Club Austerity: got its newest member, the UK, as expected overnight with big cuts in spending and tax rises, including a new tax on banks. The new levy on banks will be aimed at raising 2 billion pounds a year from next January. France and Germany will follow Britain in imposing the levy based on how banks earn to protect taxpayers from the cost of resolving future financial crises. The UK tax will be imposed on UK banks and building societies and on the UK operations of foreign banks, so Goldman Sachs et al will not escape, nor will the National Australia Bank. As something of a sop, corporate tax will be cut 1% a year for the next five years from the current level of 28%. Banks will relocate their business to Switzerland as a result.

Prosperity through austerity: was the message that George Osborne, the UK’s Chancellor, tried to ram home in his budget speech and figures. Economic growth will be 1.2% this year, rather than the 1.3% forecast under Labour’s spending plans. Next year growth will be 2.3%, down from 2.6%, in 2012, growth is expected to be 2.8%, but growth will only rise to 2.9% in 2013. The deficit will fall from 10.1% of GDP, or 149 billion pounds, this year to 1.1%, or 20 billion, in 2015-16.

Kill or cure: said the Financial Times. Added to the cuts from the previous Labour administration, the total deficit reduction package will be 113 billion pounds in 2014-15 and 128 billion pounds the next year. Arghhh. The FT estimated that as cutting 5,000 pounds from every UK household in 2015-16. Which will make an impact on economic growth. Government borrowing would fall from just over 10% of GDP to 2% in 2014-15. Watch unemployment; its forecast to fall from 8% this year to 6.1% by 2015-16, which is not much of an improvement at all. If it rises (as it will under the cuts planned for government departments of 25%), and shows no sign of improving, watch the financial rectitude of the government implode as political desperation takes over.

Club austerity’s bill. So roughly the total of cuts over the next two to five years by the UK, Germany, Spain, Portugal, Greece and Italy is closing in on 250-300 billion euros. If France cuts, it will rise past 300 billion, if it cuts. France is sitting back letting others take the harsh medicine and ease pressure on the euro and the eurozone as a whole. France talks tough, but that’s all. Others are tougher. Will there be enough growth over the next five years to replace that lost spending, plus cover the impact of tax increases like the rises in VAT? That’s the big unanswered question. A dip back into recession, or recovery slows and runs low for the next year or more, will be agonising and painful. Spain, Greece and Portugal won’t be growing, will the others?.

Yuan Watch: So is the move to a more flexible Yuan good or bad? On Monday the market pundits had us believing it was good, yesterday and overnight it was bad. I think they don’t know very much. America went back to worrying about housing, down, oil, who knows and life in general. There is every indication the Chinese are achieving what they set out to do, allow it to move more freely, but not predictably. They look like they knew that western commentators will not grasp this point and would go for absolutes, such as ‘good’, or ‘bad’. Most commentators have overlooked the point that the move to a more flexible Yuan is a measure of the increased confidence of the Chinese Communist Party Government now has in the state of the economy and the financial system. This confidence obviously outweighs fears the move will see an inflow of hot money and lead to speculation and possible social disharmony.

Yuan Watch 2: So yesterday, after the mid point was increased, the central bank stood by while trading pushed the rate down from that level. The Yuan fell by around 0.20%, which Bloomberg and other services said was the biggest drop since late 2008. China has warned that the value will go up and down, and that is what it seems to be encouraging after the morning mid-point fix

Yuan watch 3: So the trading pattern has already been set by the Chinese Government; stick it higher and then see what happens. Market reports yesterday afternoon suggested that Chinese banks were selling the Yuan after the mid-point was fixed, perhaps with tacit approval from the central bank. That seems to have been an attempt to signal to the market that what goes up, can go down, and to tell speculators and Chinese companies that if they are thinking of indulging in some hot money smuggling to try and boost returns from a revaluation, then they might just lose. So watch for when China slips in a devaluation to remind the West what goes up (like Tuesday’s big rise of 0.43%), can go down as well.

An unlikely trio: What do Sigma Pharmaceuticals, Alesco Corporation and Elders have in common? Answer, they have all surprised the market with sudden and dramatic downgrades of earnings and taken asset and other write-downs and reported big losses. Sigma’s was a $389 million loss, Alesco, $126 million and Elders will be a $70 million turnaround and plunge into the red by the time the books are ruled off next September 30. And did any analyst or prominent stock picker forecast these downgrades?

Elders sunk: Elders loss of $8 to $14 million (after a forecast profit of $55.7 million) will be even more galling for some analysts because a big part will be played by the Rural Bank, which Elders and the Adelaide and Bendigo Bank used to own 50-50. But Elders sold 10% to Bendigo to raise much needed cash. The Rural bank used to finance much of Elders Managed Investment Schemes in timber and forestry. But the now 60% owned Rural Bank said earlier this month, no more dough, ending Elders’ hopes for some income and profits from this tax dodge this year. And why did the now Bendigo-controlled Rural Bank say no? Because Bendigo has its hands full with hundreds of millions of dollars of dodgy loans and debts from the collapse of Great Southern, and didn’t want any more on the books of its 60% subsidiary. Was there a nudge somewhere from a regulator?

It’s China, not Europe: ABARE points out that the impact of the European debt crisis on Australia’s commodity export earnings “is likely to be modest.” It says that in 2008-09, “the European Union was the destination for around 8 per cent of Australian agricultural exports, 7 per cent of Australian energy exports and 12 per cent of Australian minerals exports. As a result of the European debt crisis, the Australian dollar has depreciated markedly against the US dollar.” Although that has turned in recent days. “This sharp decline in the value of the Australian dollar, if sustained, is expected to provide support for the value of Australian commodity exports. This assessment of a relatively modest impact of the European debt crisis on commodity export earnings is based on the assumption that economic growth in China will not be significantly affected by the recent developments in Europe.”

A trend? Perpetual chairman, Bob Savage has lost CEO David Deverall who today indicated that he will step down next March. Last Friday Mr Savage, with his David Jones chairman’s hat on lost CEO Mark McInnes under very different circumstances. Thankfully for Fairfax Media CEO Brian McCarthy, Mr Savage is just a board member, otherwise…..

Peter Fray

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Peter Fray
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