Britain ranks below Peru in new ‘sovereign risk’ world order

Peru: not as risky as Britain

Britain ranks below Peru in a new analysis by one of the world’s biggest fund managers of the risk to investors who buy government bonds. Norway, Sweden and Switzerland are the least risky bond issuers among 44 countries analysed in the BlackRock Sovereign Risk Index. At the other end of the scale, also in descending order, Egypt, Portugal and Greece are reckoned to be the most risky.

Britain falls near the middle of this new world order, ranking directly below Russia, China, Czech Republic, Israel and Peru. Some small comfort may be taken from the fact that gilts issued by the British Government are reckoned to be a better bet than bonds issued by France, the Philipines and Poland; which rank directly below Britain.

Dissatisfaction with credit rating agencies such as Standard & Poor’s, Fitch and Moody’s – which have issued nearly 100 sovereign risk downgrades since the global credit crisis began – prompted BlackRock to begin collating its own analysts’ views earlier this year. It claims back-testing of this analysis suggests it is more accurate than the credit rating agencies’ and that the current crisis will continue with more government’s getting into trouble with excess debt.

Benjamin Brodsky, managing director of fixed interest at BlackRock said: “Our initial analysis was judgmentally based, and contemporaneously validated by a high correlation with sovereign credit default swap (CDS) market spreads. Over recent months we have constructed the back history of this approach running from, taking care to use ‘real-time’ data.

“In this quarterly update for the index, we complement our earlier analysis, showing how the BlackRock Sovereign Risk Index (BSRI) has outperformed both ratings agencies and sovereign credit default swap spreads in highlighting downgrade risks.

“Considering heightened activity within the Eurozone periphery in recent years, we present a case study that focuses on Greece, Ireland, Italy, Spain, and Portugal. We show how the BSRI would have led agency activity over the span of these countries, while leading markets in their shift from complacency.”

As independent analysis from the Centre for Economics and Business Research suggests Britain might be better off if the eurozone breaks up, Ewen Cameron Watt, managing director of investment strategy at BlackRock, said: “Driven by multiple fundamental insights to the nature of sovereign credit risk, the BSRI presents a useful tool for profiling the strengths and weaknesses of countries against one another.

“Our research suggests these insights can lead rating agency activity, with an excellent track record at preceding downgrades, and historically would have highlighted areas of market complacency.

“As a backdrop for the future, we believe the multi-decade compilation of sovereign and banking crises by Reinhart and Rogoff presents a compelling case that in recent years financial markets have been complacent about risks that have always been present and, as more countries approach their upper limits of sustainable leverage, a return to a higher incidence of crises seems likely.”

A fundamental shift of economic wealth from West to East is underway and relative valuations of international bonds reflect that transition. Mark Dampier of wealth managers Hargreaves Lansdown put it most succinctly: “The emerging markets have the savings; the developed world has the debt. Sooner or later, prices will reflect those facts.”

Fast cars and loose fiscal morals: there are more Porsches in Greece than taxpayers declaring 50,000 euro incomes

The Porsche Cayenne: more common in Greece than people who admit earning €50,000

Jubilation about the German deal to save the euro could prove short-lived if fresh news of Greek tax evasion gains wider currency. There are more Porsche Cayennes registered in Greece than taxpayers declaring an income of 50,000 euros (£43,800) or more, according to research by Professor Herakles Polemarchakis, former head of the Greek prime minister’s economic department.

While German car workers may take pride in this evidence of their export success, German taxpayers may be less keen to bail out a nation whose population appears to take such a cavalier approach to paying its fiscal dues. Never mind all that macroeconomic talk about deficit distress, many Greeks are still plainly riding high on the hog.

Something can’t be right when the modest city of Larisa, capital of the agricultural region of Thessaly with 250,000 inhabitants, has more Porsches per head of the population than New York or London.

Perhaps the penny – or the euro – is already dropping, because Professor Polemarchakis writes that Larissa “is the talk of the town in Stuttgart, the cradle of the German automobile industry, and, particularly, in the Porsche headquarters there”, since it “tops the list, world-wide, for the per-capita ownership of Porsche Cayennes”.

“The proliferation of Cayennes is a curiosity, given that farming is not a flourishing sector in Greece, where agricultural output generates a mere 3.2pc of Gross National Product (GNP) in 2009 – down from 6.65pc in 2000 – and transfers and subsidies from the European Commission provide roughly half of the nation’s agricultural income.

“A couple of years ago, there were more Cayennes circulating in Greece than individuals who declared and paid taxes on an annual income of more than 50,000 euros.”

Hard to believe? Don’t take my word for it. The report in Athens News will add to fears, expressed by leading economist George Soros and others, that last week’s deal to save the euro can only buy a little time – not a permanent solution. China may also question why it should support economies that pay their unemployed more than most of its workers earn.

Binding such widely differing cultures as Greece and Germany together was always going to be a problem; not least because of diverging attitudes to such financial fundamentals as work and tax. Now, ahead of this week’s G20 Summit in Cannes, some euro-enthusiast must be sent to the cradle of culture to explain that deficits will balloon unless all taxpayers pay their fiscal dues. I nominate Vince Cable.

Europe kowtows to the Chinese dragon

Come to this. Few things could be more bizarre, or humiliating, than the sight of eurozone political leaders kowtowing to the Chinese in the hope that a few crumbs might fall from the dragon's table to help prop up the newly enhanced European Financial Stability Facility.

The Chinese threaten to extract a high price; security for their money, open access to European markets and freedom to buy advanced technologies (and there I was thinking they'd already stolen it all). They might also demand, though I have seen no evidence for this in published comments, that Europeans cease all open criticism of Chinese mercantalism, human rights abuse and anything else that tends to concern us over China's ever onwards and upwards rise to superpower status.

A few facts and figures. At $12.2 trillion in 2010, the eurozone's gross domestic product is more than twice as big as that of China and its income per capita is more than four times as high. And yet there's the eurozone's emissory, Klaus Regling, going cap in hand begging for handouts. How can a region be so rich and yet apparently so poor at the time?

It's a paradox which goes to the heart of the problem of global imbalances. What in effect is happening is that the Chinese earn far more than they spend. The consequent surplus in earnings and production is saved and exported. It's a funny old world that has some of the poorest people in the world lending to some of the richest to buy the goods they make but cannot themselves afford to buy, but that's the way it is.

Whatever concessions the Chinese manage to extract from the likes of Nicolas Sarkozy, who's been on the phone to President Hu Jintao, they would be well advised to leave well alone. As the investment guru Jim Rogers said on BBC radio's Today programme, the EFSF is essentially a scam. It might buy a little time, but it cannot solve the eurozone's underlying problems. The bit of it the Europeans want the Chinese to invest in is a "special purpose vehicle" – appropriately known as a SPIV – which is essentially a piece of financial engineering to make the fund bigger than it really is. It's a confidence trick.

It's also a surrogate for what the eurozone should really be doing to add liquidity to distressed peripheral nation bond markets – which is to give the European Central Bank the freedom to act as a central bank is meant to in its lender of last resort capacity and print money to ease the crisis (see this excellent piece by the economist Paul De Grauwe). Only the Germans won't allow it. They'd prefer to dance with the Chinese dragon than do the obvious. At best, they are going to end up badly singed.

Gaddafi and the markets: is it time to buy on the bullets?

How will the death of Col Gaddafi affect investment markets?

After the death of Colonel Gaddafi, investors seeking early exposure to emerging markets are asking whether it is time to buy on the bullets.

But, while the early bird is said to get the worm, it is equally true that the early worm just gets eaten. Risks are high in the Middle East and North Africa (MENA), a region avoided by most emerging markets funds, and the Arab spring might yet turn into an Arab winter.

Andrea Nannini, manager of HSBC Middle East and New Frontiers fund said: “Libya did not really have a proper stock market so it was always peripheral from an investment point of view. The economy has been closed for many decades, so a part from oil and gas investments from the international majors, there was relatively little investment from neighbouring countries.

“Despite the initial enthusiasm, the transition process will likely be long, complicated, and volatile, just as previous examples in Iraq and Egypt have shown. Medium to long-term, there will be be very interesting opportunities in Libya as the reconstruction process unfolds. This will present opportunities for companies investing there.

“Generally we think the Middle East should do relatively well in the current volatile global environment. These countries are benefitting from years of high oil prices which meant they have accumulated vast wealth and can stimulate economic growth without generating fiscal deficits, unlike in Europe and the US. In North Africa we see very strong long-term potential due to the strong demographics and consumer demand story, but see challenges in the short-term due to the political transformation in many of these countries.

“Valuations in the region are cheap and foreign investors are generally under-invested in the region, which partly explains why the region has performed so well in relative terms over the last few months during the volatility in global financial markets.”

But Dan Morris, market strategist at JPMorgan Asset Management said: "I believe the recent events in Libya will not have a major impact on oil prices. Gaddafi's capture always seemed inevitable, so markets had already factored in the return of the country's oil production. Events in Europe are going to be much more influential over the next few weeks."

David Coombs, head of multi-asset investments at Rathbone Unit Trust Management, started building exposure to emerging markets including MENA earlier this year but warned that investors should still treat the asset class with care. He said: “We started to sell down those markets around September 2010, when valuations were looking rich, on a relative basis.

“By December this view had become more or less consensus, and the subsequent uprisings in the MENA region only served to illustrate that a political premium is still required.”

Rising appetite for emerging markets is also reported by Rod Aldridge at Barings Asset Management who said: “We are seeing an increasing number of investors looking for exposure to emerging markets year-on-year and we anticipate this trend will continue given the enormous potential for growth compared to developed markets.

“Clearly investors are seeing the benefit of diversifying their investments as they opt to invest across a number of regions within emerging markets; which is important given each region varies hugely in terms of the risk/reward profile it offers. Investors should always remember that emerging markets can be very volatile and investing in them many not be suitable for everyone.”

That caution was emphasised by leading independent financial adviser Mark Dampier of Hargreaves Lansdown, a long-term emerging markets enthusiast who remains wary of short and medium term risks: “I don't at least yet buy MENA funds as I prefer global emerging markets funds. There will continue to be much social unrest in the MENA region and eventually the Saudis will be hit.

“It is probably still too early to buy most emerging markets. We really need to see interest rates falling but we are getting closer to that point which may occur, perhaps, at end of year.”

Some ethical investors may consider it in poor taste to even talk about profit opportunities that may arise from a bloody revolution, while others believe emerging economies need the developed world’s capital more than its sympathy. For now, though, most emerging markets experts argue it is too early to increase exposure to the MENA region.

House price cuts helped sales surge by nearly 10pc last month

The great house price stand-off, where vendors are reluctant to cut prices to levels at which buyers are willing and able to buy, may be about to end with a burst of activity. But will vendors or buyers blink first?

Property sales increased by 9.5pc last month as prices continued to drift 2.3pc lower over the last year, according to analysis of Land Registry figures by LSL Property Services, owners of estate agents Your Move and Reeds Rains.

David Newnes, a director of LSL, claimed: “It’s certainly not all doom and gloom for homeowners. Buyer activity is picking up as transactions have been much higher than we would normally expect at this time of the year.

“Increasing activity means buyers currently feel properties represent good value and that shows there is still plenty of confidence among both buyers and mortgage lenders that prices won’t plummet in the coming months. Add to that the fact that mortgage finance is currently cheaper than ever before, and there are plenty of positives to focus on when assessing the market.”

David Hollingworth of London & Country Mortgages was less bullish: “There are certainly two ways of looking at this from a homeowner’s perspective. On the negative side, prices appear to have fallen but on a positive note there is buyer demand with purchasers ready to go ahead when they feel they are getting the right price.

“We may now be seeing some vendors readjusting their expectations about what price they can realistically achieve. It appears that those vendors that are prepared to accept buyers’ offers are finding that the sale can go ahead.”

Bank of England base rate remaining frozen at 0.5pc for 31 months has helped support sales and prices, according to Stephen Smith, a director of Legal & General Mortgage Club: “Improved availability of higher loan to value deals is starting to help engender some movement in the housing market, and this may be making sellers feel that now is the time to strike a deal.

“Although the main high street lenders may still be restricting lending to those with larger deposits, a range of smaller building societies and specialist lenders have become active over the last few months.”

But housing turnover remains far below normal and Ray Boulger of John Charcol said it is too early to predict how the stand-off between buyers and vendors will end: “The market varies so much in different parts of England and Wales that there is no single pattern to the increased number of transactions.

“In some areas it is definitely a buyers’ market but elsewhere sellers have the upper hand. Furthermore, strong rental demand has pushed rents up to a level where rental yields are close to underpinning property values.”

Births, deaths and divorce – along with less dramatic factors such as moving to find work – prompt hundreds of thousands of property sales in a typical year. But many of these transactions have been put on hold since the credit crisis began. September's figures suggest that dam may be about to break but it is not yet clear whether this will be the start of a decisive downward movement in house prices.

Steve Jobs and the best investment I ever made

Steve Jobs, 1955-2011

Steve Jobs, the co-founder of Apple who has died at the age of 56, was a genius who changed millions of people’s lives and – funnily enough – one of the first to recognise that fact was Microsoft billionaire Bill Gates.

When Mr Jobs literally unveiled the first Apple Macintosh computer in 1984, with showmanship that was in stark contrast to the techie norm, then as now, Mr Gates said: "To create a new standard, it takes something that's not just a little bit different: it takes something that's really new, and really captures people's imagination. And the Macintosh – of all the machines I've seen – is the only one that meets that standard."

The two titans of new technology were less kind toward each other later. Mr Jobs accused Microsoft of copying Apple and said they “just make really third-rate products” but then softened that with the characteristically quirky statement: "I wish [Bill Gates] the best, I really do. I just think he and Microsoft are a bit narrow. He'd be a broader guy if he had dropped acid once or gone off to an ashram when he was younger."

Coming down from the clouds, when the first Apple Macs went on sale in London, I was a cub reporter. When I joined The Daily Telegraph in 1986, we were still making the paper with much the same technology the Victorians used; hot metal presses at the back of our inky offices on Fleet Street.

Journalism is not a well-paid racket and I freelanced to make ends meet. In those days, that meant getting up early in the morning to deliver bits of paper – called ‘folios’ at a time when cutting and pasting meant just that – to magazine publishers before going on to do the day job.

Then a friend explained that computers would change all that forever; making it easier and quicker to produce, store and transmit copy. It all sounded rather technical to a Luddite like me. But I was impressed with the Apple Macintosh Classic. It was easy to use, with little or no need for technical training or back-up because the answer to every problem was always somewhere on the screen, and so I bought one in 1990.

It is an interesting perspective on the massive deflation in the price of technology during the last couple of decades that the Mac Classic then cost pretty much the same as the Mac laptop I am writing on now; about £1,000. Needless to say, that was a lot more money then than now – and you got a lot less for it. The Mac Classic had a small black and white screen and no internet access.

Despite those facts, I wrote more than 500,000 commercial words on that little box of tricks before trading up to an iMac about 10 years later. Without wishing to brag, the Nineties were a happy hunting time for freelance journalism when – for example – ‘a sentence like this might cost you £10 plus VAT’.

What a long time ago that seems now. But it meant that – unlike colleagues whose best investment might be their home or buying shares in emerging markets 20 years ago – mine was definitely the Apple Mac Classic. House prices and share prices can fall – and you haven’t made a penny profit until you sell – but all that freelance was invoiced, paid and taxed long ago.

So, while millions of consumers around the world will remember the Apple co-founder for their enhanced enjoyment of sound and vision on everything from iPods to iPhones and iPads, many of us also have good reason to be grateful to Mr Jobs for making it easier and more efficient to do what we do to make a living.

 

Why 50pc tax row misses the point: what about the squeezed middle?

New analysis which shows that the United Kingdom has the fourth highest top rate of income tax in the European Union will add to calls for the 50pc band to be scrapped – but I beg to disagree.

Global analysis by accountants KPMG found that out of 96 countries surveyed, only five had tax rates equal to or above the UK’s top rate, which takes effect when annual income exceeds £150,000.

Within the EU, we share our fourth highest tax rate with Belgium and Austria. Only Sweden, Denmark and the Netherlands impose higher rates. Our top rate compares with the EU average of 37 pc and the Western European average of 45 pc.

Marc Burrows of KPMG, commented: “With doubts around what the 50pc top rate of tax is actually yielding, is the highest top rate of personal tax really a table that we want the UK to top?”

No, of course not, but while public finances are desperately stretched, even enthusiasts for less government and lower taxes – such as your humble correspondent – may feel there are more pressing candidates for fiscal reform.

Relatively few people are paid more than £150,000 a year but hundreds of thousands of the poorest people in Britain suffer marginal rates of tax higher than 50pc because of unintentional poverty traps. A toxic combination of income tax, National Insurance Contributions (NICs) and means-tested tax credit withdrawals hits hard-working members of the squeezed middle and means other people living on less than national average earnings have a top marginal tax rate of 73pc.

Hard to believe? Here’s how it works. People earning just over £6,420 – or less than a quarter of national average earnings, according to the Office for National Statistics – pay income tax at 20pc, plus NICs at 12pc and suffer tax credit clawbacks at 41pc; a total marginal tax rate of 73pc. That means they will be allowed to keep just 27p in every extra £1 they earn.

Mike Warburton of accountants Grant Thornton pointed out: “This means that someone earning as little as £144 a week keeps only 27 pence from every £1 that they earn above minimal limits. I am not sure how this reconciles with politicians’ promises to make work pay. It is hardly an incentive to get up early and make an  extra effort.”

Nor are unexpected and unwelcome tax spikes confined to people on very low earnings; marginal rates higher than 50pc also hit families earning just over £40,000.

Richard Mannion a director of accountants Smith & Williamson, said: “Under the tax credit system, families are entitled to a family entitlement of £545, but that is taken away at the rate of 41p for every £1 of income over £40,000. So that means that the entitlement is reduced to nil once income exceeds £41,330 and creates a 73pc tax spike between £40,000 and £41,330.

“The interplay between personal tax, NICs and means-tested benefits is horrendously complicated, but what is clear is that low earning families face the highest marginal rate of tax. This doesn’t sound fair to me; it certainly doesn’t sound like a system to encourage independence and make work pay.

“It is wholly unjust that families struggling to live on low incomes pay higher rates of marginal tax than those earning more. Charging less well off taxpayers at rates of 73pc just brings the system into disrepute.”

So, while I am all in favour of less tax, the Chancellor should set to work much lower down the income scale than £150,000 a year. That will win him far more friends – and votes – than worrying about the 50pc band, which can wait till later.

Buy to let Britain booms amid mortgage famine – but can it last?

Average rents in London now exceed £1,000 a month – or £1,025 to be precise – for the first time, according to a survey of 18,000 flats by LSL Property Services.

Rents in the capital increased by 6.6pc last year – and by 4pc across England and Wales to a national average of £713 a month – as rising numbers of people find it impossible to buy. The house price crash that many wish for  has yet to materialise and house prices continue to rise in London. Meanwhile, credit crunched banks and building societies remain reluctant to lend.

According to the Council for Mortgage Lenders, only about 189,000 first time buyers secured loans last year, compared to an average of nearer 390,000 a year before the credit crisis.

No wonder Scottish Widows predicts that by the time tuition fee increases have added to graduate debts, the average age of first time buyers in Britain will rise to 44. It was 27 just a few decades ago.

Meanwhile, everybody has to live somewhere and it all adds up to good business for buy to let landlords. David Newnes, managing director of LSL said: “In the last two years, average rents have risen by more than £50 a month.

“With significant improvement in the number of buyers able to secure a mortgage unlikely in the foreseeable future, competition for rental accommodation will not drop and further rent rises remain on the cards. Recent graduates moving for their first jobs have further exaggerated the long-term and growing demand from frustrated buyers. ”

Rising numbers cannot even afford to rent a flat of their own. Jonathan Moore, director of Easyroommate.co.uk, said: “Lenders’ unrealistic deposit requirements, combined with hefty house prices have left the private rented sector groaning under the strain of demand from frustrated first-time buyers.

“Such strong competition for limited accommodation is taking its toll on rents, and they will continue to climb for as long as the mortgage market remains at a standstill. As rents rise, driving down affordability in the private rented sector, many renters are cutting costs by turning to flatshares.”

Others are simply failing to pay their rent. According to LSL, 10.7pc of all the rent due last month went unpaid – an increase in arrears of nearly a fifth over the last year. Even when demand consistently runs ahead of supply, there is only so much the market can bear before signs of strain start to show.

Never mind the cost of living; have you seen what it costs to die around here?

"That'll be £1,270, please, sir. Coffins are extra."

Never mind today’s increase in the cost of living – have you seen what it costs to die around here? Inflation does not stop with the last breath, and basic burial costs vary more than house prices from one part of Britain to another.

The cheapest are as low as £50 but the most expensive hit an eye-watering £1,270. Nor is the division on a simple north/south basis, as is the trend with house prices.

Strangely, two of the 10 cheapest places to be buried are in the constituencies of former Chancellors of the Exchequer. Nigel Lawson’s former seat at Blaby, Leicestershire, came in with a rock bottom quote of £50 for a basic interment, while John Major’s former seat at Huntingdonshire, Cambridgeshire, was fourth cheapest of 255 local authorities surveyed with a charge of £115.

By contrast, the most expensive place for a basic burial was Lichfield, Staffordshire, which charged £1,270 – or more than 25 times as much as Blaby – while Elmbridge, Surrey, was not far behind with costs of £1,138 according to funeral plan provider Avalon.

Bear in mind these figures do not include additional costs such as having a vicar, priest or other religious representative in attendance and you can see why some chose to save up for the dread event. Recent research by Mintel suggests a basic funeral now costs more than £2,600 but a church service and flowers would push this above £3,000.

Before the Welfare State set out to care for people from cradle to grave, saving up for a decent send off was the basis of many life companies’ business. But soaring taxation and the death of the savings habit put an end to that.

Now former Norwich Union manager Mike Cooper, managing director of Avalon, reckons there may be a gap in the market. Fewer than three in 10 of the people who die in Britain are now buried – and rising costs are a major factor in families choosing cremation.

He said: “As space dwindles and fees grow, the number of burials is expected to decrease rapidly. It seems that dying has become a very expensive business.

“While the traditional funeral is still part of our cultural fabric, burials are now out of reach for many of the population. It’s no surprise that cremation is by far the most popular choice for funerals.”

No wonder more people have started saving again toward paying for one of life’s few certainties. As rising inflation and taxation, coupled with frozen or falling earnings continue to squeeze living standards, relying on the children to do you proud could prove a mistake.

Reasons to be cheerful about pensions panic

Contributions to the pension fund have collapsed, according to the ONS. (Photo: PA)

Stock market cynics who claim that the herd always buys at the top and sells at the bottom will take comfort from the latest pension sales figures from the Office for National Statistics.

They show that contributions to retirement funds – most people’s biggest exposure to the stock market – collapsed by nearly a tenth or £2bn last year, as the credit crisis pushed down share prices. The statistics in the ONS Pension Trends survey are based on HM Revenue & Customs tax receipts and reliefs, so give a better picture of what is really happening in the market than any fund managers’ gloss on events.

While it might bring cheer to cynics – and contrarians who will see mass pessimism as a sign that the bottom of this market cycle cannot be far away – the ONS report makes dismal reading. Any fool can opt out of saving but it is more difficult to opt out of growing old.

Of course, share prices may fall next week, next month or next year. But for most people – who are not retiring next week, next month or next year – depressed global stock markets may present a buying opportunity. It is a paradox of stock markets that, unlike most other markets, falling prices make most people less willing to buy.

By contrast, rising share prices make most people more eager to invest. Buying high and selling low is the opposite of the way to make a profit. While nobody has a crystal ball to tell which way share prices will go next, many studies have shown that time invested in the stock market is more likely to produce results than trying to time the market.

For example, HSBC's decade-long study shows that time invested in emerging markets – rather than attempting to time when to buy or sell – is the strategy most likely to produce results. Over the last 10 years or so, investors who bought and held funds which matched the Morgan Stanley Countries Index (MSCI) global emerging markets index enjoyed average annual returns of just over 15pc.

By contrast, if they missed just the best 10 days in the last decade then their annual return fell by more than a third to 8.5pc. If they were out of the market on the 20 days when share prices rose most – equivalent to just two days per year – then their annual return over the decade plunged by two thirds to less than 5pc.

More people are living longer and so it makes sense to save more in tax shelters, such as pensions; not less. Humans are herd creatures and it takes determination to buy when others sell but those tempted to follow the anonymous doom-mongers of cyberspace might do better to consider the words and actions of one of the world’s most successful investors. Warren Buffett of Berkshire Hathaway is buying with both hands at present because, as he famously advised: “Be fearful when others are greedy and be greedy when others are fearful.”

Debt crisis: Is the Great Reckoning upon us?

Gordon Brown: one of the chief architects (Photo: AFP/Getty)

In response to the crisis of 2008, UK policy-makers did five key things:

1. They bailed out a number of banks that had inadequate capital.

2. They insisted that banks that were not bailed out had to raise additional capital privately.

3. They raised spending, by around £110 billion (mainly by continuing with previously-scheduled large. spending rises even though the situation had changed).

4. They enacted a temporary tax cut (around £12.5 billion).

5. They printed money (around £200 billion).

Of these policies, the first three were serious errors. The last (money-printing) was done well, and was the key reason for the growth from mid-2009 to mid-2010. The temporary tax cut was in principle a good idea, though it would have been better to have cut income tax than VAT. And if we had not done the ill-conceived spending rises, we could have made the temporary tax cut at least three times (perhaps six times) as big. Extensive academic studies have demonstrated that temporary tax cuts provide much more effective stimulus than spending rises (indeed, since spending rises may be believed to be permanent – as they often are – they can make households and businesses believe that the medium-term growth outlook is worse (as it would be if the public spending stayed up) and thus actually damage growth even in the short term.

However, although raising spending was an error, much the worst error was bailing out the banks. As of 2008, the situations in the UK, Spain and Ireland were all fairly similar: each had had a serious housing bubble; each had banking sectors of above 400 per cent of GDP; none of them had particular high government debt; all had government deficits headed towards 10 per cent of GDP. There was no intrinsic way for us to know that Ireland would be very rapidly ruined by its decision to bail out the banks, whilst in Britain it would be more drawn out, and in Spain matters would be somewhere in between. Irish nominal GDP shrank by around 20 per cent in 2008/9. (The worst recession of the past century in Britain was that of the early 1920s, when nominal GDP shrank by around 28 per cent.)

Bailing out the banks meant that the governments of Britain, Ireland, Spain and elsewhere took onto the public balance sheet the liabilities of the banking sector. (I occasionally read articles suggesting that this is true in a metaphorical sense, because of the large deficits run. No. It is true in a literal sense. According to National Statistics, the liabilities of RBS and Lloyds are UK government liabilities.) This overstretch in the government balance sheet is a key reason the government needs to cut the deficit as quickly as it does – without the commitments to the banks, we would have been able to run larger deficits for longer (especially if those deficits were the result of temporary tax cuts).

I would have opposed bailing out the banks even if I had been certain it would “work” in its own terms. It is immoral to tax poor people to keep rich people rich, despite their bad investment choices, and it destroys the functioning of capitalism. But there was always the danger that – as in Ireland – they wouldn’t work in any sense, but would simply bankrupt the governments involved. The crisis of 2008/9 was not simply a liquidity crisis. It was not the result of market irrationality. It was not even simply a matter of insolvency arising from past losses. In a number of cases the business models of financial institutions were no longer going concerns – they were value-destroying enterprises, not value-creating ones. This was not simply a matter of gambles with fancy financial derivatives. Even before the bonds market madness of 2005-7, around 30 per cent of the gross income of European retail banking came from mortgages. But mortgage volumes remain way down on their mid-2000s levels, and even when they come back the value of transactions will be much lower. The only way a number of these business could continue without significant restructuring of the sort that would occur under administration is for governments to provide an ongoing stream of subsidies.

Recent developments in financial markets suggest that we may soon face a Great Reckoning for the policy errors of 2008/9. Some bank shares are now worth less than before nationalisation; the cost of insuring the debts of some banks has recently been higher than the 2008 peaks. Governments have been arrogant in assuming themselves capable of bailing out some of these monster banks, when they had made such bad losses. They have been deluded in assuming that significant structural change was not required in the banking sector. There is now a significant risk that, around Europe in particular, many state-owned banks will go bust, despite government backing. If it happens, this is likely to bring down governments – indeed, may even lead to constitutional overthrows in two or three countries. The consequence could be another recession as bad to twice as bad as that of 2008/9.

In countries such as Britain and Ireland and Spain, that ought to have been OK. Public debt – setting aside banking sector liabilities – is not at critical levels even now. We ought to be able to cut taxes temporarily, increase deficits, and see ourselves through in the normal way. Unfortunately, because of government over-commitments in the banking sector, we will struggle to maintain solvency even by cutting spending as aggressively as is politically deliverable.

A further phase of recession (indeed, even simply tepid growth) will necessitate further spending cuts. The UK political debate is still stuck in an absurd situation in which a supposedly-serious political party, egged on by quite a section of the press, still wants to pretend that the alternative to the Coalition’s programme would be to cut spending less and cut slower. The truth is that we are likely to have to cut spending more and faster. Indeed, there is a chance that we shall yet be forced to cut spending much faster – including on sacred cows like health – because a further phase of recession could well lead financial markets to lose confidence in our government’s bonds, as they have lost confidence in the bonds of other governments.

Much of this was avoidable. We did not need to bail out the banks, bankrupting multiple governments in the process. There were alternatives, such as imposing debt-equity swaps. We did not need to whack up spending, undermining long-term growth rates. We could have kept spending under control and instead cut taxes.

Four years after the financial crisis began, in the summer of 2007, we still send tens of billions more, every few months, to bail out the banks – though these days we have rebranded our banking sector bailouts “sovereign debt bailouts”. The patience of taxpayers with such nonsense is an affront to democracy – No. More than that: democracy has failed, and in a number of European states political upheaval may (justly) be part of a Great Reckoning.

Perhaps we shall muddle through, for a little while yet, with policy errors simply leading to hidden damage and injustice – as usual. But if, despite the trillions poured into them, large government-backed banks now go bust, dragging down their states’ solvency in the process, the bailouts of 2008/9 will go down as the greatest economic folly in history. And I shall be bitter and ungracious enough to say: I told you so.

Expat pensioner exodus: would the last person to leave Britain please switch off the lights?

Falling standards of living in Britain are encouraging rising numbers of pensioners to retire overseas – but experts warn expats to beware the dangers of disappointment.

Hopes of warmer weather and lower costs are two obvious motivations for leaving Britain when you no longer need to go to work every day – and recent legal changes have made it easier for expats to take their pensions with them.

More than 1m British passport holders are believed to have retired overseas and Standard Life reports that Spain remains the most popular destination – despite Foreign & Commonwealth Office (FCO) statistics which show it is also the country where Britons abroad are most likely to get into trouble.

For example, according to the FCO, while there are slightly fewer British residents in Spain than America, 50pc more Britons were arrested in Spain than America last year. More than five times as many Britons were hospitalised in Spain and a total of 1,786 died there, compared to 148 in America.

One explanation is that 13.3m Britons visited Spain on holiday, compared to 5.25m British holidaymakers in America. Elsewhere, Australia was the second most popular retirement destination, while France was pushed into fourth place by America, with Ireland coming fifth.

John Lawson, Head of Pensions Policy, Standard Life commented: “Retiring abroad is a dream for many people, but does require careful planning and advice. Many people think living abroad is cheaper than living in the UK, but this isn’t always the case.

“Doing your homework in advance of moving, matching your retirement income and expenditure, and making the appropriate decisions around purchasing an annuity or using income drawdown are key considerations. Your retirement income could also be subject to exchange rates and currency fluctuations, as well as local tax laws.

“You also need to think about your state pension and what, if any, reciprocal agreement is in place. A reciprocal agreement entitles you to any increases in the UK state pension, paid for by the country you retire to. However, if there isn’t a reciprocal agreement in place, then you need to be very careful your retirement income is sufficient to cover your living costs over a long period of time. Over a 20 year retirement, your basic state UK pension could halve in real terms if a reciprocal arrangement is not in place.”

Recent legal changes have made it easier to take your private sector pension overseas – and return to Britain later if you wish. However, David Franks of specialist wealth managers Blevins Franks said: “The expatriate needs to carefully consider whether they should move their UK regulated pension fund  into a Qualifying Recognised Overseas Pension Scheme (QROPS), which is an approved overseas pension fund.

“The benefits include being able to invest in your new country’s currency to remove exchange rate risks and costs, removing your fund from UK regulations, and you may even be moving into an improved tax regime.  You need to evaluate what UK guarantees you might be giving up, and the costs of any new structure.

“An interesting new development is proposed new UK tax residence rules. These give far greater certainty over exactly how many days you can spend in the Britain without becoming a tax resident.”

More pensioners look set to become expats in future. A survey of 7,500 people by benefits consultants Aon found that nearly six in 10 Britons wanted to retire overseas last year.

Less than half or 43 per cent of Britons said the United Kingdom was their preferred retirement location, making us the most unhappy Europeans about the quality of life in our home country. Among other Europeans questioned, only the Germans (46 per cent) and the Irish voiced nearly as low levels of satisfaction with their home countries at 46 per cent and 49 per cent respectively.

By contrast, Spain (87 per cent) and France (81 per cent) topped the popularity tables when it came to workers intending to retire in their home country, followed by the Danes (74 per cent).

Oliver Rowlands, head of retirement at Aon Consulting said: “Cheap air travel and the communication tools available over the internet means that retiring overseas doesn’t necessarily mean being completely absent from your family’s life, making the prospect of emigration to other countries on an previously unseen scale a real possibility.

“There are financial implications that people thinking about retiring overseas need to consider. Cost of living may be higher in the country of choice. There can also be tax implications and healthcare benefits can vary widely for expatriates and this will be a major concern for retirees as they grow older.”

Few expat pensioners can do much to increase their income if local taxes rise or sterling continues to fall against the currency of the country of their choice. So it is important to beware exchange risks and other potential setbacks before leaving Britain – and resist the temptation to hope financial worries end at Dover.

Sustained above-target inflation reduces the value of your money

In 2008/9, CPI inflation was more than one per cent above the government’s 2 per cent target between May 2008 and February 2009.  During that period, inflation in the actual cost of living (i.e. the RPI index, rather than the target variable, CPI, which is not a measure of the cost of living – contrary to much confused commentary – but a policy index (like the old RPIX)) peaked at 5 percent in September 2008.  But the episode was short-lived and followed immediately by deflation.  So in fact the cost of living in October 2009 was less than that in June 2008.

The policy index CPI measure of inflation went more than one per cent above target again in January 2010, and has stayed there ever since.  During this 2010/11 period of elevated inflation, by contrast to the brief 2008/9 episode, the cost of living (RPI) has risen by 7.7 per cent.  If RPI has risen at the old RPIX target of 2.5 per cent per annum, then over the period the cost of living would have risen by 4 per cent.  (If RPI had been 2.8 per cent, roughly equivalent to the CPI target of 2 per cent, then the cost of living would have risen by about 4.5 per cent.)

So that means that the period of sustained well-above-target inflation has meant a rise in the cost of living some 3.1-3.5 per cent more than if inflation had been kept to target.  Sustained above-target inflation is a sustained eroder of wealth.

That does not, of course, mean that temporary spikes are irrelevant, either.  In May 1978 annual RPI inflation was 7.7 per cent – not really so terribly far above the 5 per cent of the past twelve months.  In May 1980, less than two years later, it was 21.9 per cent.  In May 1983 it was down to 3.7 per cent.  Yet no-one (outside the outer fringes of Thatcher-hating-dom) thinks we should ”look through” the “temporary” spike in inflation of 1979/80.

But it does mean that the inflation of 2010/11 has already been a lot worse than that of 2008/9.  And that is before we find out whether it will really magically vanish when the economy recovers, as the Bank of England and others hope-against-hope.

Inflation: pensioners are biggest victims of RPI/CPI double-dealing

Millions of rail commuters – not to mention their student offspring – are entitled to feel the Government is not playing fair with its double-dealing measurements of inflation. But pensioners are the biggest losers from the way the real value of money is falling.

Rail fares and student loans are uprated in line with the Retail Prices Index (RPI) which is consistently higher than the Consumer Prices Index (CPI), which is applied to things that cost the Government money – such as pensions.

If that sounds like a dry technicality, then beware that new calculations from Saga show that inflation has robbed many older people of nearly a fifth of the purchasing power of their pension since the credit crisis began.

How you measure the rate of inflation depends on what you put in your sample or shopping basket. Excluding mortgage costs and council tax helps keep CPI more than 10pc lower than RPI. The respective  annual rates of increase were announced by the Office for National Statistics today as 4.4pc and 5pc respectively.

But even the RPI does not adequately reflect the way pensioners’ cost of living is rising because they tend to spend more of their money on food and fuel – where commodity inflation makes double digit increases common – and less of their money on electronic goods where prices are falling.

Ros Altmann, director general of Saga said: “Since the credit crisis began four years ago, the effect of RPI has been to reduce the purchasing power of money by 13.9pc – which may surprise some people, as they tend not to notice the cumulative effect of inflation.

“But we calculate the cumulative effect of inflation over the same period on those aged between 65 and 74 has been 18.8pc. If you are living on a fixed annuity, that’s money you will never recover. They have lost nearly a fifth of their purchasing power in four years.”

The Bank of England’s policy of keeping base rates much lower than any measure of inflation has transferred wealth from savers to borrowers by eroding the value of savings and debts. The idea is to prevent higher insolvencies, unemployment and repossessions; all of vital importance to people of working age.

Taking these factors into account, while commuters and students may feel it is unfair that their rail fares and loans are linked to RPI, their standard of living is unlikely to have fallen as much as pensioners’.

Everybody is going to suffer in this financial crisis, according to no less an authority than the Governor of the Bank of England, but older people who must live off their savings and can do little to protect themselves are being hit hardest.