News From the North East

March 22nd, 2008

News is emerging of exactly how Northern Rock will operate now that it is in Government hands. The ‘troubled lender’ has announced that it will cut a third of its staff and reduce mortgage assets by half, leaving current borrowers out in the cold when their deals expire.

The bank is expecting to cut just over 2,000 from its workforce by 2011, in an effort to help repay a £25 billion emergency loan Northern Rock was forced to borrow from the Bank of England last September to stop it going bust. The bank’s management hopes to pay back the loan in three or four years.

Northern Rock has said it is aiming to reduce its current loan book, which is worth £100 billion, to around £50 billion by selling off the mortgage assets to other lenders or by simply declining to offer new loans to existing customers.

The bank has said it will continue to offer prime mortgages to customers, but it will not give unsecured loans and those customers whose mortgages have come up for renewal are being encouraged to seek deals from alternative mortgage providers.

Ron Sandler, executive chairman at Northern Rock, denied that Government support gave the bank an unfair advantage over other rival mortgage providers. ‘We recognise that we’re supported by the Government and we don’t wish to abuse that support by competing unfairly. We’ll ensure we strike a sensible balance. Things that are being said aren’t always accurate. Our headline rates are between 6 per cent and 6.25 per cent and that’s well within the basic band’.

Northern Rock said today it will work ‘sensitively’ with its staff and Unite, the union, ‘to minimise the extent and impact of job losses‘.

However, Unite said it will oppose any compulsory redundancies and is seeking assurances that Northern Rock’s workforce will be reduced through voluntary means only. It would seem that controversy shows no signs of leaving Northern Rock any time soon.

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The Effects of the Credit Crunch

March 22nd, 2008

No matter how insulated you think you have made yourself from the effects of the Credit Crunch it will effect you. I have outlined below the various arms of the global financial markets and how the crunch will effect each of them.

Getting a mortgage is undoubtedly much harder than it was six months ago and even though the Bank of England has cut interest rates twice since December, the cost of borrowing is continuing to rise. A year ago, when interest rates were at exactly the same level they are today, 5.25 per cent, the cheapest two-year tracker mortgage was offered by Cumberland Building Society at 4.73 per cent, more than 0.5 percentage points below the base rate. Today, the cheapest is offered by HSBC, and comes in at 5.24 per cent. On a £250,000 mortgage, that works out at about £100 more each month.

The jobs market is the key to whether the UK economy can escape the worst effects of the credit crunch. Unemployment, and the fear of it, kills confidence. This is what went wrong in the economy during the last recession, in the early 1990s, when the property market and consumer spending collapsed, creating their own downward dynamic. Now it is pushing America into recession. The UK’s exceptionally flexible labour market and moderate wages growth should protect businesses, investment and employment from too much harm. But high inflation and a squeeze on living standards feeding through to higher pay demands could put that at risk.

Although stock markets have been falling, commodity prices have continued to soar in recent months. Anyone nearing retirement should already have transferred most of their pension money away from equities. For those who have 10 or more years to go, now is the time to sit tight and keep making your monthly contributions. Continuing to drip feed new money into a falling market ensures that you are buying stocks when they are at their cheapest

Credit card and personal loan providers are now cherry-picking their new customers, as well as cutting levels of risk within their client portfolio. As a result, millions of people have had the limits on their credit cards slashed, sometimes by as much as 90 per cent. Others, such as 161,000 customers of the internet bank Egg, have been told their accounts are being closed. But for those with a good credit score, it is still possible to get credit at cheap rates. Lenders such as Moneyback Bank and Barclaycard are offering personal loans for as little as 6.7 and 6.8 per cent APR respectively. Virgin Money, Abbey and even Egg are still offering 0 per cent balance transfer deals on credit cards, with no interest to pay for over a year.

As banks have struggled to raise the money they need in the capital markets, they have been forced to offer more attractive savings rates, to try to persuade more customers to put their money with them. As a result, it’s now possible to get rates as high as 6.5 per cent on instant access savings accounts, one and a quarter percentage point above the Bank of England base rate. Alliance & Leicester is even offering a rate of 10 per cent for cash ISA customers who also switch their current account. It’s important not to save more than £35,000 with one provider, however, unless it is the Government-backed National Savings & Investments or Northern Rock. Although the Government has strengthened the Financial Services Compensation Scheme, which protects consumers if banks goes bust, it only promises to guarantee the first £35,000 of any savings.

The effect of the credit squeeze on inflation is hard to gauge. The only direct effect will be to make credit more expensive, especially for less credit-worthy customers of the banks. So, for some, overdrafts, car loans and mortgage repayments will cost more to arrange than was the case in the past. More widely, the squeeze on investment and consumption that comes with a credit squeeze will tend to depress demand and dampen inflation. Business plans are cut back; consumer promotions postponed; holidays and meals out curtailed. However, there would have to be a truly catastrophic collapse in demand to push back the current round of increases in oil and other commodities such as food.

So it is a mixed bag. While it is true that everyone will be effected some will be more effected than others. What is clear is that by being prepared the more sensible will be able to mitigate those effects and thereby weather the storm.

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Bear Stearns and what it means for us

March 14th, 2008

Few people in this country outside of the City of London will have heard of Bear Stearns, the American investment bank, until today. It is now being called the ‘American Northern Rock,’ which tells you that the bank is more infamous than famous, except the ramifications of Bear Stearns are likely to be far more serious than those of Northern Rock.

Experts are warning that there is now an increased likelihood of recession and a painful housing slump, after Bear Stearns, which was America’s fifth biggest bank, was forced to turn for emergency cash to the US Federal Reserve.

The news sparked scenes of panic in Wall Street and the City of London, where bank shares tumbled and fears grew that other banks around the world will be hit by the crisis. Many of the problems at Bear Stearns, which employs 1,500 people at its London office, are isolated to the company. However, they underline the almost unprecedented scale of the financial crisis.

There will be potentially severe knock-on implications for the UK which is already struggling to cope with the credit crunch. British families have already seen their finances squeezed by higher utility bills, food prices and taxes. Now, banks in the US and the UK are nursing their losses are likely to raise the interest rates charged on mortgages and loans to try to recoup cash from their customers, analysts have predicted.

Since the credit crunch first hit last summer, the Bank of England has had to cut its interest rates twice in a bid to stimulate the flagging economy. However, lenders, who have found it increasingly hard to borrow money from each other, have failed to pass on the benefits to their customers.

Some 1.4 million householders are due to agree new mortgages when their fixed rate deals run out over the next 18 months, while around six million have home loans with variable rates.

The growing crisis also places pressure on Alistair Darling, the Chancellor, who is facing questions after he suggested in this week’s budget that Britain is well placed to weather the current economic turbulence. Senior economists have said the growing financial crisis has increased the chances of recession in the UK as families struggle with their finances.

The Bear Stearns crisis severely undermines the optimistic economic forecasts delivered by Mr Darling. The Chancellor may be forced to slash spending, raise taxes and borrow even more in the coming months as the economic slowdown takes hold.

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