Britain, disturbed

Britain, disturbed
London’s real estate market has been nose-diving since the Lehman shock in 2008. The market was overheated by the excess capital from leverage finances, so the contraction was also quick. The market value of assets owned by Britain’s financial institutions diminished by a large margin. Approximately one-third of the money invested in Britain’s real estate came from abroad. For instance, Icelandic banks used to manage an asset that was 10 times larger than Iceland’s GDP during their heyday, and their main investment destination was Britain. As the crisis deepens, the capital from abroad started to fly, causing the pound to depreciate.

One of the biggest mistakes by the British government in 2008 was to purchase stocks issued by banks and grant them unlimited guarantees, believing the rescue packages would work. This was a wishful thinking. Endangered Royal Bank of Scotland alone, for instance, owns credits worth 2 trillion pounds which is far larger than Britain’s GDP ($2.6 trillion in 2008, by the IMF estimate). If 10% of these credits don’t perform, the entire expenditure for the NHS and education and research will be blown off. Compensation will have to be done by the public money. London has no such fiscal strength.
We're a nation on the brink of going bankrupt (Daily Mail)
The Wall Street Journal pointed out that the British government had failed to produce the intended effect on the financial market. It was rather becoming worse, and both the price of bank shares and the pound were falling. The general fear is so strong that the double collapse of banking system and the excess devaluation of the pound may be quite possible.
Restoring Confidence in the U.K. (WSJ)

Is the pound finished?
The US and Britain share the same financial system but not the currency. The US dollars are still the settlement currency of the world, such that dollar devaluation or inflation is unlikely even if the FRB prints more dollar than it should. International capitals that seek to withdraw from corporate shares and commercial papers will simply go to the treasury bills, so the US bond sells even if the fiscal deficit sustains. But the pound sterling is not such a world currency. In 2007, despite its petrol revenue and the effort to restore the external balance, the UK recorded the world’s third largest current account deficit. Britain’s accumulated fiscal deficit is already 400 billion pounds, which is roughly 250% of its GDP. Britain is more indebted than in 1976, when she asked for a rescue to the IMF last time. Britain cannot afford to spend more.

The British government is obliged to intervene and keep the financial system from collapsing so that the savings accounts of its citizens shall be safe. Yet the exchequer can no longer obtain capital from the bond market. The government thus instructs the BoE to print more pounds to support the non-performing loans owned by banks (= lend money for worthless collateral). This is the same policy by the FRB in the US. But the pound not being a hegemonic currency means that a currency crisis will become imminent if too much pound is supplied.
Treasury gives go-ahead to `print money' (FT)
US’ hot shot investor Jim Rogers declared the end of the pound and recommended all who own assets in pounds to sell them. The North Sea oil reserves and the City’s financial community, both of which have supported the strength of the pound, are now dry. Britain now has nothing to sell. City’s dominance is being taken over by rich Asian markets.
Jim Rogers: 'Sell any sterling you might have. It's finished' (The Independent)
Jim Rogers: `UK has nothing to sell' (FT)
Rogers, upon anticipating the continued growth of Asia, has moved his headquarter from the US to Singapore. Britain did not collapse as fast as he had wished, and Chinese stock prices have been falling. Nonetheless, Britain’s recovery doesn’t seem to occur any time soon, and business keeps on growing in Asia. Rogers is not a demagogue. Tory leader Cameron warned that Britain might soon need to ask the IMF for rescue. News agency Bloomberg anticipated IMF’s bailout for Britain before 2010.
We'll have to go begging to the IMF, says Cameron (The Independent)
Britain to Go Broke, Russia to Join OPEC in 2009 (Bloomberg)
One of the few not-so-bad banks, HSBC, has relatively fewer non-performing loans. But this is due to HSBC’s unique history that its Asian division used to be part of Britain Empire’s oriental wing, and after the 1997 Hong Kong handover, excess lending had been discouraged under the supervision of HK Monetary Agency. The Guardian observed sarcastically, that Britain’s savings account holders must praise Hong Kong.
Unless we are decisive Britain faces bankruptcy (The Guardian)

The curse of the euro
As the chancellor of exchequer, Brown concluded that Britain would not join the euro after his famed ‘five points test’. Looking back, it was a bad luck for Britain. If joined, the currency wouldn’t have been devaluated so much even if London enlarged the fiscal deficit. Indeed, the Maastricht Treaty obliges signatories to limit the deficit under a threshold, but Brussels doesn’t enforce it during the crisis times. In the eurozone, government deficit is rapidly expanding in Spain, Italy, Ireland, and Greece, to an extent that they may have to leave the euro. The Times says that Britain in non-eurozone will suffer less than in the continental countries, where the only fate is an economic meltdown after the expulsion from the eurozone.
It's a bitter chill but Britain is not Iceland (The Times)
In reality, however, such expulsions are unlikely. Eurozone states have given up their sovereign rights to print money and short-term monetary policies, and have agreed to be bound in their various economic policies. The EU aims to gradually take away the rights from its member states for harmonisation. Such strong political will probably render no intention kick out troubled fellow members. In fact, the EU has been extremely lenient in countries that failed in their obligations.
If the eurozone countries will never be expelled, under the same financial crisis and real estate market collapse, Spain and Ireland would appear in much better stead than Britain or Iceland. Icelandic kronas had to be suspended after its central bank printed too much, while Ireland had no such monetary trouble. Iceland recently filed an application to join the EU. The europhiles in Britain will similarly criticise the government for not joining the euro. The Guardian thinks the financial market will never recover unless London promises to join the euro after the crisis. But that would mean that the assets of the British people would be valued lower than before the pound devaluation. Then critics would undoubtedly say that Britain should’ve joined the euro while the pound was still strong. Chinese Xsing-Hua even analysed that Britain cannot join the euro in the future in any case.
News Analysis: Are Britain's hopes to join euro dashed? (Xin-hua)

President Obama chose Sarkozy as the first head of state to meet with during his European tour. Then Merkel. Brown was kept waiting in queue. Compare with 2002 when Bush swore into office, the first European visitor was Blair.
Barack Obama: Downing Street prepares for Obama snub (Telegraph)
During his last year in office, the same Bush refused Brown’s request for a meeting to prepare for the G20 summit, and instead chose Sarko. America is now looking for a new partner in Europe. Britain’s economy is heavily financialised, and its market system is a copy from the US.

Intelligence, you too
Britain’s traditional advantage is not only the City, but also its intelligence capability to manipulate international politics and markets. Commodity markets, Russia, democratisation movements in CIS and the Middle East, climate change, there are many fields at their discretion. If China’s growth is detrimental to Britain’s interest, for example, the MI6 can conspire to forge a military alliance between India and Japan to create political tension and instability in the Asia-Pacific. Yet, recently, the MI6 has made three big mistakes. First of such was the failure of the war on terror. Obama carefully seeks an exit strategy, and he will definitely close Guantanamo during his first term.
Obama 'declared end' to war on terror (Yahoo Canada)
Secondly, Israel is in danger. Israeli lobbyists in US have spoken for the benefits of Britain in many aspects of foreign affairs. 2009 invasion on Gaza was hugely unpopular by the UN, calling for a tribunal on war crimes committed by Israel. Thirdly, regulators in most major countries are interested in enact legislation to limit the activities of hedge funds and tax haven jurisdictions, which have been instrumental for Britain to wage economic wars against enemy markets. Cesspools of undisclosed capitals and speculators are now targeted for closure. These indicate that MI6 is not as powerful as it used to be. In Henry Kissinger’s recent essay, he insisted that the international political government needs to expand its scale to manage the global financial system. Effectively, he means that international organisations must acquire new functions to act like the world government. He otherwise articulated things such as the new Bretton Woods regime would be desired; US’ presence in the world was too strong; Sino-US relation would determine the world economic order; if the G2 is in conflict then China would attempt to create the Asian international order without US, and US would be tempted to protectionism.
Après le déluge. The chance for a new world order (NY Times)

With the weakened financial community and intelligence capability, Britain has much less to offer. America may not need the special relationship anymore, and perhaps seeks a new rival to partner with.