Tuesday, 21 April 2009

IMF Latest: Britain is Bust

Edmund Conway reveals chilling evidence from the latest IMF report on the "health" of global finance that the entire world banking system is technically insolvent.

Though he chooses not to analyse the UK's uniquely parlous predicament compared with other economies, it is now clear from these catastrophic figures: Britain has gone bust. The borrowing strain on the British economy is going to reach a critical point.

The table below is a key extract from the report. I've highlighted the significant figures for what is predicted banks will need for the next financial year from the UK government.

Table 1.4. Bank Equity Requirement Analysis

(In billions of dollars, unless shown)

United States Euro Area United Kingdom Other Mature Europe

Estimated Capital Positions at end-2008

Total reported writedowns to end-2008 510 154 110 70
Capital raised to end-2008 391 243 110 48
Tier 1/RWA ratios at end-2008 10.40% 7.30% 9.20% 7.30%
TCE/TA end-2008 3.70% 2.50% 2.10% 2.30%

Scenario Bringing Forward Writedowns

Expected Writedowns 2009-10 (1) 550 750 200 125
Writedown-adjusted Tier 1/RWA ratio 6.70% 1.10% 4.70% 1.70%
Writedown-adjusted TCE/TA 0.10% -0.20% 0.40% 0.50%

Allowance for Expected Earnings

Expected net retained earnings 2009 and 2010 (2)

(after taxes and dividends) 300 600 175 100
Net drain on equity (retained earnings) 2009 and 2010 (3) = (1) - (2) 250 150 25 25

Equity Requirements

Equity needed to reduce leverage to 25 times3 275 375 125 100
Equity needed to reduce leverage to 17 times4 500 725 250 225

Added to the vast UK PSBR, currently spiralling out of control thanks to exploding unemployment and a totally irresponsible government, the IMF makes it abundantly clear here that there will definitely need to be a another gigantic bank bailout. The distressed condition of the banks is further highlighted in the table by the extraordinarily worrying figures on their risk weighted asset ratios.

The suitably red figures give some indication of the colossal scale of the problem, depending upon the action taken. Between £90Bn and £180Bn will be needed to stop British banks from failing between now and 2010, on top of the £70Bn that's already been pumped in and the £200Bn+ in guarantees.

This will take UK borrowing to unprecedented, titanic and frankly impossible levels. We will be a nation in debt for generations.

If that money cannot be raised - and this report has just increased the likelihood of such an event enormously - the Bank of England will simply be forced
to print more cash or the government will have to apply for a huge IMF loan. Probably both will be necessary.

One thing is certain, if Alastair Darling starts talking about 'green shoots' tomorrow, then he is lying to us all. The only way we can avoid total meltdown - a full-blown depression - in this country is to cut state spending across the board right now.

One way or another, that's going to happen. Better to have some sort of control over how the foul medicine is administered to the patient than to pretend the patient can be cured by the disease. That should be the clear Opposition line from now on.

One thing's for sure: tomorrow's Budget will be ineffectual - and almost certainly a total pack of lies.

Channel 4 News has the story now: it all looks extremely ominous. The government, according to C4, has already lost £50Bn of taxpayer money and faces, they say, a whopping £200Bn bill for the total bailout. Say a prayer, folks. A big one.

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