The Great Debate UK

from FaithWorld:

Muslim Brotherhood treads cautiously in the new Egypt

(A girl waves an Egyptian flag at sunset in Cairo February 14, 2011 /Suhaib Salem)

The Muslim Brotherhood is treading cautiously in the new Egypt, assuring the military government and fellow Egyptians that it does not want power and trying to dispel fears about its political strength. The target of decades of state oppression, the Brotherhood wants to preserve the freedoms it is enjoying under the new military-led administration that took power from Hosni Mubarak.

So far, signs are encouraging for the Brotherhood: an eight-man judicial council appointed to propose democratic changes to the constitution includes one of its members. But experts say the Islamists remain wary of the military. That partly explains why they have gone out of their way to say they are not seeking power -- a reiteration of a position they have long espoused to avoid confrontation with the state.

The Brotherhood has said it will not field a candidate for president and will not contest enough seats to clinch a majority in parliament. The message, experts say, is partly aimed abroad, especially at the United States, which has expressed some concern over the role the Brotherhood might play in the post-Mubarak Egypt.

The Brotherhood might win 25 to 30 percent of the vote in a free and fair election, said Mohammed Habib, a member of the Brotherhood's Shura Council and its former deputy leader. "The Brotherhood want to reassure the Egyptian people and the Arab and Islamic world that they do not seek power, or want to compete for power, as much as what matters to them is that there is freedom and democracy," he said.

Read the full analysis here.

Could the Middle Eastern unrest start to unsettle financial markets?

-”Kathleen Brooks is research director at forex.com. The opinions expressed are her own.”-

The peoples of the Middle East are rising up and letting their political views be known. In Tunisia, Egypt and Yemen protestors have taken to the streets to demand political change, and in the case of Tunisia they have succeeded. These tensions between the people and their governments have caught the global media’s attention. It has also set off something of a domino effect with other autocratic regimes in the region worrying that the same could happen to them.

The protests were sparked initially by rising food prices. They are a sensitive issue in the Middle East; in Egypt, for example, they have been rising at a 17 percent annual rate. With approximately 15 percent of Egypt’s population living in poverty, the rising price of food erodes living standards and fuels resentment at governments perceived as turning a blind eye to the plight of the poor.

However, as the protests gather momentum criticism of food policies has spread to criticisms of the ruling elite and charges of corruption and economic mis-management threaten to topple more than just Tunisia’s Zine El Abidine Ben Ali. Adding fuel to the protests are high youth unemployment rates – it’s running at 35 percent in Egypt. When more than half the population is under 25, the lack of opportunities for ambitious, energetic young people is a deeply de-stabilising force.

Interestingly, the latest global economic update from the International Monetary Fund (IMF) in October 2010 sounded a note of warning on the social issues facing the Middle East. Although it noted that growth prospects had improved markedly for 2010 and 2011, it also pointed out that governments should concentrate on raising growth and creating jobs for expanding populations. Although rising oil prices will boost revenues for oil producing nations, this will come with its own challenges. The report added that rising revenue streams could fuel inflation, which would require tighter fiscal conditions. It recommended that government spending should be focused on long-term goals including social and development needs.

But what about the effects on the market?  The domestic stock markets have been hit the hardest as most currencies in the Middle East are still pegged to the dollar. Egypt’s market had to be closed after a plunge of more than 10 percent in a matter of minutes last week. The Bloomberg GCC 200 stock index has also come off its highs. Added to this, Egypt’s sovereign credit outlook was revised to negative from stable by a leading credit ratings agency. But so far the problems haven’t spread to global financial assets and outside of the Middle East risky assets have continued to perform well.

In the short-term, as protests continue, hot money flows will abandon the markets of the most troubled nations, or those that look like they could be next, which will hurt domestic asset prices. There could be more credit rating downgrades and depending on the duration of the protests they might hit first quarter growth. But, in the long-term a change of government for some of these nations may be no bad thing. Getting rid of corrupt (Tunisia) or tired governments such as the 30-year regime of Egypt’s Hosni Mubarak may be no bad thing. These old autocracies are falling behind the pace of change that is transforming the daily lives of their citizens who have information at their finger tips and use social media sites and mobile phones like their counterparts in the west. But a concomitant rise in living standards hasn’t materialised with the introduction of new technology and the people want this to change.

What WikiLeaks reveals about the changing map of global power

-Andrew Hammond is a Director at ReputationInc. The opinions expressed are his own-

The WikiLeaks release last month of around a quarter of a million classified U.S. State Department documents has, by critics, been variously characterised as the “September 11 of world diplomacy” (Italian Foreign Minister Franco Frattini); an “attack on the international community” (U.S. Secretary of State Hilary Clinton); and a threat to “democratic sovereignty and authority” (French Government Spokesman Francois Baroin).

Debate will long continue, across the world, about the rights and wrongs of WikiLeaks’ actions. Nevertheless, there can be no doubt that the episode has, highly regrettably, caused not inconsiderable damage to the United States.

Underlying many of these issues is the fundamental question of what the Wikileaks affair reveals about the changing map of influence and power in a world that continues to be transformed by the information revolution and economic globalisation. To date, these forces have generally reinforced U.S. pre-eminence for several reasons, including the country’s relative technological edge over much of the rest of the world (which will decrease over time); the fact that its dominant culture and ideas are very close to prevailing global norms; and its multiple channels of communication which help to frame global issues.

However, as the WikiLeaks’s releases underline, this emerging environment has simultaneously raised new challenges not just for the United States, but for all countries. For instance, with technological advances leading to vast increases in information, international publics have generally become more sensitive to “spin” and propaganda. Here, governments must not just compete for credibility vis a vis their foreign counterparts, but also with new actors such as Al-Jazeera and indeed WikiLeaks.

Information that appears to be spin or propaganda, or indeed sensitive leaks that are damaging, can undermine the credibility of a country and/or its government. For instance, pre-war intelligence controversies about Iraq damaged the reputation both of the United States and United Kingdom, and also of the Blair and Bush administrations.

In this current context, key dangers from the WikiLeaks episode for Washington (and certain of its allies) is potential backlash from some international publics, and also foreign elites proving more cautious in sharing information and cooperation going forwards. As Representative Peter Hoekstra, the ranking Republican on the House of Representatives Intelligence Committee has asserted, a “catastrophic issue here is a breakdown in trust”.

Bank bonus season again

–Laurence Copeland is a professor of finance at Cardiff University Business School . The opinions expressed are his own–

Bank bonuses are in the news again, and once more we see the spectacle of the Prime Minister indirectly pleading with the bankers not to be too greedy. Note the contradiction in the government’s position: even though we own two of the largest and most culpable banks, we dare not impose explicit limits on their pay lest they decamp to places where the political climate is more hospitable and the regulators more tolerant. But although enforced limits are out of the question, it’s quite OK to pressure them by every other means  – which, of course, raises the question: why should bankers be more willing to stay in Britain when their pay packet is limited by “voluntary” restraint rather than government intervention?

Of course, as I have argued here before, the likelihood of them moving any substantial part of their business overseas is grossly exaggerated and in any case is a far less worrying prospect than is often suggested. We should not be intimidated by dark hints about investment banking operations moving lock, stock and barrel to Frankfurt, Paris, Singapore or Shanghai. First, the world’s major investment banks typically employ hundreds, sometimes thousands of people in every major financial centre, so at worst we are talking about a marginal reallocation of staff from London towards the other four or five cities which are serious competitors. Is that such an awful prospect?

Recall that no less a figure than Adair Turner called for a reduction in Britain’s financial sector, on the grounds that it is far too large relative to our economy. Moreover, every time you hear mention of the contribution of investment banks to the UK economy – the taxes they pay and the number of people they employ – bear in mind that in the last two years they have cost us far, far more than they will ever provide in tax revenue, and that will still be true even if we are able to avoid another systemic banking crisis for the rest of the century.

Some readers may think I am exaggerating – far from it. There have been many estimates of the cost of bailing out the banks, most of which only include the more-or-less direct costs of recapitalising them, buying up their toxic assets, providing open-ended guarantees, and so on. But there are other costs which, though indirect, are no less real.

I was reminded of one major cost the other day, while checking my credit card statements. Consider the following facts: if I were tempted to borrow on my credit card this month, I would be charged interest of 23% on purchases or 28% on cash, compared to only 20% or 22% in mid-2006. Yet back then, before the crisis, the banks themselves had to pay around 4.5% to borrow in the money markets, whereas today they can raise funds for 0.5% or even less. In other words, banks have been allowed to exploit their monopoly power – greatly increased after the crisis mergers – to push their gross margins up by about 7 percentage points to what must be all-time record levels, simply so as to allow them to rebuild their reserves. By my back-of-the-envelope calculations, the cost to credit card borrowers of this dispensation must be something approaching £5bn per year.

Then bear in mind that credit cards are simply one form of unsecured lending, which is in any case dwarfed in volume by mortgages, where admittedly margins probably have not increased quite as dramatically. Nonetheless, in total the cost to the consumers and businesses (especially small firms) of refinancing the banks must be running at a level of £50-100bn per year, simply in additional interest cost alone – all of this on top of the billions (or trillions) officially acknowledged.

Inflation or deflation: a stress test for democracy

-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own-

The policy debate is hotting up. On one side, we have the expansionists, arguing that it’s the Nineteen Thirties all over again, that Keynes is right now as he was then – we need more, not less government spending, we are digging our own graves by cutting back, especially as the fiscal retrenchment is continent-wide, covering thrifty North Europe as well as profligate ClubMed. According to this view, fiscal contraction will exacerbate the situation by magnifying the fall in the level of economic activity, leading to a downward spiral and, incidentally, making it harder than ever to repay our debts.

On the other side, the contractionists argue that comparison with the Nineteen Thirties is grossly misleading. Debt levels were far far lower for all the major economies in those days. Most important of all, in the Nineteen Thirties the threat (which duly materialised) was deflation, not inflation, so government spending financed by printing money was riskless.

The central question then is this: is inflation actually a risk today? Or is deflation the bigger risk?

On the one hand, falling prices could be catastrophic for two reasons.

First, ever since Keynes, economists have believed that deflation causes unemployment because wage levels rarely fall pro rata, so employers, squeezed between lower prices for the goods and services they sell and unchanged labour costs, are forced to lay off workers so as to protect their businesses.

Secondly, a falling price level implies a rising debt burden, or an increase in the real cost of repaying the country’s outstanding debts. If you think this is purely a matter of economic theory, just compare it with the situation facing a householder with a mortgage – inflation raises his wages and the price of everything he buys, making the burden of his mortgage lighter every year, while deflation does the opposite, meaning he has to struggle to repay a debt which remains unchanged while the value of everything else (including his house) is shrinking.

Will Nick Clegg’s government “suggestion box” work?

-Mark Kobayashi-Hillary is the author of several books, including ‘Who Moved my Job?’ and ‘Global Services: Moving to a Level Playing Field’.The opinions expressed are his own.-

If Thomas Paine were around today he would be a blogger, writing virtual pamphlets that shake a fist at the machinery of government.

Fortunately I am a blogger, but as I sat in a library in Whitechapel this morning listening to Deputy Prime Minister Nick Clegg launching his ‘Your Freedom’ initiative, I couldn’t help recalling a few lines from Paine’s ‘Common Sense’:

“Some convenient tree will afford them a State House, under the branches of which the whole Colony may assemble to deliberate on public matters. It is more than probable that their first laws will have the title only of Regulations and be enforced by no other penalty than public disesteem. In this first parliament every man by natural right will have a seat.”

Paine was describing how a new society, without historical baggage, would setup and structure a system of parliament. There would be regular meetings under a tree for all locals, until the meetings got too large and unruly or we found it more convenient to outsource the attendance at the tree to a representative… something we now call parliamentary democracy.

But what happens if the parliamentary representatives get too detached from the people they represent? Regular elections are meant to provide an opportunity for the public to have a voice, but in a globally connected and constantly changing era, perhaps we need a better way of helping the public to find a voice.

UK’s green agenda needs selling to investors

– Alexander Smith is a Reuters Breakingviews columnist. The opinions expressed are his own –

Britain’s new coalition government wants to cut the country’s carbon footprint as well as its colossal deficit. But the alliance’s more ambitious green policies sound expensive — especially for an administration whose priority is fiscal discipline. Private sector involvement will be critical. And investors may take some convincing.

UK energy regulator Ofgem predicts that up to 200 billion pounds of investment is needed over the next 10 years in new infrastructure to maintain secure supplies and meet climate change targets.

Many of the new government’s ideas are recycled hand-me-downs from the former administration. The roll-out of smart electricity meters had already been put in train by the former Labour government. A smart grid, which allows users with, say, solar panels to sell electricity back in, is a logical next step. Both will probably need heavy taxpayer subsidy to encourage consumer take-up.

The bigger capital projects appear to need extensive external funding. There is a fresh commitment to build a high-speed rail network. Combined with the nixing of a third runway at Heathrow and refusing to build additional ones at Gatwick and Stansted airports, this could offer a viable alternative for inter-city travel.

The new government is also promising measures to promote energy generation from waste and the sea, requiring investment in research, technology and infrastructure. New restrictions surrounding the construction of coal-fired power stations — which must include carbon capture and storage technology — present a further private-sector opportunity. But power companies will be unsettled by the coalition’s fudge on new nuclear power stations.

Then there is the proposal to establish a national network for recharging electric and plug-in vehicles. With car-makers ploughing money into manufacturing battery-powered cars, there may be plenty of interest in developing such a system.

Eerie calm before Britain’s election

– James Saft is a Reuters columnist. The opinions expressed are his own –

To look at sterling and gilts, you would hardly know that Britain is sailing into a general election which will likely deliver a weaker government with a diminished ability, if not will, to grapple with high debts, an uncertain role in the global economy and an aging population.

It is impossible to say what will be the result on Thursday, nor what deals may be made between the surging Liberal Democrats, a bedraggled Labour party which will still have a significant wodge of votes and the Conservatives, who must be both hoping that their hour has arrived and that that hour does not prove to be Monday morning at 8 a.m., pouring with rain and all the trains are late.

There is a huge range of scenarios — a weak minority or majority government or a coalition of some form — but the common denominator across almost all likely outcomes is that all raise the risk of a weak government unable or unwilling to push through aggressive deficit-reduction measures.

And an aggressive, credible and clearly enunciated plan is exactly what is needed. Even before the horse trading and compromising begins, all three parties’ plans lack either scope or specificity. Specificity about what will be cut or who will be made to pay more may well arrive, but it is likely to be at the expense of scope. Unless of course, Britain gets a sharp goading, as did Greece and the euro zone, from the financial markets.

Although pat comparisons between Greece and Britain cannot be made — Britain can devalue the pound and set its own interest rates — on some significant measures Britain is in a worse situation than Greece’s. Britain’s fiscal deficit is forecast at 13.3 percent of GDP in 2010, according to the Bank for International Settlements, worse than Greece, Ireland or any other major country you care to name.

Investors are reassured by the fact that Britain has an average debt maturity of 14 years, and appear to be betting it has time enough to work its way through its issues. Unusually, uncertainty this time does not seem to be unsettling investors. It is not hard to see that changing once the results are in.

The race for the premiership: high tension, low quality

– Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

“The most exciting race in years”. “It’s going to go down to the line.” “The old order has truly been upset.”

The General Election or the climax of the premiership season? Blues or Reds? Does it matter? The breathless hype from the media, the whining about unfairness from the also-rans, the ducking and diving, the spin-doctoring and financial shenanigans and, most of all, the breathtaking dishonesty of the main protagonists – they’re all there at the top of English football as much as at the top of (British) politics.

There is one other thing they have in common too. In both cases, the excitement of the climax hides the same dismal reality. In our politics as in our club football, the country is plumbing new depths. The difference is that next year, in all probability, the Premiership will again be the best league in the world, whereas our politics is only going to get worse.

This has been the most dishonest election in postwar British history, possibly the most dishonest ever. Anyone who had slept through the last three years would never suspect that the economy was not still cruising ahead at a 3 percent annual growth rate, with rock-solid financial institutions and a AAA credit rating for its unassailable fiscal strength.

The politicians trade insults accusing each other of having secret plans to act responsibly, while trumpeting their own determination to carry on spending as if the budget deficit were 1.7 billion pounds, the sort of number we were used to before 2008, rather than 100 times as great, as it is in reality.

Cameron in his uninspiring way showed some signs of honesty in the early stages of the campaign, until, like the rugby player he used to be, Gordon Brown tackled him and dragged him down into the mud.

UK should resist temptation to dump bank stakes

– George Hay is a Reuters Breakingviews columnist. The opinions expressed are his own –

The UK’s forced investments in the banking sector are in rude health. The 41 percent holding in Lloyds Banking Group and 70 percent stake in Royal Bank of Scotland are comfortably above where the government bought the equity. But that doesn’t mean whoever wins next week’s general election should charge into a sale.

True, the government would get a fair price. RBS expects to make a 15 percent return on equity by 2013, implying it would generate earnings per share of 6.7 pence if all the government’s “B shares” are converted, according to Morgan Stanley. Such earnings would justify a current valuation of 50.3 pence once capitalised and discounted. That compares with a market price of 58 pence and the government’s purchase price of 50 pence.

Lloyds, meanwhile, has just reaffirmed that it expects a profit in 2010. Analysts anticipate earnings per share of around 9 pence by 2012, implying a current valuation of 68 pence once capitalised and discounted back — against a market price of 70 pence and the government’s entry price of 63 pence.

Selling chunks of either bank for a small profit would have superficial political attractions. But it could prove embarrassing if the new government then slapped tighter regulation on the sector. Both the opposition Liberal Democrats and Conservatives have threatened to break up the UK’s big banks, while regulatory reforms from the Basel Committee and proposed bank taxes could eat into margins. Swingeing government spending cuts could also derail the UK’s fragile economic recovery.

A slump in the shares following an opportunistic government sale would leave a bad taste in the mouth. With a total of 70 billion pounds of bank equity to offload, the government needs to think carefully about the after-market performance of any initial sale.

If the recovery gathers pace, the government could face a different accusation — selling the taxpayer short. The more bulllish analysts are saying RBS could even have 15 billion pounds of excess capital in three years.