Sunday, 26 April 2009

EU & New Labour move to finish of the City of London

The parrot cry for more financial regulation as I predicted is now being exploited by the EU as a means of the Franco-Prussian axis getting the lucrative finance business out of London and across to Paris and Frankfurt. The first steps are in a leak from the Commission of proposals on hedge fund and private equity regulation. Two UK trade organisations, AIMA and BVCA, representing these two activities are quoted in Friday's DT as saying, "the Commission is being unduly influenced by French and German political groups who want to see regulation of these funds most of which are London based" These trade groups also say, "The volume of political rhetoric is baffling".

Its not bafffling to readers of my blog or those with any prior experience of the EU Commission. It is the EU way in all things! It has served them well for the last 50 years so why change? Darling Brown will of course support the EU, they both hate the City, and are even doing their bit to help by jacking up the top tax rate from 40% to 50% so making London less attractive to these funds.

Another liitle snippet from the Finance bill is that Darling Brown will be cutting the issuance of index linked gilts from around 25% of total issuance to 12% of issuance. These gilts are the only way a pension fund can hedge RPI index guaranteed pensions. It clearly shows that HMT realise that the Quantitative Easing programme will inevitably trigger much higher inflation and they are seeking to keep as much issuance in conventional gilts where the liability can be 'eased' down by inflation. This what HMT really think of our economic situation!

Even this might be difficult as sellers of government bonds increase and buyers diminish as reported by Liam Halligan and AEP in today's Sunday Telegraph. Commerzbank said, "every European bond auction is turning into an event risk". No wonder. Every government in the world is trying to sell its paper and as any fule do kno (Nigel Molesworth) that means bond prices, including Gordon's gilts, will fall and their inversely correlated yields will rise. But is it it better to be in the Euro or out of it?

The PIGS are looking more and more like Iceland. With debt denominated in Euros that they cannot print their only option is a default ie can't pay, won't pay. This will be very difficult for the Eurozone but provided it stops at Greece and Spain and Italy do not default then it will be manegeable. If it spreads to Italy then the EU could start to crack open.

Before we cheer to loudly however we should realise that the UK is in poor shape as well. Out of the Euro we can print and devalue our currency at will and our pigmy politicians will certainly do this. This means a falling standard of living for everyone in the UK but worse it makes Foreigners much warier of investing in UK bonds so we end up in a high inflation high interest rate economy like the 70s and 80s.

Of one thing I am sure the politicians of all parties do not have the answer. As LH points out all that Cameron came up with was cheap political point scoring and slogans. What we need is a new system and I will write of that next time.

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