The global economic outlook has turned down in the past month despite the unexpected EU summit deal to aid Spain and Italy which sparked a share price rebound at the end of June.
That had gone into reverse by the weekend. It seems no sooner is there a relief of pressure than it returns. Within days of the banking crisis in Spain being addressed - and there are opposing views on the degree to which it has been - the scandal at Barclays introduced a new level of risk that could prove serious for the UK economy.
The macro picture is that the world economy is slowing. US factory output in May was its lowest since mid-2009. Most of the EU is in recession and parts of it in depression.
German manufacturing activity shrank at its fastest since June 2009. In France, the national auditor warned "the country is in the danger zone" requiring "an unprecedented curb on public expenditure and increase in taxes".
The UK faces a fresh downturn following at least six months of GDP decline, from a position described by the Financial Times (FT) as “contained depression”.
FT chief economic commentator Martin Wolf described the EU summit deal as “small steps, incapable of achieving the conditions for an end to the crisis”, and he dismissed the EU growth package as “partly illusory . . . a mere bagatelle”.
Worse, Wolf pointed out: “The outstanding debt of Italy and Spain is a little less than six times the size of the European Stability Mechanism [ESM] . . . speculators can bet safely against a fund known to be too small to stabilise a market.”
His colleague Wolfgang Munchau pointed out: “Spanish banks will ultimately need a lot more than the euro100 million earmarked. The ESM will need to refinance the programme for Greece, Ireland and Portugal. It will have to cope with Cyprus and maybe Slovenia.”
Now added to this mess we have the scandal exposed at Barclays, which threatens to exacerbate the UK’s economic woe given the outsize proportion of GDP contributed by financial services and the City of London.
The City’s position as the world’s leading financial centre must be in jeopardy after Barclays was fined $290 million by US and UK authorities for attempting to rig the Libor interest rate (the London inter-bank lending rate) that is a global benchmark for mortgages, loans, credit card fees and financial products.
The bank admitted submitting false data to bolster traders’ profits and to present a more flattering picture of its financial position during the banking meltdown of autumn 2008 through a deception that went on four years (2005-09). Yet Barclay’s chief Bob Diamond told MPs two days after resigning that he only discovered the deception two weeks earlier - a claim the chair of the Treasury select committee labelled “implausible”.
Barclays was certainly not alone and has suggested the practice was common, even implying the Bank of England was aware of it. Regulators are investigating 20 banks. At the same time, four of the UK’s leading banks (including Barclays) were found guilty last week of misleading small businesses into buying complex interest rate insurance they didn't need, leading them to huge losses.
UK business secretary Vince Cable referred to the banks as “a cesspit” and Bank of England governor Mervyn King declared: “Something went very wrong with the UK banking industry.”
The scandal is extraordinary given the level of oversight of the banks through the crisis of 2008 and since, and the massive bail-outs they received. It leads directly back to the credit boom that pre-dated the crisis, the crunch when that ended and the financial meltdown that, in turn, led to the current debt crisis.
So a crisis partially made in the UK may be about to bite more deeply here if confidence in the City is not restored, hurting the wider economy, household spending and therefore travel demand - and the squeeze may extend to the luxury sector if City bonuses are curtailed.
If you ask me, the situation is close to as bad as it has been since October 2008.
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