16th November 2007

On Hold! Well……. maybe.

However, there is a more immediate issue about rates – they are in fact going up. This may seem at odds with my previous paragraph, but I am referring to the cost of money that borrowers will have to pay both right now and over the next few months. Certain credit cards have already been adjusted but it will be fascinating to watch if banks start curtailing certain personal and company lines of credit and whether their margins are quietly widened. The range of available mortgages has also been adjusted, with less choice and far fewer discounts. Money has just got rarer - and it just got more expensive. So if someone asks you the question – will the credit crunch really affect us in the broader economy? The answer is, it already has, and there is quite likely more to come.

The one thing you can be certain of is that the banks will be finding ingenious ways of earning back their losses.

What did come out last week were some of the rough estimates of the financial damage from the current credit crisis and figures of around $200 billion were mentioned. Whether this is true or not will only come out in time. However, just to put this into perspective, the FT noted the figure of US and EU Tier-1 capital being $2,000 billion – so the damage could be potentially over a 10% hit? And perhaps maybe more as the losses are crystallised by those further down the investment tree who were buying these toxic bonds.

I am all in favour of “giving back” to customers but the marketing habit of credit cards to offer cash back facilities can go too far. Offers like this are often just minor inducements to encourage usage and loyalty, but can go too far if they encourage excessive spending, especially at a time when we know many, too many, are living on extended debt. The launch therefore of an offer for a 4% cash back incentive by one credit card firm could be seen as going too far. For a mean Scot like myself this is something for nothing so long as you don’t run credit card debt, but for many it will be an attractive incentive to swap cards again and run up extra expenditure just before Christmas. Providing free drinks to alcoholics is irresponsible; providing debt incentives to the financially weak is outrageous. No wonder our industry has such a poor reputation.

We often hear the environmental “Jeremiahs” pointing to key events that in their view are likely to be the tipping points for the state of our global environment. From ice shelves breaking off, to the CO2 saturation in the forests, each are worrying events. Economically last week we may have heard the cracking of a disintegrating financial ice shelf with the comments from China about the weakness of the US$.

As you probably know China has built up huge reserves of US$, thought to be in the range of $1,400 billion and growing at some $60million every hour. It is not unreasonable therefore for the Chinese to consider spreading the risk of being in one currency by asset allocating around the globe into others such as the Euro. This trend has been going on for some time, but with the threat of further devaluation of their $ reserves it seems that they may wish to speed this process up. If true, it will serve only to accelerate the decline in that currency’s value. Good news probably for the US deficit but bad news for importing inflation into the US. As far as I can remember, a country never sustained its wealth by devaluing its currency. This is a trend to watch.

And finally……………… As the Winter storms hit it obviously becomes an increasingly difficult time for mariners. Thus there is always concern when a rescue mayday signal is received. Recently the Civil Aviation Authority receivers on the Isle of Man picked up a ship’s distress signal but before the full effort of the rescue services swung into action the bright sparks at RAF Kinross identified that the vessel, somewhat puzzlingly, appeared to be on dry land. After some intense tracking it has finally been located in a pile of fridges north of Belfast. Now that must have been an impressive storm.

Have a good week and a very happy Diwali.