Another credit crunch looms

The threads holding up the balance sheets of the banks are growing perilously thin.

The finance sector is signalling alarm, and our politicians are once again asleep at the wheel. Another "credit crunch" may be looming. The most significant evidence emerged from the ECB's second Long Term Refinancing Operation (LTRO) on Thursday last week.

The LTRO is simply language intended to disguise the "printing of money" by the ECB for lending to private European banks at a very low rate of interest - 1 per cent. (In fact, the money is not even printed: it is created by entering digits into an ECB computer, and then transferring hundreds of billions of euros as 'bank money' to private banks.)

The fact that British banks rushed to drink from this punch bowl, tells you something about the state of their balance sheets.

For reasons that I suspect are largely ideological, the British government and HM Opposition refuse to face the reality that our private banking system and large parts of the corporate and household sectors are effectively bankrupt. Given this context - and the grave threat posed by an insolvent private finance sector - the joint and somewhat myopic focus by all political parties on the public debt is surely irrational.

Many households, firms and banks in the private sector are only kept from liquidation by a) "forbearance" - bankers hanging on in the hope that e.g. defaulting mortgage debtors will eventually repay; and b) injections of 'liquidity' by publicly-backed central banks.

But the threads of forbearance and liquidity holding up the balance sheets of the private banking system are growing perilously thin.

The ECB is by law (the Lisbon Treaty) prevented from making low-cost finance directly available to sovereign governments of the Eurozone. Whereas the Bank of England has effectively financed the government's deficit by buying government bonds at very low rates of interest from private banks, Greece and Portugal cannot rely on the ECB to purchase their bonds at low rates. Instead they have to turn to private bankers/financiers - who charge much higher rates of interest. (Readers are free to speculate as to who may have had a hand in drafting the Lisbon Treaty and the ECB's mandate.)

To avert Armageddon in the global financial system last December, the ECB turned the cheap money spigot on - in the vain hope that private banks would lend on low-cost ECB loans to governments. And that they would do so at a rate of interest a little nearer to the 1 per cent the ECB had charged them.

So much for wishful thinking.

This onlending - borrowing cheap and lending dear - is called 'the carry trade', and extremely profitable it is too. Take Portuguese 10-year bonds: private banks are using their 1 per cenr ECB loans to buy these at 14 per cent - a nice, effortless little earner. The case of Greece is of course, worse: the rate of interest the 'carry trade' extracts from Greece for short-term loans is frankly, criminal. Indeed the ECB's easy, cheap money can be said to be helping bankrupt the very governments it purports to help in its roundabout way.

But I digress. Last week big banks as well as many small banks, rushed to suck on the teat of cheap central bank funding. Our very own Lloyds Bank, already largely government-owned, borrowed €13.6bn from the ECB while Barclays, which claims it never relied on public funds, borrowed €8.2bn; RBS borrowed €18bn. In total 800 European banks rushed for help from the ECB.

This is a worrying development.

But even more disturbing are signs that banks no longer lend to each other. Just as the credit crunch of August, 2007 was heralded by a freezing up of inter-bank-lending, so history appears to be repeating itself. According to the FT, banks deposited a record €777bn overnight with the ECB last week, up nearly two thirds from the previous day.

In other words, banks were borrowing from the ECB at 1 per cent and then re-depositing funds with the ECB for less - 25 per cent.

Banks could earn a great deal more in the inter-bank market - but that market scares the hell out of them. They know a lot more about their fellow bankers' solvency than our politicians do. Which is why they are parking their (our) money with a bank that cannot go bust: the taxpayer-backed ECB.

Given that our politicians are looking the other way, this should scare us too.

Ann Pettifor is director of PRIME - Policy Research in Macroeconomics.

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The tale of Battersea power station shows how affordable housing is lost

Initially, the developers promised 636 affordable homes. Now, they have reduced the number to 386. 

It’s the most predictable trick in the big book of property development. A developer signs an agreement with a local council promising to provide a barely acceptable level of barely affordable housing, then slashes these commitments at the first, second and third signs of trouble. It’s happened all over the country, from Hastings to Cumbria. But it happens most often in London, and most recently of all at Battersea power station, the Thames landmark and long-time London ruin which I wrote about in my 2016 book, Up In Smoke: The Failed Dreams of Battersea Power Station. For decades, the power station was one of London’s most popular buildings but now it represents some of the most depressing aspects of the capital’s attempts at regeneration. Almost in shame, the building itself has started to disappear from view behind a curtain of ugly gold-and-glass apartments aimed squarely at the international rich. The Battersea power station development is costing around £9bn. There will be around 4,200 flats, an office for Apple and a new Tube station. But only 386 of the new flats will be considered affordable

What makes the Battersea power station development worse is the developer’s argument for why there are so few affordable homes, which runs something like this. The bottom is falling out of the luxury homes market because too many are being built, which means developers can no longer afford to build the sort of homes that people actually want. It’s yet another sign of the failure of the housing market to provide what is most needed. But it also highlights the delusion of politicians who still seem to believe that property developers are going to provide the answers to one of the most pressing problems in politics.

A Malaysian consortium acquired the power station in 2012 and initially promised to build 517 affordable units, which then rose to 636. This was pretty meagre, but with four developers having already failed to develop the site, it was enough to satisfy Wandsworth council. By the time I wrote Up In Smoke, this had been reduced back to 565 units – around 15 per cent of the total number of new flats. Now the developers want to build only 386 affordable homes – around 9 per cent of the final residential offering, which includes expensive flats bought by the likes of Sting and Bear Grylls. 

The developers say this is because of escalating costs and the technical challenges of restoring the power station – but it’s also the case that the entire Nine Elms area between Battersea and Vauxhall is experiencing a glut of similar property, which is driving down prices. They want to focus instead on paying for the new Northern Line extension that joins the power station to Kennington. The slashing of affordable housing can be done without need for a new planning application or public consultation by using a “deed of variation”. It also means Mayor Sadiq Khan can’t do much more than write to Wandsworth urging the council to reject the new scheme. There’s little chance of that. Conservative Wandsworth has been committed to a developer-led solution to the power station for three decades and in that time has perfected the art of rolling over, despite several excruciating, and occasionally hilarious, disappointments.

The Battersea power station situation also highlights the sophistry developers will use to excuse any decision. When I interviewed Rob Tincknell, the developer’s chief executive, in 2014, he boasted it was the developer’s commitment to paying for the Northern Line extension (NLE) that was allowing the already limited amount of affordable housing to be built in the first place. Without the NLE, he insisted, they would never be able to build this number of affordable units. “The important point to note is that the NLE project allows the development density in the district of Nine Elms to nearly double,” he said. “Therefore, without the NLE the density at Battersea would be about half and even if there was a higher level of affordable, say 30 per cent, it would be a percentage of a lower figure and therefore the city wouldn’t get any more affordable than they do now.”

Now the argument is reversed. Because the developer has to pay for the transport infrastructure, they can’t afford to build as much affordable housing. Smart hey?

It’s not entirely hopeless. Wandsworth may yet reject the plan, while the developers say they hope to restore the missing 250 units at the end of the build.

But I wouldn’t hold your breath.

This is a version of a blog post which originally appeared here.

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