2008 Budget

26 March 2008


Reader Writes:
Do you think the budget has done enough to keep us from recession and assist the ailing banking sector as I am thinking of buying some shares after the banks’ prices have taken a battering?

In short, no. In fairness to our Darling Chancellor’s new role, he really must feel like Tony Underwood when isolated having to face the runaway train called Jonah Lomu. “Here, take this and go out wide and I’ll pop over and get the prawn sandwiches and a pay rise”. Nice if you can get it!

In his budget Mr Darling was heard to say that debt is low in the Uk!

Right now we have a £1 trillion debt tower. There is fear that same debt tower could collapse as borrowers find it difficult to refinance their borrowings. Many have been blessed with low or fixed rates, but are coming out of these into higher rates, which will cost them much more. In an attempt to cut their payments, they are approaching banks who are saying no to refinancing.¹

This is causing great concern. The inevitable downward spiral could easily happen: Consumers stuck with higher rates decide to slow spending. This causes profits to fall, which causes companies to lay off staff, or even raise the prices further on their goods. Neither of the two options are a good one.

Laying staff off means more people relying on the government, and also more people who cannot spend.

Raising prices further only ensures increased inflation. Increased inflation means rates will probably rise. Rising rates mean more people than now will be offloading property, as they can no longer afford it, and this increase in supply, along with falling demand, means falling house prices.

This eats into our ‘equity’ which is exactly what gives us our confidence and keeps us spending. Interestingly this equity is what most of the banks secure their debts against.

Get it? Not pretty!

We are hearing news of inflation picking up over the next few months due to higher energy prices and rising food costs. If it does, this will put further pressure on the Bank of England to keep rates as they are – not good news for the wobbly tower of debt and the housing market, which is already flopping.

The budget has created a bit of doom in the city as Mr Darling’s soaring borrowing forecasts have been linked to a potential shortfall in taxes paid by banks and other financial institutions as profits collapse.

Alistair Darling has also said his borrowing will reach £43 billion next year, that’s almost 43% or £13 billion more than Mr Brown forecasted in his budget last year.¹

Ah well its only numbers.

The news that CCC - Carlyle Capital Corporation (a $21 billion mortgage fund) had collapsed has given the city the spooks.

What is worrying about CCC is that it was invested into high quality mortgages rather than sub prime. A closer look at the prospectus however suggests that it was a high-risk vehicle. The risk section ran to 24 pages and it allowed itself to ‘leverage without limit’.¹ There is no higher risk. The city is preparing itself for other high profile collapses which would inevitably dump assets back into the market driving prices down further.

Perhaps the greatest risk for me in terms of banks is the fact that considerable risk on their balance sheet has been securitised i.e. the debt has been packaged up and sold on but could easily come back to bite.

In that respect it is effectively hidden. It is that lack of transparency that makes it difficult to value a bank’s share price, which of course makes it less attractive.

Given this and the potential for many more individuals to default on loans and hand back their properties, it is no wonder banks’ share prices are having a tough time. 


If you have a financial or investment query call Peter on 0800 0112825 or e-mail info@wwfp.net and take a look at our section on investment

Source¹ The Times


Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.