A sense of impending doom may dominate this week as the latest attempt to stave off a financial meltdown of Europe’s banking system unfolds.
Should it prove a watershed, it is likely to be for the wrong reason – that no agreement results and a major bank goes belly up. More likely, the latest attempts at a deal will stall and attention shift to a further round of talks.
It is possible details of a bank bail-out may be agreed. However, in that event it is likely the funding would almost immediately prove inadequate.
Indeed, at the weekend it emerged that Greece could need considerably more than double the bail-out amount previously agreed, while the ‘haircuts’ – massive losses – promised holders of Greek government bonds threaten to make addressing the next debt crisis even more tricky.
What is least likely is a deal capable of drawing a line under the crisis. Martin Wolf of the Financial Times put it this way: “It is unlikely the euro zone will find ways to manage its emergency. It is inconceivable that it will cure the illness . . . partly because it is a chronic condition.”
Of the latest assessment of the needs of the banks, he concluded: “This is an exercise in market psychology, not science.” All the while the markets will oscillate like a barometer during the Caribbean’s hurricane season.
In the words of an unnamed senior EU official: “We have lost the main parachute, we are on the reserve chute and we’re not sure that will work.” You can see why the markets might by jumpy.
The UK is not directly involved, but will be directly affected. The UK’s economic position is deteriorating as it is. The Bank of England has cut its forecast for GDP growth in the last quarter of this year to “near zero”.
That would mean 15 months of stagnation after the sharpest recession since the 1930s – and we know now the recession of 2008-09 was comparable in scale to that of the early thirties. The UK economy shrank by 7.1% in 2008-09 compared with 7.6% in 1929-32, though in the latter case the economy recovered more quickly – which is a bit of a worry.
In the circumstances it seems extraordinary that the official inflation rate (the Consumer Prices Index) is now at a 20-year high of 5.2%, even as unemployment at 8.1% has reached its highest since 1994.
The latest minutes of the Bank of England’s monetary policy committee issued last week reveal there was unanimous agreement on the need for a £75 billion injection of cash into the UK economy – the only disagreement being on whether more was required.
Leave aside the contradiction in approach between the UK central bank pumping money into the economy and the UK government removing it through cuts in public spending – will it work?
Quantitative easing (QE) is supposed to stimulate lending, borrowing, spending and investing. But the banks remain loaded down with debt – a fact Bank of England governor Mervyn King acknowledged last week, telling the Institute of Directors: “Four years into the crisis . . . the underlying problem is one of solvency – solvency of banks and of countries. The underlying problems of excessive debt have not gone away.” So the likelihood is the banks will hang on to the cash injection.
What does it mean for travel? Not much light or evidence of the tunnel end.
UK consumer spending is now 6.4% below its pre-recession peak. The monetary policy committee minutes note “consumer spending in the second quarter of 2011 was only a little higher than at its trough two years earlier”. They go on: “The squeeze on households’ real income and fiscal consolidation are likely to continue to weigh on domestic spending.”
This will continue not just as a consequence of the crisis, but as a matter of policy. King was explicit about this. The “unsustainable build-up of debt” came from “unsustainably high levels of consumption in the UK and other advanced economies”, he said. “The burden of debt will go on rising in [this] group of countries until these spending patterns adjust.”
The squeeze on consumer spending that made this summer’s outbound market the most difficult in memory certainly served to adjust spending patterns. The problem is the crisis in Europe means the adjustment is not working. King warns: “We could be facing a recovery that is not merely reluctant but recalcitrant.”
This winter’s travel market will be tough. Next summer’s may be slow. The markets will punish any weakness among listed companies, and may prove punishing to all.
Thomas Cook had a decent day on Friday after announcing a renegotiation of its credit facilities and a capital boost. Yet a study of the FTSE performance of major retailers – of which Thomas Cook is now the biggest in travel – found the sector the most ‘bet-against’ on the London Stock Exchange.
The study, reported in the Sunday Times, identified Dixons, Argos parent Home Retail Group, Comet owner Kesa, Ocado, HMV, Mothercare as the subject of hedge-fund bets on their share prices crashing.
This phenomenon will not subside and Thomas Cook will remain vulnerable to it. QE may or may not make much difference to the wider economy, but comes at a price. King warned: “Easy monetary policy [QE] means the ultimate adjustment of borrowing and spending will be even greater.”
The squeeze is a long way from over – and we may not be through the worst.