be three new High Street banks in the UK over the next three to four years as a result.

But the chancellor said he would only sell parts of the banks when "the time is right", to ensure taxpayers get their money back.

There is speculation that buyers might include Tesco and Virgin.

One should not understate the importance of this decision. This is a game-changing move by the UK government. One year ago, it was the U.K.’s decision to recapitalise its banks which changed the economic policy landscape. U.S. policy makers were forced to switch TARP policy from buying up dodgy assets at inflated prices to injecting capital (see my post “Recapitalising Britain” from 7 Oct 2008).

Yet again, the British are leading the way in reform. If you recall, just two weeks ago Mervyn King, the Governor of the Bank of England, made a blistering attack on government policy and advised breaking up too big to fail banks. At the time, Prime Minister Gordon Brown publicly rejected this idea.

However, it seems Labour were not as against King’s ideas as Brown’s comments suggested. The move last week by the Dutch to break up the bankassurance giant ING may have been the impetus. The Chancellor, Alistair Darling, suggested an increase in competition on Britain’s high streets was uppermost in his mind.

Mr Darling said this was the best way to ensure "proper competition and choice". He said having just "half a dozen big providers was not acceptable".

Why Bradford & Bingley was not mentioned with the other three banks under government control is unclear. Tesco’s and Virgin have been two of the more innovative financial service providers on Britain’s high streets and we should look on their ability to compete at scale as something which will shake up financial services in Britain. Tesco’s bid to compete in the banking sector is particularly noteworthy because of its enormous presence on high streets and immense customer base.

I reckon this move will put pressure on the US where the Obama Administration has been completely unwilling to break up the large banks, which are now even more dominant than before the crisis.

Related posts:

• Nils Pratley: A tale of two banks at RBS and Lloyds
• German deposit guarantee sets up a German-British row
• Irish government unveils plan to recapitalise banks
• The EU driving changes in European banking
• Einhorn: Break up too big to fail financial institutions

The Nationwide monthly index of house prices came in this morning showing a 0.4% bump in October from September. While this was less than last month’s 0.9% rise, it was the sixth consecutive month of price increases and it marked the first time in two years that house price in the U.K. were higher year-on-year. In fact, house prices are now a full 2.0% higher than in October 2008 according to the Nationwide figures.

Nevertheless, the Nationwide Chief Economist Martin Gehbauer is sticking to his more cautious view in contrast to his predecessor.  He says:

House prices rose for a sixth consecutive month in October, but the strong upward momentum in property values seen over the summer is showing some signs of moderating as we head into the autumn months. The price of a typical property was 0.4% higher on the month in October, compared to an increase of 0.9% in September and 1.4% in both July and August. The 3 month on 3 month rate of change – generally a smoother indicator of the near term trend – dropped back slightly from 3.8% to 3.4%…

Preliminary GDP figures released by the Office of National Statistics showed that the UK remained in recession during the third quarter of 2009, defying widespread expectations that the economy had begun growing again over the period. The surprisingly poor figures have mixed implications for the housing market. On the one hand, a deeper and longer recession implies higher levels of unemployment and a longer period of subdued wages, both of which will act as constraints on the housing market’s recovery. Given the poor labour market situation implied by the economy’s ongoing weakness, it is difficult to imagine the housing market returning to the buoyant levels of activity and price inflation that prevailed earlier in the decade. On the other hand, the figures mean that interest rates are likely to remain at or near their current record lows for well into next year. As a result, mortgage affordability will remain relatively favourable for both new and existing borrowers. This should limit the number of distressed sales and cushion the negative impact of labour market weakness on housing demand.

The Nationwide numbers have generally been more bullish than the Halifax numbers and a gap has opened up between the two indices (see last month’s post). So, it will be necessary to see how the data are confirmed by the Halifax early next month. What should be clear is that low interest rates are a temporary salve.  The recent increase in house prices is not sustainable unless we see an uptick in the British economy and a stabilization of the jobs market.

Source

House Prices Rise At A Slower Rate In October – Nationwide press release

Related posts:

• Nationwide: UK house prices up strongly for third month
• Nationwide: U.K. house prices resume their descent
• UK: House price fall moderates, prices still down 13.9% in year
• Nationwide: UK house prices down 15.9% from last year
• Nationwide: UK house prices down 14.6%

When it comes to the housing meltdowns in the richest economies, the US has been matched only by Spain, Ireland and the UK. All four countries have seen spectacular losses of wealth in the housing sector over the last two years.

The response by all four governments was to apply as much stimulus as they reasonably could to prevent their economies from descending into free fall. This has opened up gaping holes in each countries’ government accounts. However, in contrast to the United States or the UK, both Spain and Ireland have the Euro as an external constraint which limits their policy choices.  This has resulted in credit downgrades for the sovereign debt in Ireland and Spain.

Looking at Spain, there was massive over-building in the property sector, which attracted a lot of labor to Spain. Now that these jobs have been vaporized, the unemployment rate has soared to near 18%. The problem is quite acute and there are few policy solutions. Reinforcing this point for me was a discussion I had with Spain-expert Edward Hugh, who writes at the blogs Global Economy Matters and A Fistful of Euros, in the wake of some downbeat comments by Paul Krugman about the country.

Edward wrote:

The problem is Spain can only create jobs through exports. The problem is, with Brussels prices we cannot attract investment to build new factories to create high volume unskilled employment. At this stage in the game we are not in competition with Brussels, but with Bratislava. That may not be a pleasant truth, but it is simply like that. We have attracted a large quantity of people here to work in unskilled low-value employment. The industry that gave them work just permanently disappeared out of sight. We need, urgently to find alternatives since we cannot pay them all 420 euros a month for ever. This is more than a simple academic exercise, it is now a question of life and death for the Spanish economy.

Basically we need to go back to 2000 wages and prices and start again. Maybe you don’t like this idea, but can you point me to anyone who has an alternative?"

Obviously, a huge cut in nominal wages is never going to fly in any country because wage prices are sticky. Call it “money illusion” or call it a desire to maintain a decent standard of living, across-the-board nominal wage cuts are a political non-starter. But, this is what is needed in Spain.

Edward does address the standard-of-living problem this presents:

This is not simply about bringing down wages. It is about simulating a devaluation by bringing down prices AND wages together. So you as an employee should be in the same situation as before. The only realistic way to do this is through a pact between employers, unions and political parties, everyone.

The only real problem is with the debts, since they will also need adjusting down, but see another thread here on this.

But OK, I’m not saying this is going to be easy, just that we have no alternative. We shouldn’t have inflated the housing bubble in the first place.

Of course, being able to devalue the currency is one way to achieve this. But, Spain does not have that option. These are the very real policy cul-de-sacs faced in the aftermath of a debt-fueled asset bubble. And since another one seems to be inflating right now, I reckon the U.S. and the U.K. will be joining Ireland and Spain on this dead-end street in due course whether their currencies are weak or not.

Related posts:

• European House Prices are slowing
• Spain and Ireland ‘thrown to the wolves’ after ECB move
• Spain intervenes to save Caja Castilla La Mancha
• UK real wages falling
• Spain gets deflation

We received word today from the British government that GDP in the UK contracted for a record sixth quarter in Q3 2009. I like Neil Hume’s headline on this one, “GDP shock flop.”  If you were listening to the

BBC’s Wake Up to Money

Bloomberg puts the right spin on things:

Britain’s failure to escape the worst recession since World War II may force the Bank of England to increase its bond-purchase plan next month, economists said.

Seven months after Governor Mervyn King’s central bank started a 175 billion-pound ($287 billion) program to rescue the economy, the Office for National Statistics said today gross domestic product unexpectedly shrank 0.4 percent in the third quarter. None of the 33 economists surveyed by Bloomberg predicted a contraction.

“Having pumped in so much money and still seeing a decline in GDP is damaging from a perspective of confidence and expectations for recovery,” said Stephen King, chief global economist at HSBC Holdings Plc, in an interview with Bloomberg Television today. “They’ll be thinking very hard about whether to extend quantitative easing. They need to do something to show they care about the economy.”

Britain is still mired in recession even after pledges of about one trillion pounds in stimulus and banking aid from the Bank of England and Prime Minister Gordon Brown. King, whose push to expand bond purchases to 200 billion pounds in August was defeated, may win more support at the next Bank of England decision on Nov. 5.

The yield on the two-year gilt declined 6 basis points to 0.88 percent after the GDP report. The 10-year gilt yield slipped 3 basis points to 3.67 percent.

I would add that Sterling is getting crushed in the foreign exchange market – even against a weak US Dollar.

So, riddle me this: if the economy is so bad, why are house prices in London at an all-time high?  The explanation I came up with on Monday was that this is the natural  response to easy money when the economy has a large output gap – namely asset price inflation.  And this is certainly helping to pad bonuses in the City of London, a contributing factor to the increase in residential property prices in London.

Meanwhile, in the rest of Britain, the only thing keeping the country from economic freefall is budget-busting government stimulus. The Telegraph’s Angela Monaghan has a good article out today showing the emergency measures still in place including record low interest rates, quantitative easing, sales tax cuts, and the car scrappage scheme, not to mention the government’s backstops in the financial services industry. Where this leads is anyone’s guess at this point.

What should be clear, however, is that now is not a good time to tout a need for people to “tolerate the inequality as a way to achieve greater prosperity for all” as Lord Griffiths has done. He only brings greater scrutiny onto the financial sector. I found this statement particularly unconvincing:

I believe that we should be thinking about the medium-term common good, not the short-term common good … We should not, therefore, be ashamed of offering compensation in an internationally competitive market which ensures the bank businesses here and employs British people

This is an argument for good times, not recession – and even then one must question whether large bonuses in the financial sector are truly in the medium-term common good.

Related posts:

• London house prices at an all-time high
• Random Musing: London house prices
• French economy contracted in Q2
• Recession ‘95% likely’ in Britain
• Recession nears in New Zealand

If our response focuses only on the symptoms rather than the underlying causes of the crisis, then we shall bequeath to future generations a serious risk of another crisis even worse than the one we have experienced.

-Mervyn King, Governor of the Bank of England

The Bank of England head has come out unequivocally against continuing with the status quo.  He sees grave risks at large global institutions like HBOS and RBS, which lent recklessly and leveraged up to a point where they threatened collapsing the entire UK financial system. As a result, he is now calling for them to be broken up or we risk a more severe crisis down the road.

However, Gordon Brown has rejected this notion and is looking to move forward with a tweaked version of the status quo.

The Telegraph reports:

Mr Brown told MPs that "the difference between having a retail and investment bank is not the cause of the problem."

The Prime Minister added that "the cause of the problem is that banks have been insufficiently regulated at a global level."

Mr Brown was responding to Mr King’s fiercest attack yet on big banking in a speech he gave in Edinburgh last night. Mr King indicated the country’s high street banks should be separated from their risky investment banking arms.

"“It’s clear King’s not happy with where we are now,” Colin Ellis, an economist at Daiwa Securities told Bloomberg. “He said the regulatory structure was inadequate, and coming from the governor of the Bank of England that’s as damming as it could be."

Lest we forget, Mr. Brown is the architect of the present regulatory structure in the UK. It was under his guidance as Chancellor that the regulatory structure was divvied up into the tripartite authorities of the FSA, the Bank of England and the Treasury. As with any incumbent, Gordon Brown has a legacy to protect and this puts his interests at odds with ours. So, it should be a given that Brown is not going to break up the banks, especially since he was the architect of the Lloyds-HBOS merger to begin with.

But, it is disingenuous for Brown to claim that right-sizing these institutions means abandoning the Universal Banking model.  There are 100 different ways to downsize a bank as the forced downsizing at Citigroup demonstrates.

Below is a video of Governor King speaking on the subject, making his call for greater regulation and an end of too big to fail.

In related news, Goldman Sachs’ Vice Chairman Lord Griffiths has defended Goldman and their outsized bonuses with the unfortunate phrasing that Britons must:

tolerate the inequality as a way to achieve greater prosperity for all.

To make matters worse, he threatened Britain with a loss of tax revenue by explaining bankers will just move to Switzerland if the UK tries to take their money away.

Are we looking at “the biggest moral hazard in history?” That’s how the Mervyn King video ends.

To be continued.

Related posts:

• UK: Darling confirms government to break up too big to fail banks
• FSA: Gordon Brown complicit in credit bust
• Lloyds gets HBOS for a song
• The Last King of Scotland
• Quote of the day: Gordon Brown, get your bazooka

Further proof that the reflationary efforts of policy makers is taking hold comes from London in the form of record high house prices.  The Guardian reports:

Property asking prices in London have broken through the record high set in November 2007 as the drought of homes for sale around the country continues to distort the market. New research out today shows that the average asking price in London jumped 6.5% to £461,157 in the four weeks to 10 October, sailing through the high of £412,731 set in November two years ago.

The survey by the property website Rightmove also shows that asking prices in England and Wales are now higher than a year ago, after climbing 2.8% in the past month.

Back in March, when the global economy was flat on its back, I suspected that policy makers saw only one way out of this mess: another asset bubble.

Their efforts point in four directions:

1. Increase asset prices. If the assets on the balance sheets of banks are falling, then why not buy them at higher prices and stop the bloodletting? This is the purpose of the TALF, Obama’s mortgage relief program and the original purpose of the TARP.
2. Increase asset prices. If assets on the balance sheet are falling, why not eliminate the accounting rules that are making them fall? Get rid of marking-to-market. This is the purpose of the newly proposed FASB accounting rule change.
3. Increase asset prices. If asset prices on the balance sheet are falling, why not reduce interest rates so that the debt payments which are crushing debtors ability to finance those assets are reduced? This is why short-term interest rates are near zero.
4. Increase asset prices. If asset prices on the balance sheet are falling, why not create Public-Private partnerships to buy up those assets at prices which reflect their longer-term value? This is what Geithner’s Capital Assistance Program is designed to do.

So I lied, there is only one direction the government is headed: increase asset prices (or, at least keep them from falling). Read White House Economic Advisor Larry Summers’ recent prepared remarks to see what I mean. (Summers on How to Deal With a ‘Rarer Kind of Recession’ – WSJ)

The same was certainly true in Britain as well. With share prices up well over 50% and property again at a new high in London, the government has succeeded beyond anyone’s wildest dreams.

Mind you, the real economy is still in a shambles, with manufacturing taking the slowdown especially hard.  But, the employment market is not nearly as dire and the economy seems to be leaving recession.

Things are a lot better in the City than in the real world because the increase in asset prices is a huge boon for the banks. Expect bankers in the City to reap the benefits in the form of record pay packages this year.

Unfortunately, if you are a renter looking to get onto the property ladder, it is going to be rough sledding.

Related posts:

• Random Musing: London house prices
• If the UK economy is still in recession, why are London house prices hitting new records?
• Nationwide: U.K. house prices down 16.6%
• US Home prices down 16% over last year
• Denmark’s house prices fall

Paul Krugman has noticed that trade has absolutely collapsed with this economic downturn. It is worse than the Great Depression.

Question: is this aiding global re-balancing?

Here are two data points from Europe today which lead to that question.

The BBC reports on Germany:

Germany’s trade surplus fell 43% in August after a drop in exports from Europe’s biggest economy, according to the national statistics office.

Germany exported 8.1bn euros (£7.45bn;$11.95bn) more goods than it imported in August, down from 14.1bn euros in July.

The fall in exports was the first for four months and had not been expected.

Most focused on whether this trade reduction, especially the decline in export from export-powerhouse Germany meant that recovery has stalled.  I think the more important question is whether the trade flows are representative of re-balancing.

On that same subject, we get data from debtor Britain via the Guardian saying the current account imbalance is also narrowing:

The trade deficit has narrowed during the financial crisis from £8bn to £6.2bn in the year to August, while the tentative global recovery is also helping exporters.

Britain’s trade deficit with the rest of the world narrowed modestly in August to £6.2bn as exporters sought to capitalise on the sliding pound, and the recovery in overseas markets.

Yawning trade deficits have been a symptom of Britain’s out-of-kilter economy over the past decade. Mervyn King, the Bank of England governor, has repeatedly said he would like the weakness of sterling to bring about a "rebalancing" in the economy, by boosting exports.

The trade deficit in goods has been narrowing since the crisis began, and official figures released this morning showed that it was £6.2bn in August, down from £6.4bn in July, and more than £8bn in August 2008.

The ONS said exports actually fell, by £100m over the month, but imports fell faster, by £300m, as consumers tightened their belts. However, Vicky Redwood, of Capital Economics, pointed out that exports rose by 1.6% in the three months to August – the first quarterly rise in over a year.

It certainly helps that the pound has fallen apart, but the decrease in Britain’s current account deficit is mirrored in debtor America as well.  So, while trade flows are diminishing, so too are trade imbalances.

Related posts:

• European-Asian trade falls off a cliff
• The Euro and Baltic currency overvaluation
• When will Sterling hit Euro parity?
• The Cult of Zero Imbalances
• Germany: Inflation tames retail sales

The Halifax reports that UK house prices rose for the third consecutive month in September, up 1.6% from August levels. Key to the rise has been a lack of supply coupled with increased demand (100% mortgages have helped as well).  Last week, Nationwide had pointed to a rise in ‘accidental landlords’ who did not wish to sell into a soft market as a reason for the limited supply.

Nevertheless, house prices are still 7.4% lower than they were at this time last year, according to the Halifax.  What I find curious, however, is that the Nationwide data released last week show house prices flat with year ago levels.  Below is a BBC News graph showing the growing discrepancy between the two major UK house price indices.

As in the U.S., I would like to see how these figures hold up in winter time, especially giving the huge disparity in the two indices.  Moreover, Britain has shown a considerable degree of economic weakness of late. Manufacturing data released today showed industrial production at the lowest levels since 1987, leading many to believe the UK has yet to shake off a nasty recession.  If economic weakness lingers, expect it to also be reflected in home values.

Sources

More signs of house price rises – BBC News

House Prices Now At Same Level As September 2008 – Nationwide

Related posts:

• UK house prices up for third time in fourth month
• Nationwide: U.K. house prices rise for second time in three months
• Nationwide: U.K. house prices resume their descent
• Nationwide: UK house prices rise for fourth month
• House prices in the U.K. up for first time since Oct 2007

Nationwide released data from its August 2009 house price index showing that house prices rose 1.6% from the previous month.  This is the fourth consecutive month in which house prices have risen in the UK, bringing the year-on-year change to –2.7%.

Martin Gahbauer, Nationwide’s Chief Economist, said low interest rates are behind the recent rise (emphasis added):

“The exceptionally low level of interest rates offers some explanation for why house prices have not repeated the very sharp falls of 2008. There are two main channels through which the low level of interest rates has impacted the housing market. First, mortgage payments for existing homeowners – especially those with tracker or standard variable rate loans – have been reduced substantially. Before the MPC began cutting rates, the average interest and principal payment per mortgage holder represented about 38% of the average post-tax labour income. Following the steep cuts in base rate, this has fallen to just 28% of post-tax income, despite historically high levels of outstanding mortgage debt. The fall in debt servicing costs has meant that fewer homeowners are under immediate financial pressure to sell than might have been expected in a recessionary economic background with rising unemployment. Partly as a result, fewer second-hand properties have come onto the market than is normally the case in recessions, which has contributed to moving the balance of supply and demand more in favour of sellers over the course of 2009.

In addition to limiting the supply of second-hand homes, lower interest rates have also had an impact on the demand side. Even though house prices remain high relative to earnings, the fall in interest rates has improved the affordability of mortgages for those looking to buy a home. This helps to explain the strong rise in new buyer enquiries reported by estate agents for most of 2009. Although not all of these enquiries are turning into sales, house purchase transactions have continued to slowly increase from the record lows reached in late 2008.”

Obviously, this leaves open to question what will happen when interest rates rise.  Certainly, by that time, the economy will be on sounder footing and the financial pressure to sell will be less.

The rise in residential property prices in the UK does show the market has housing stabilised.  Definitive confirmation would come in the winter when the market is less buoyant.  For now, it seems the worst is over.

House price bounce extends into August – Nationwide

Related posts:

• UK house prices up for third time in fourth month
• Nationwide: U.K. house prices down 17.6% in year to Februay
• Nationwide: UK house prices up strongly for third month
• Nationwide: UK house prices down 15.9% from last year
• Nationwide: U.K. house prices down 16.6%

UK house prices have now risen for three months consecutively and four months in five according to statistics released by Nationwide Building Society this morning. The rise for July was a very robust 1.3% month-on-month, which translates into almost 17% on an annualized basis. Clearly, housing is doing very well during this summer selling season.

While prices could still fall during the slower Fall and Winter time frame, the recent rise in prices is beginning to look like a bottoming.  To be sure, prices are still down 6.2% year-on-year, but the index is within striking distance of the October and November 2008 figures, suggesting we may move into positive year-on-year territory if this trend holds through to Fall.

Nationwide’s Chief Economist Martin Gahbauer had this to say about the figures (emphasis added):

The price of a typical house rose for the third consecutive month in July, increasing by 1.3% on a seasonally adjusted basis. The 3 month on 3 month rate of change – generally a smoother indicator of the near term trend – rose from 1.0% in June to 2.6% in July, the highest level since February 2007. House prices are still 6.2% lower than 12 months ago, but this represents another sharp improvement from the 9.3% year-on-year decline in June. Even if prices were to remain unchanged for the rest of 2009, the year-on-year rate would continue to improve since prices were falling very sharply in the second half of last year. For the first seven months of 2009 as a whole, prices have risen by a cumulative 1.3%, suggesting there is now a reasonable chance that prices could end the year slightly higher than where they started. Only a few months ago, such an outcome would have appeared unthinkable.

I should also note that mortgage applications have been increasing strongly, evidence that first time home buyers are coming back to the market.  This underlying demand may be buoying prices.

Overall, the data cannot be seen as anything but bullish.

Source

House prices up for third month in a row – Nationwide website

Related posts:

• Nationwide: U.K. house prices resume their descent
• Nationwide: U.K. house prices down 16.6%
• Nationwide: UK house prices down 14.6%
• UK house prices fell another 1.7%, now down 12.4% annually
• Nationwide: UK house prices rise for fourth month

In the just finished second quarter of 2009, the UK economy was contracting a massive 5.6% from the year ago period.  This is the worst performance since records began in 1955. What’s more, the data surprised to the downside, with the quarter-on-quarter contraction coming in at 0.8%, much worse than the 0.3% contraction which had been expected.  Yet, somehow markets are shrugging this data off and the FTSE is up for the day.

The Telegraph has some wonderful graphs in a slideshow attached to their article on the story.  See their story here.  It shows that the depths of recession in the UK are behind us at this point, as the economy shrank at a much faster 2.4% in Q1.  Nevertheless, the data in the graphs should leave no doubt that the UK is still in recession despite some speculation that it had left recession late last quarter.

The Guardian reported the data this way:

Britain’s economy contracted by a record 5.6% over the past year as output fell for a fifth straight quarter, the government revealed today.

Dashing hopes that the steepest decline in growth since the 1930s might be nearing an end, the Office for National Statistics said gross domestic product fell by 0.8% in the three months to June.

The size of the drop surprised the City, which had expected only a 0.3% decline following recent signs of a pickup in the housing market and strong growth in high street spending.

Sterling dropped sharply after the data, losing a cent against both the dollar and euro to $1.6450 and €1.1577. Mark O’Sullivan, director of dealing at Currencies Direct, said the poor figures had sparked a sell-off of sterling and it is likely to remain under pressure: "The political uncertainty in the UK until the next general election remains a real worry for investors. Many will stay away, particularly with the Conservatives keeping their policies so close to their chest. This could mean further bad news for sterling."

Shares, enjoying their tenth successive day of gains, appeared to shrug off the news, however. The FTSE 100 was up almost 30 points at 11am, at 4589.28.

Describing the figures as "shockingly bad" Vicky Redwood, UK Economist at Capital Economics, said they "firmly dash any hopes that the UK had already pulled out of recession." Getting the economy back on track "looks likely to be a long hard slog," she said.

Ahead of today’s data, some economists had even predicted that the UK could post its first positive growth since early 2008, and the size of the decline prompted immediate speculation that the Bank of England would be forced into fresh emergency action to kick-start activity.

You can bet the Bank of England will continue to be very accommodative for the foreseeable future. former MPC member David Blanchflower told Bloomberg that would be his recommendation going forward.

Former policy maker David Blanchflower said in an interview on Bloomberg Television yesterday that the economy may not be through the worst, and the central bank risks stifling the recovery were it to raise rates or reverse the bond-purchase program prematurely.

“My worry is that the tightening comes too soon and people kill off any recovery that’s coming,” he said. “It’s very early days to say that you know the endgame is even in sight.”

Related posts:

• Data watchers beware, huge seasonal adjustments distort the numbers
• GDP Revisions
• Data on past consumer deleveraging during recessions
• U.K. Services Contract
• If the UK economy is still in recession, why are London house prices hitting new records?

The Economist released its remarkably telling Big Mac Index this past weekend.  The index looks at the relative cost of Big Mac in various countries to gauge how over- or undervalued the currencies in those locales are.  Judging from this Index, there are some monster distortions in the currency markets right now.

The numbers marked in red are the areas I would like to highlight. They are representative of massive currency overvaluation in Europe (+72% in Norway, +55% in Denmark, +29% in the Eurozone) and absurd levels of undervaluation in Asia (-49% in China, –52% in Hong Kong, –47% in Malaysia and –42% in the Philippines).  One might argue the European overvaluation represents a repudiation of the U.S. dollar.  Sterling is only +3% versus the Dollar in the index, so that suggests a repudiation of the Pound as well.

On the other hand, Asian currencies are generally not floating but rather fixed via dirty float to the U.S. dollar. For example, the Malaysian ringgit and the Chinese renminbi are two currencies with a managed float. So, the undervaluation of Asian currencies is a political decision of mercantilist economic policy in the region. This has been a major cause of the fabled Asian savings glut and large current account surpluses in Asia.  In my view, this as also been a major source of instability in the global financial system. 

Clearly, Bretton Woods II has outlived its usefulness.

Source

The Big Mac index: Cheesed off – The Economist

Related posts:

• The Big Mac Index
• The dollar is rising against floating currencies
• Is the Fed just jawboning?
• The weak dollar trade regains momentum
• U.S. Dollar: Cliff Diving Again

This comes via the Telegraph:

UK Financial Investments (UKFI) said in its annual report that its loss on the two stakes – 70pc of RBS and 43pc of Lloyds Banking Group – had reached £10.9bn at the end of June.

The losses, which are not yet realised, have been wracked up since Gordon Brown was forced to inject billions into the troubled lenders in October.

The investment, which amounts to more than £3,000 that each UK household, will not be quickly disposed of. The recession is continuing to hit both banks hard.

“Given the size of our holdings and assuming that there might not be a strategic buyer for our stakes in these banks, we might expect to undertake several transactions in each bank’s shares, and that these will take place over a sustained period,” UKFI said.

The Treasury is hoping that the disposals of its stakes will eventually generate a profit for the taxpayer, after bailing out the banks when the system almost collapsed at the end of 2008 in the wake of the failure of Lehman Brothers.

Analysts at UBS have speculated that Lloyds could be forced to write off as much as £13bn on mortgage and commercial property lending, and lending to businesses, when it posts its results for the first half of the year on August 5.

You can forget about generating profits.  It’s not going to happen.  After all, we’re looking at another £13 billion in losses.  The UKFI should focus on mitigating losses.  That is a believable story.

Related posts:

• RBS reports a record loss of 24 billion pounds
• Lloyds gets HBOS for a song
• Lloyds has a decent first half
• British commercial property prices down 27% in 2008
• Deutsche Bank and HBOS hit by writedowns

This comes via the Nationwide website:

As a responsible lender which aims to support its borrowers Nationwide has responded to market conditions and made an option available which enables some existing customers in negative equity to move home. This is not available to new customers. The maximum LTV for existing customers taking a new deal at Nationwide remains at 95%.

Nationwide remains a very prudent and cautious lender with a track record of low arrears, low possessions and has a low LTV (loan-to-value) mortgage book. As the borrower is required to put down a deposit of at least 5%, under this scheme, the LTV and the risk to Nationwide will reduce as a result of the transaction.

Nationwide introduced this option on 10 June 2009 for existing customers only in the following particular circumstances:

• they are in negative equity
• they need to move home
• they meet our strict lending criteria and
• they have a good credit record.

The Society does not anticipate, and has not seen, a great demand for this service.

Borrowers in these unique circumstances are simply able to transfer part of their existing negative equity with them when they need to move home – as illustrated below the actual value of the negative equity and the LTV will reduce in all circumstances.

The maximum LTV available is 95% on the new property plus the remaining negative equity amount carried forward from the current property. The customer will need to pay a 5% deposit on the new property from their own funds, for example:

Current property value	£200,000	New property value	£250,000
Current mortgage	-£220,000	5% deposit required	-£12,500
Negative equity amount	=£20,000	Negative equity carried forward	+£20,000
Current LTV	110%	New mortgage	=£257,500
		New LTV	103%
		New negative equity amount	£7,500

Both the main loan and the associated negative equity top-up are restricted to three and five year fixed rate products to protect the customer from potential payment shock over the short term and are only available on a repayment basis.

Rates available on the main loan match those available to existing customers not in a negative equity situation who are moving home with a 95% LTV and are currently:

• main loan up to 95% LTV: 6.73% (3 year fixed) and 7.48% (5 year fixed)
• top-up loan covering 100-125% LTV: 7.23% (3 year fixed) and 7.98% (5 year fixed).

Andy McQueen, director of mortgages at Nationwide said: “Nationwide is a responsible lender and our negative equity policy is an appropriate and prudent response to market conditions and demonstrates our continued commitment to supporting our customers.”

Related posts:

• Nationwide brings back 125% LTV mortgages
• Home Equity Lines Pulled
• Nationwide looking to buy targets in UK mortgage market
• Nationwide: British home prices now higher than a year ago
• Nationwide: U.K. house prices down 16.6%

The Nationwide, the world’s largest building society, is now bringing back the dreaded 125% mortgage.  While the lender claims these mortgages are a “niche product” designed for customers of Nationwide in negative equity, the Financial Services Authority (FSA) is looking to ban this type of lending.

From the BBC:

It will only be available to existing customers in negative equity who want to move house.

Negative equity means that the value of someone’s home is less than the amount they owe on their mortgage.

Nationwide said the deal was a very "niche offer" and that not everyone in negative equity would qualify.

The Financial Services Authority is considering limiting mortgage loans to 100% of a property’s value.

‘No more risk’

The Nationwide only offers new customers mortgages worth 85% of the value of the home they want to buy.

Under its new arrangement, borrowers would take out a loan for 95% of the value of their new house at a fixed rate of 6.73% for three years or 7.48% for five years.

They would then be able to add on the negative equity from their old home, up to another 30% of the value of the new property, at a higher fixed rate of 7.23% for three years or 7.98% for five years.

Now, this is a different product than the one being sponsored by the U.S. government ( see posts on that here and here). In the U.S., the 125% mortgage only applies to the refinancing of mortgages of existing properties.  Here, the Nationwide is offering to fund 95% of the new house purchase, plus up to 30% negative equity from a previous residence.

While I am sceptical about the rationale for this product, it is quite innovative. First, the negative equity portion carries a higher rate than the 95% mortgage.  Moreover, loan exposure for Nationwide probably won’t increase because these deals are for existing customers.  And, Nationwide seems to have found a way to get more house transactions in a climate where prices have been declining.

To my mind, the 125% product offered by this building society shows how innovative the financial services industry can be in any investing or economic climate.  However, products like these operate on the fringe of what should be considered prudent. I see it as further evidence that the financial services industry needs strong oversight to prevent lenders from taking on too much risk and creating the kind of financial crises we have experienced.

Related articles
Nationwide offers 125pc mortgage to home owners trapped in negative equity – The Telegraph
Nationwide brings back 125% mortgage – The Guardian

Related posts:

• Nationwide: guidance on its 125% LTV product
• Home Equity Lines Pulled
• Nationwide: U.K. house prices down 17.6% in year to Februay
• Nationwide: UK house prices rise for fourth month
• Nationwide: U.K. house prices resume their descent

On the same day that the worst economic growth numbers in the U.K. in 51 years, we also get some news that the British economy may be stabilising. Well, at least house prices seem to be stabilising as Nationwide reported a 0.9% increase in house prices in UK June.  That is the third rise in four months and takes the annual decline to only 9.3% over June of 2008.

Nationwide Chief Economist Martin Gahbauer notes that the 3-month average house price change is up for the first time in eighteen months.

The three month on three month rate of change – a smoother indicator of the short-term price trend – turned positive for the first time since December 2007 to stand at 0.9%, up from -0.4% in May. If the pattern of price movements seen in the first half of the year is repeated over the second half, then prices could show only a small single digit fall for 2009 as a whole. This would represent a stark shift from trends seen at the turn of the year, when most indicators were pointing to a repeat of the large declines seen in 2008.

Part of the reason prices have stabilised is the huge shadow inventory that has been taken off the market as prices declined, reducing residential property inventory.  How long this lasts is anyone’s guess.  But Gahbauer is cautious.

While it is encouraging to see that prices are no longer seeing steep falls, there are still many obstacles in the way of a genuine and sustainable price recovery. To begin with, abnormally low supply levels are unlikely to last forever, as the recent price increases should make previously hesitant sellers feel more confident about marketing their properties. Additional supply is also likely to come from homeowners who see their financial position impacted by higher unemployment and lower incomes. With the stock of property available for sale likely to eventually increase, house purchase demand will need to rise more convincingly from current levels to prevent a possible relapse in price levels.

Part of the reason that Gahbauer is awaiting further evidence has to do with the high cost of housing relative to income in the UK.  We are still at levels unseen in the last 25 years, suggesting that house prices are still too high.

Nevertheless, three months in four is a good counter-trend to be taken seriously. To the degree this data is confirmed by the Halifax when it reports, we should start to consider that the U.K. is the first of the large housing bubble markets (Spain, the U.S., Ireland and the U.K.) to stabilise.

Source
House Price Rise Continued in June – Nationwide

Related posts:

• Nationwide: UK house prices rise for fourth month
• Nationwide: UK house prices up strongly for third month
• Nationwide: U.K. house prices rise for second time in three months
• Nationwide: U.K. house prices resume their descent
• UK house prices up again in September

You probably saw in my links that Fiat had bowed out because of German government demands. The Magna story also comes via the BBC:

Canadian car parts maker Magna International is the preferred bidder for GM Europe, owner of Opel and Vauxhall, Lord Mandelson has said.

The UK business secretary said a deal between Magna and GM was very near.

He was speaking after reports that Magna had reached an agreement in principle to rescue GM Europe.

The other potential bidder, Fiat, did not attend Friday’s talks with the German government, saying Berlin’s position was "unreasonable".

GM in the US is expected to declare Chapter 11 bankruptcy on Monday.

Here is the associated video of Lord Mandelson spinning the details about how government in the UK sees things.

Related posts:

• GM considers keeping Opel, raising capital
• German Press: Fiat to sign a deal with Opel, not Chrysler
• Opel and Fiat spells bankruptcy for Chrysler and GM
• Fiat as the engine for change in the auto industry
• Germans reject Chinese offer for Opel

Marshall Auerback here with some thoughts on the UK given the recent stellar performance of Sterling.

“The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years. The objections which are raised are mostly not the objections of experience or of practical men. They are based on highly abstract theories – venerable, academic inventions, half misunderstood by those who are applying them today, and based on assumptions which are contrary to the facts…Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense.” – J.M. Keynes in a pamphlet to support Lloyd George in the 1929 election.

Is the UK once again the economic sick man of Europe? Or is it, as Alistair Darling, chancellor of the exchequer, argued in his Budget speech on Wednesday, just one of a number of hard-hit high-income countries, which can recover if given the right dose of fiscal medicine? We suspect the latter, assuming that the government avoids listening to the siren songs about “national insolvency” and continues to be “profligate” from a public sector perspective as Lord Keynes urged as early as the 1920s. There is ample historic precedence for this: During WWII, a radically different approach was initiated in the United States. Government spending exceeded tax collections in 1942, 1943, 1944, and 1945 by 14.5%, 31.1%, 23.6%, and 22.4% of GNP respectively. Unemployment was under 2% by 1943, and output increased from $209.4 (billions of 1958 dollars) to $337.1 by 1943. By comparison, what the UK is borrowing today is modest.

No question, the numbers announced in last month’s budget certainly look grim: the IMF is now forecasting a UK general government deficit at 9.8 per cent of GDP in 2009 and 10.9 per cent next year. In the UK Budget, the Treasury forecasts the general government deficit at 12 per cent of GDP, or over, in 2009-10 and 2010-11.

To hear the pundits, this level of borrowing leaves the UK on the threshold of another 1970s-style currency crisis of the kind that could mean the UK would have to go cap in hand to the International Monetary Fund. The fear is that the explosion of public debt and gilt issuance, exacerbated by the UK government’s increasing financial exposure to the banking system, will lead to a sovereign default crisis in which sterling would collapse. It is a good scare story, and it is also a hysterically inaccurate one. In a fiat currency world, a sovereign government that issues its own floating rate currency can never become insolvent in its own currency. This is not Iceland writ large. In fact, we would argue that the UK’ s high level of government borrowing is a necessary precondition to economic recovery, as it offsets private sector deleveraging and prevents the onset of Fisherian style debt deflation dynamics. If anything, the only flaw we saw in this budget was the decision to implement any tax increases of any kind, no matter how great the political appeal. Instead of piling on new taxes that threaten recovery, the Budget should merely have conceded, as President Obama’s did, that tough decisions on taxes and spending may be needed in the future. But the unpredictability of the economic outlook and the danger of prolonging the recession make it foolish to decide right now on the fiscal adjustments required.

There is no question that the UK has some unique features which make it more than just another casualty of the global credit crunch. Weekly wages fell at the fastest rate in 60 years in February as City bonuses were slashed and workers agreed to reduced hours in the wake of recession, the latest official figures show. Of the 219,390 “announced job losses” recorded across the EU in the first quarter of 2009, the highest number (63,314) was in the UK, followed by Poland (38,975), Germany (17,461) and France (11,779). There is a good reason for this: a large number of these losses are concentrated in finance. For many years, policy makers placed a big bet leveraging London up as the centre of finance, thereby rendering the country uniquely vulnerable to the current contraction of finance as a percentage of GDP. Furthermore, the sectors of the UK economy that have collapsed – housing and finance – are particularly revenue-intensive. As a result, notes Martin Wolf of the Financial Times:

The ratio of current receipts to GDP is expected to shrink from 38.6 per cent in 2007-08 to 35.1 per cent in 2009-10 – a fall of 3.5 percentage points. Moreover, as a general rule, the debt-fuelled spending of the private sector was highest that have seen the largest swings in the balance between private income and spending. The shift in this balance in the UK’s private sector between 2007 and 2010 is forecast (implicitly) by the IMF at 9.6 per cent of GDP (from minus 0.2 per cent to plus 9.4 per cent). The swing in Germany, in contrast, is just 0.6 percentage points.

That said, the overall consensus for the UK is that it will be amongst the worst performing economies in the world, worse than the euro zone, and we think the level of fiscal expenditures being planned by the government might make its performance one of the best IN A RELATIVE SENSE.  In these times of economic stress, it is worth remembering the old expression:  In the land of the blind, the one-eyed man is king, particularly in a country which can do fiscal policy, a state of affairs uniquely not present in the European Union. As strange as it sounds, public sector profligacy is preferable to prudence, because as the private sector’s spending and borrowing go into hibernation, government borrowing must expand significantly to compensate.

Some paint a morbid picture of the UK government having to absorb $4,500bn (€3,400bn, £3,100bn) of UK bank foreign currency liabilities – three times GDP – and ending up in a debt default and a situation akin to Iceland or Ireland. No one should take this argument too seriously. If these liabilities, which include non-UK banks, were to become part of public debt, so too would a matched £4,600bn of foreign currency assets. The total balance sheet would rise sharply but, on a net basis, nothing much changes. In this vital respect, the UK is unlike Iceland, Russia and many other countries with foreign currency asset and liability mismatches. Moreover, the UK’s much feared current account deficit is now a benign 2 per cent of GDP and falling precisely because of sterling’s weakness, which has acted as a shock absorber for the British economy, not a harbinger of impending currency flight.

The solvency canard, which seems to underlie most of the phobia surrounding the UK’s finance, is based on flawed reasoning. Credit or fiat money systems cannot be analyzed as if they were commodity money systems, and conventional economics still does not get that. In fact, assumption of a gold standard lurks behind many parts of contemporary mainstream economics, including the view that governments are somehow budget constrained, as illustrated by the commentary underlying the recent UK budget. Problems would only arise if a large portion of the UK’s debt was foreign currency denominated, as was the case for the Asian NIEs in the 1997/98 financial crisis.

As soon as Darling mentioned the headline figure that public finances would be an additional 175 billion pounds in the red next year, the shock reverberated around City dealing rooms, pushing the pound and government bonds lower. The figure in question represents an eighth of Britain’s national income, that the government will be forced to borrow this year, more than four times what the chancellor expected a year ago.

For all of the bloviating from the press on this issue, sterling actually closed the week up against the dollar post the budget and is now some 10% above its crisis lows, when the fashionable talk was all about “Reykjavik on the Thames”. In a country with a currency that is not convertible upon demand into anything other than itself (no gold “backing”, no fixed exchange rate), the government can never run out of money to spend, nor does it need to acquire money from the private sector in order to spend. This does not mean the government doesn’t face the risk of inflation, currency depreciation, or capital flight as a result of shifting private sector portfolio preferences, but the budget constraint on the government, the monopoly supplier of currency, may be different than we have been taught from classical economics, which is largely predicated on the notion of a now non-existent gold standard. The UK Treasury cuts you a benefits cheque, your cheque account gets credited, and then some reserves get moved around on the Bank of England’s balance sheet and on bank balance sheets to enable the central bank (in this case, the Bank of England) to hit its interest rate target. If anything, some inflation would probably be a good thing right now, given the prevailing high levels of private sector debt and the deflationary risk that PRIVATE debt represents because of the natural constraints against income and assets which operate in the absence of the ability to tax and create currency.

In addition to ideological opposition to high levels of government spending, many critics of the UK government’s approach display an ignorance of simple financial balances accounting. A high level of private sector debt delinquencies and defaults suggests private debt burdens got too high relative to private income flows. Liquidating or restructuring existing private debt then makes more sense than getting banks to loan more money to the private sector. Private debt liquidation, which is the Austrian solution, can take the whole system down if enough people try to do it at the same time, or if a large enough institution does it in a disorderly fashion. As Irving Fisher noted, attempts to pay down debt can lead to higher real debt burdens as forced asset and product sales drive prices into the ground. We had a taste of that with the Lehman bankruptcy. Debt liquidation might form some part of the solution when seeking to eliminate private sector indebtedness, but it cannot be the main course.

If not, then the private sector needs to be in a position to net save and pay down debt. That cannot happen unless some other sector is willing and able to deficit spend. Some of this can be achieved through increased exports, although if every country sought to depreciate their currency in the manner of sterling, the result would likely be a further collapse in trade, since “beggar thy neighbour” devaluations mark protectionism by another name: two potential candidates, the government sector or the foreign sector.

Given the contraction in foreign demand and rapidly diminishing trade flows, that leaves government to deficit spend if the private sector is going to net save. This is not high Keynesian theory – it is double entry book keeping, which we have been doing for 5 or 6 centuries now. Think T accounts, 2, sides to every transaction, rather than micro household behavior, and you will avoid the more obvious fallacies of composition. At the lowest level of manufacturing capacity utilization in post WWII history, and a rapidly rising employment rate of 7% in the UK (and rising), the crowding out perspective is not terribly relevant, is it?

There is therefore a built-in contradiction in a recent Financial Times editorial, (“Sudden debt?”, April 25, 2009), which readily distinguishes between the UK’s current economic plight and that of an emerging market:

There is, however, a vital difference with most emerging countries, which labour under what economists call “original sin”: they cannot issue debt in their own currency. That multiplies their vulnerability, since currency depreciations automatically add to their debt burden, reducing their ability to repay.

This, at least, is a problem the UK does not have – yet. The yield on 10-year gilts has spiked since the Budget speech but remains a moderate 31 basis points above the bund. The short and long ends of the yield curve have barely budged. And although the record deficits will cause the UK’s public debt to double – the government expects it to stabilise at 79 per cent of gross domestic product – that only brings it just above German levels. Japan, whose debt stands at about twice its GDP, shows that this is perfectly affordable so long as the bond markets are happy to refinance it.

And yet the editorial still goes on implicitly to raise the issue of solvency by noting that “if gilt investors began to doubt its commitment or ability to close the deficit, the market’s willingness to refinance UK sovereign debt could come to a sudden halt. The government must pre-empt perilously self-fulfilling doubts before it is too late.” A commitment to close the deficit is precisely what doomed Japan throughout most of the 1990s, when premature attempts at “fiscal consolidation” actually increased budget deficits by foolishly deflating incipient economic activity. It is the reversal of trade deficits and the increase in fiscal deficits, which gets a country to an increase in net private saving. That in turn will stabilise growth and improve the deficit picture. Once this is achieved, any notions of national solvency should go out the window.

So who will buy the massive new quantities of gilts? Phrased in this manner, the question still reflects a lack of understanding of a monetary system in a fiat currency world. The real question, posed by Professor Charles Goodhart (a former member of the Bank England’s Monetary Policy Committee), is: why issue so many gilts? Like all other governments, Her Majesty’s Government in the United Kingdom spends by crediting bank accounts (bank deposits go up and bank reserves are credited by the Bank of England). All else being equal, this generates excess reserves that are offered in the overnight interbank lending market, putting downward pressure on overnight rates. The purpose of gilt sales, then, is to substitute interest bearing gilts for undesired reserves, which would suggest that government deficits per se do not exert upward pressure on interest rates. Quite the contrary: they put downward pressure that is relieved through gilt or bond sales. But if the objective is to keep long rates down, why issue so many long dated instruments? There is no reason that the central banks could not simply offer a whole spectrum of maturities with spectrum of rates and let markets choose what they want to hold.

Yes, there may well be practical political constraints. The problem of course is that if enough investors read significant government spending as an inflationary expansion of the monetary supply (even if deflation is getting printed in the monthly CPIs as is the case today in the UK), then a shift to inflation hedges, which can include equities since they are after all claims on real productive assets, can occur.

In addition, if the Bank of England continues to pursue a quantitative easing program designed to trash yields on cash and near cash instruments, and if it is successful, fewer private investors by definition will be interested in owning gilts (especially if they realize at some point the BOE will be abandoning quantitative easing, as would be expected once a recovery is underway).

Plugging existing holes in the balance sheets of financial institutions does not really accomplish anything that improving private sector money income flows through fiscal deficit spending does not accomplish better. Loans that are getting serviced do not go into default. Some of these loans were Ponzi loans from the get go, and would only fly if home price appreciation continued forever. Those loans need to be liquidated, and while there may be a place for the central bank to lower mortgage rates to try to stabilize home prices, the Bank of England has no business trying to set off another housing bubble. Better to bolster private income growth so existing loans can be serviced rather than have the public sector taking positions in banks.

Which again brings us back to the government’s fiscal spending: The more fiscal deficit spending is trained on building out infrastructure or encouraging new investment growth in leading industries (say by procuring solar panels for federal buildings to help that industry reach economies of scale and lower unit costs to be more competitive with oil based technologies, or say by getting government out of the way on stem cell research), the less we have to worry about a) a new growth model that replaces the UK/US consumer debt driven model, and b) nominal income or wealth being created with no real output or productive capital stock being created. In this way, government as employer of last resort programs is preferable to more transfer programs to keep households limping along. In fact, an employed labor buffer stock is a more effective price anchor than today’s unemployed buffer stock, because all studies show business prefer to hire people already working rather than the unemployed.

The notion of government as employer of last resort is a very interesting fiscal policy option that has been hinted at tentatively by the Labour government, but generally with great reluctance, because of the fear that it may result in a larger budget deficit. But the real key toward a substantial UK recovery (as is the case in the US) is not restrained fiscal activism, but substantially more government spending to offset the implosion of private sector demand. Once the government honestly addresses the solvency issue of a government spending and borrowing in its own currency, there is nothing that could in theory prevent the UK Government from offering a job to anyone who applies, at a fixed rate of pay, and let the deficit float. This would result in full employment, by definition. It would also eliminate the need for such legislation as unemployment compensation and a minimum wage.

Of course, this is a fairly revolutionary notion, albeit an accurate picture of what can be achieved in a fiat currency environment with gold standard constraint. Gordon Brown’s government has a credibility problem and a problem of political fatigue. They need to figure out how their emperor with no clothes story can be best revealed to the general public. If budget deficits do not require Treasury financing, then this needs to be made plain and palatable for the citizenry to embrace, painted as an opportunity rather than a risk. This new class of government employees, which could be called supplementary, would function as an automatic stabilizer, the way unemployment currently does. A strong economy with rising labor costs would result in supplementary employees leaving their government jobs, as the private sector lures them with higher wages. (The government must allow this to happen, and not increases wages to compete.) This reduction of government expenditures is a contractionary fiscal bias. If the economy slows, and workers are laid off from the private sector, they will immediately assume supplementary government employment. The resulting increase in government expenditures is an expansionary bias. As long as the government does not change the supplementary wage, it becomes the defining factor for the currency- the price around which free market prices in the private sector evolve.

So where do we go from here? In many respects, the UK is an interesting test case for the global economy and the success or failure of its future fiscal policies have huge implications, given that the country stands at the crossroads between the two competing approaches embodied by the US and European Union respectively. One thing we can say with some degree of certitude is that the UK should not fear a public sector led expansion, given that private sector-led expansions are almost always inherently unsustainable because (as the past 20 years has demonstrated), they generate growing debt burdens that must eventually be reversed. That reversal can be cushioned and, indeed, largely offset by public sector debt expansion (assuming that the debt is denominated in the “home” currency), which does not suffer from the same need to be reversed, given the government’s monopoly role as the creator of currency and ability to tax.

It is important to get rid of the fallacious reasoning that government expenditures are in any way comparable to typical household expenditures. The government is sovereign. This fact gives to government authority that households and firms do not have. In particular, government has the power to tax and to issue money. The power to tax means that government does not need to sell products, and the power to issue currency means that it can make purchases by emitting IOUs. In the words of James Galbraith:

No private firm can require that markets buy its products or its debt. Indeed taxation creates a demand for public spending, in order to make available the currency required to pay the taxes. No private firm can generate demand for its output in this way. Neither of these statements is controversial; both are matters of fact. Nor should they be construed to imply that government should raise taxes or spend without limit. However, they do imply that federal budgeting is different from private budgeting, and should be considered in its proper, public context.

While it is common to regard government tax revenue as income, this income is not comparable to that of firms or households. Government can choose to exact greater tax revenues by imposing new taxes or raising tax rates. No firm can do this; even firms with market power know that consumers will find substitutes if prices are raised too much. Moreover firms, households, and even state and local governments require income or borrowings in order to spend. The federal government’s spending is not constrained by revenues or borrowing. This is, again, a fact, completely non-controversial, but very poorly understood, as evidenced by the persistent cries of UK profligacy in the context of its recent budget. We need to proceed boldly, but can only do so by disposing of a number of traditional bogeymen that no longer apply in a post-gold standard world: public debt burdens, national solvency, and “crowding out”. Above all, it is crucial to understand that the global desire for private sector deleveraging depends on another sector to do the opposite if it is not to become economically disruptive. For one sector to run a surplus, another must run a deficit. This is a basic accounting identity that seems to have been lost by the vast majority of economists and pundits. In principle, there is no reason why one sector cannot run perpetual deficits, so long as at least one other sector wants to run surpluses. But certainly for the current environment there is nothing, nor should there be anything, which should stop the UK government from running large deficits so that the private sector can happily build up its savings again, as was the case in the US in the aftermath of World War II.

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Is the housing market in the U.K. bottoming?  Many pundits are talking as if it is and now we get the Nationwide data for May 2009 which shows a second rise in three months.  I am sceptical that we are at a bottom, so let’s see what the Halifax data say.

Fionnuala Earley has moved on.  So Martin Gahbauer, the new Chief Economist at Nationwide, has comments:

“The price of a typical house rose by 1.2% in May, providing further evidence of some improvement in housing market conditions over the last few months. At £154,016, the average house price is still 11.3% lower than a year ago, although this marks a significant improvement from the annual decline of 15.0% recorded in April. The 3 month on 3 month rate of change – a smoother indicator of short-term price trends – rose from -3.0% in April to -0.5% in May and now stands at its highest level since January 2008.

“Although the short-term trend in house prices has clearly improved from where it was at the beginning of the year, it is still too early to say that the market is turning definitively. During the downturn of the early 1990s, there were many months during which prices rose, only to fall back down again in subsequent periods. In the current downturn, the combination of rapidly rising unemployment and tight access to credit implies that the last of the price declines has probably not been seen yet. Nonetheless, the improvement in house price trends is consistent with signs of stabilisation in several other economic indicators and suggests that any further price declines may occur at a less rapid pace than in 2008.”

Gahbauer’s comments are more sceptical than Earley’s had been and rightly reflect the distinct possibility that price declines will continue, although potentially at a less rapid rate.  He goes on to opine that supply dynamics may be driving the recent price action.

Supply dynamics may explain some of the recent improvement in house price trends

“The movement of house prices ultimately depends on the balance of demand and supply of houses on the market. One timely indicator of the supply-demand balance is the ratio of sales to unsold stock, published monthly by the Royal Institution of Chartered Surveyors. For most of 2008, this measure was on a steady declining trend, consistent with the acceleration of house price falls as the year progressed. Although it remains at a very low level by historical standards and continues to point to further house price declines, the ratio has recently stabilised somewhat and this probably explains some of the improvement in price trends over the last few months.

Below are some charts published by Nationwide in conjunction with their data release.

Source
House Prices Rise for Second Time in Three Months – Nationwide

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• Nationwide: UK house prices rise for fourth month
• UK house prices up for third time in fourth month

On the face of it, Nationwide’s earnings report looks extremely good: 15% Tier 1 Capital, Pre-tax profit of nearly £400 million.  Given this financial institution’s leverage to the residential housing market, their results stand in stark contrast to the likes of Chelsea, which was downgraded by Fitch last week with four other U.K. building societies.  The Nationwide shows performance that also stands in stark contrast to HBOS, the erstwhile king of residential property in U.K. bank lending.  Clearly, one must understand the stark contrast demonstrates that reckless risk-taking has been a major factor in the downfall of both HBOS and RBS.  I should also note that Nationwide is not a public company.  It never demutualised as did the Halifax, a prime reason for the dichotomy in risk profiles.

Here is the press release below. Take the self-congratulatory statements (“Nationwide is the largest UK banking institution not to have raised capital during the year”) with a pinch of salt:

Nationwide Building Society today announced its results for the year ended 4 April 2009. This set of results demonstrates a resilient performance in an exceptionally difficult market place. During the period, the Society has remained free from government support, has not needed to raise additional capital and its assets have increased organically in addition to the integration of three regional brands. Nationwide continues to hold high levels of liquidity and remains well capitalised with a Tier 1 ratio of 15.1% and a high quality balance sheet. Whilst the levies payable under the Financial Services Compensation Scheme (FSCS) have had a significant impact on statutory profit, the Society remains profitable and is here for the long-term providing consumers with a real and attractive alternative to the banks.

Nationwide has performed well in unprecedented and challenging market conditions:

• Underlying profit before tax of £393 million (2008: £781 million). The reduction of 50% reflects the cost of carrying additional liquidity and margin compression in a low interest rate environment, together with an increase in impairment provisions in the current recessionary conditions.
• Reported profit before tax for the year of £212 million (2008: £686 million).
• Reported profit is after an exceptional charge of £241 million in respect of FSCS levies covering the Group’s share of interest for the full three year period of the HM Treasury loan to FSCS. These levies account for more than half of the fall in reported profit.
• Despite the challenging environment, an estimated £680 million benefit has been provided to members in the year through competitive interest rates and lower fees and charges.
• Total assets, including the impact of the mergers with The Derbyshire and The Cheshire Building Societies and acquisition of certain assets and liabilities of Dunfermline Building Society, increased by 13% to £202.4 billion (2008: £179.0 billion).

Prudent and robust balance sheet:

• Strong capital ratios with a Tier 1 ratio of 15.1% and Core Tier 1 ratio of 12.1% (Basel II, IRB basis). Nationwide is the largest UK banking institution not to have raised capital during the year.
• Balance sheet funded predominantly by retail savings, with our wholesale funding ratio of 28.6% (4 April 2008: 31.0%) being one of the lowest levels within UK banking institutions.
• Loans originated by Nationwide continue to perform strongly, with the proportion of residential mortgage accounts more than 3 months in arrears of 0.60%, compared with the CML industry average of 2.39% as at 31 March 2009. The CML industry average has deteriorated at twice the rate of Nationwide’s arrears on originated loans in the year to 31 March 2009.
• Mortgage assets acquired through mergers with Derbyshire and Cheshire and the purchase of Dunfermline’s prime residential assets have been fair valued on a basis which makes allowance for anticipated losses over the remaining life of the loans. As a result of this fair valuation exercise, Group profits should be protected from future losses.
• The recession has impacted the commercial property market particularly in the second half of the year and has resulted in a significant increase in the number and value of commercial arrears cases, albeit from a very low base. The number of Nationwide originated commercial cases 3 or more months in arrears is 179 (4 April 2008: 66).
• The proportion of unsecured personal loan balances over 30 days in arrears increased to 7.15% (2008: 5.88%), but remains significantly less than the industry average of 17.0%.
• The Society’s core liquidity ratio at 4 April 2009 was 12.8% (4 April 2008: 8.9%).
• The AFS reserve has increased to £2.0 billion negative, net of tax (4 April 2008: £0.4 billion negative). The Available for Sale (AFS) assets have been carefully reviewed based upon latest performance data and no significant additional impairment has been booked in the second half of the year. The majority of these assets were purchased with the intention of holding them to maturity and we continue to expect to recover full value for substantially all of them over their residual life.

Proactive response to market conditions:

• Merger transactions with The Derbyshire and The Cheshire Building Societies were successfully completed in December 2008, three months after announcement.
• Acquisition of prime residential loans, retail liabilities and other selected assets and liabilities of Dunfermline Building Society completed in March 2009.
• Portman integration was completed ahead of schedule, with total merger synergies of £90 million to be delivered by the end of 2009/10.
• Retail savings franchise expanded into the Republic of Ireland with the opening of a branch in Dublin.

Nationwide’s chief executive, Graham Beale, said,
“History will record 2008 as a year of fundamental change to banks and financial institutions across the world. Nationwide has remained strong in the midst of all this turbulence and has been the only major UK banking institution not to raise capital or seek access to Government sponsored capital enhancing schemes. This reflects a combination of our naturally high capital and prudent lending practices which are the hallmark features of a strong building society.

“Profitability has been adversely affected by the low interest rate environment and increased provisions as a result of the current recession. Our reported profit is 53% lower than it would otherwise have been because there is an exceptional charge of £241 million relating to the levies payable to the FSCS.

“We regard the fact that the FSCS charge is not linked to the level of risk posed to the financial system by individual institutions, but instead is allocated by share of the retail savings market, as illogical and unfair, producing a disproportionate outcome for the low risk retail funded institutions, particularly building societies. This view is shared by 173 cross party MPs. We have also lobbied for an increase in the FSCS limit from £50,000 to at least £100,000 which would reassure savers with independent institutions that they have similar protection as those with Government owned, nationalised and part-nationalised banks.

“During the year we played our part in promoting financial stability by merging with the Derbyshire and Cheshire building societies in December 2008 and by acquiring selected assets and liabilities of Dunfermline Building Society in March 2009. In addition, the Group also expanded its retail savings franchise by opening a branch in Ireland in March 2009.

“The size of the mortgage and savings market has contracted significantly in the year as a result of the extreme economic conditions. In addition, aggressive deposit taking by state owned institutions such as NS&I and Northern Rock effectively took in excess of 70% of the savings market in the second half of 2008. Against this background we maintained our competitive position with healthy market shares of over 8% for mortgages and 10% for savings deposit growth.

“Market conditions will remain challenging throughout 2009 and beyond. In particular, the low interest rate environment will continue to depress margin and higher levels of unemployment and business failures will inevitably lead to increased loan loss provisions. However, we remain confident that Nationwide’s high quality balance sheet and robust capital ratios will continue to underpin our financial strength and place us in a strong position to trade through these conditions and remain a real and attractive alternative to the banks.”

Source

Nationwide Building Society Results Press Release – Nationwide site

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• Nationwide: U.K. house prices resume their descent

After a blip in the data last month, Nationwide is reporting that U.K. house prices have resumed their fall.  However, for the second month in a row, the annual price fall has slowed.  In March, the fall was 15.7%. This month we see only 15.0% compared to prices in April 2008.

Fionnuala Earley, the Nationwide’s Chief Economist had this to say about the data:

“The price of a typical house fell by 0.4% in April. This reverses some of the rise seen in March, but is in line with our expectations, given the current economic conditions. April’s decline leaves the average price of a typical house at £151,861, down 15% from 12 months ago. The 3-month on 3-month rate of change, generally a smoother indicator of the short-term trend in prices, improved to -3.1% in April from -4.1% in March”

For the U.K., we have seen a reversion to the mean. House prices in the U.K. have now fallen to their longer-term trend. But, prices, especially in cities like London and in the southeast more generally remain out of reach for many first-time buyers. As a result, there is still more downside to come.

Source
House prices fall slightly in April – Nationwide

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