Mortgage Drought as Economy Faces Plunge into RecessionUKWatch.net - 12 Apr 2008Britain?s banks and building societies are clamping down on new mortgages against a background of rising home repossessions. First Direct was the first to withdraw its mortgage service to new borrowers, but the Co-Op Bank has withdrawn its own two-year mortgage deals offering a lower rate of interest after ?unprecedented? demand. It gave only five hours? notice that it was closing to new business. The American investment bank Lehman Brothers, which trades as Southern Pacific and Preferred Mortgages, announced it was withdrawing from the British mortgage market altogether. The bank faces billions in sub-prime losses. The Derbyshire building society had withdrawn its two-year fixed-rate deal at 4.99 percent, which had become the cheapest in the market. The Cumberland building society took the step of restricting its two-year 5.28 percent fixed-rate loan to people in its local area and the Bank of Ireland had withdrawn ?virtually everything.? The withdrawal of services by First Direct and the Co-Op was due to what was described as ?unprecedented demand,? as other mortgage providers have hiked up interest charges for new and existing customers. The Royal Bank of Scotland raised its variable-rate offset mortgage from 6.2 percent to 6.45 percent, and the Kent Reliance building society hiked its standard variable rate to 7.59 percent. Nationwide has increased some tracker loans by more than half a percent. It will, in addition, add a premium to its mortgage rates for those who need to borrow more than 75 percent of a home?s value. Direct Line has scrapped all deals except for a two-year fixed rate and has upped its interest charges from 5.95 percent to 6.69 percent, adding 2,202 a year to the cost of a 200,000 loan. The most potentially serious move was made by Britain?s biggest mortgage provider, the Halifax, which announced it will increase its mortgage rates for those without a 25 percent deposit?affecting nearly a third of potential new customers. The move also affects the Royal Bank of Scotland and Intelligent Finance. Nearly one-and-a-half million homebuyers were already facing steep increases in payments when their existing cheap-rate deals of around 4.5 to 5.5 percent run out this year. More than 3,800 people are coming off cheap fixed-rate mortgage deals every day. According to information group Moneyfacts.co.uk, the number of mortgage products available has fallen by nearly 40 percent in the past month to 4,794?a decline from 7,726 at the beginning of March. More than 90 mortgage products a day were scrapped last week. The British Bankers? Association said that the number of mortgages approved for people buying a house in February fell by a third compared with February of last year. No provider now offers the 100 percent mortgages previously available. The Times reports that even borrowers with big deposits, high incomes and good credit records are being turned away, noting that Nationwide refused a mortgage request from a long-standing customer with 50 percent equity in his 1.4 million home, a six-figure income and a clean credit record. Ian Cordwell was rejected because he was a self-employed consultant, after leaving his job as managing director at a major insurer last year. Nationwide?s lender for the self-employed, The Mortgage Works, has pulled out of the market. Cheltenham & Gloucester, part of Lloyds TSB, has instructed brokers that borrowers who work in the City and whose income depends on bonuses are not to be trusted. If they have bonuses of more than 100,000, they should be referred to underwriters and must provide their bonus history for the past two years and details of any anticipated bonuses. Increases in mortgage rates have wiped out the value of two interest rate cuts by the Bank of England in December and February. The Bank of England revealed that new home loans slumped to a near 13-year low in February?73,000 were granted, compared with 120,000 in February of last year, a decline of 40 percent. Even so, the scale of the crisis is set to intensify as the credit-fuelled spending boom grinds to a halt and goes into sharp reverse. The Bank?s figures showed that consumer credit had its sharpest rise in five years to almost 227 billion. Unsecured debt, not mortgages, rose by 2.35 billion in February to its highest level since October 2002. This was due to a 2 billion surge in borrowing through loans and overdrafts, the biggest rise since figures were first collected in April 1993. Outstanding debt on credit cards has increased by 350 million. The situation is compounded by the growing number of lenders who face negative equity. The 2.5 percent house prices fall in March was the biggest monthly decline since September 1992. Estimates vary, but all predictions are for further substantial falls for the next two years. Liberal Democrat Treasury spokesman Vince Cable warned that 3 million households could fall into negative equity within a year and that there were signs that repossessions were approaching the levels of the 1990s recession. ?There are currently three million families?three million?who have loan-to-value ratios of properties in excess of 90 percent, the Council for Mortgage Lenders confirms that,? he said. ?If the numbers I have been describing, a 10 percent fall over a year, are to materialise, all of those families, by definition, will find themselves in negative equity within a year, and many are now doing so.? Although the actual number of repossessions was far below that experienced in the early 1990s, orders filed with courts?which is the first stage of repossession?were at a ?comparable level to that of the last slump.? The Council of Mortgage Lenders? latest figures show that repossessions reached 27,100 in 2007. Howard Archer, chief UK and European economist at Global Insight, said he ?currently expects house prices to fall by 5 percent in both 2008 and 2009,? but ?the current escalation of the credit crunch means that there is an increased risk that a significantly sharper housing market correction could occur.? A further warning of a sharp rise in repossessions was made by Ron Sandler, the executive chairman of Northern Rock, the bank whose collapse and subsequent nationalisation by the government was the first manifestation of the threat posed by the sub-prime mortgage crisis that began in the United States. ?House prices are declining in certain areas, and they may continue to do so,? Sandler told Radio Four. ?And certainly the prospects for growth in this economy are not as strong as they once were. In that environment one should expect that repossessions figures?not just for Northern Rock, but for all banks?will rise.? Sandler has said he wants to drive customers away to halve Northern Rock?s business. It plans to shed a third of its workforce by 2011, about 2,000 jobs. Northern Rock?s annual report makes clear just how overexposed the banks are and the scale of the losses they could face. The run on the bank led to a massive outflow of 12.2 billion in retail deposits over the year, compared to inflows of 2.5 billion in 2006, and took out 24 billion in Government loans. The annual report discloses that Adam Applegarth, who stepped down as chief executive in December of last year, is entitled to a 760,000 payoff and could still receive 63,333 a month until November 16 of this year under his severance deal. In addition, 75,000 of his mortgage will continue to be charged at the concessionary staff interest rate. In 2006, Applegarth?s total pay package was 1.4 million, including a 660,000 bonus. He lives in a 2.5 million home outside Newcastle and has a pension fund worth at least 2.2 million from which he can start drawing at 55. The mortgage crisis to a significant degree reflects a loss of financial confidence throughout the banking system, which massive interventions by the Federal Reserve and other central banks internationally have failed to stem. Libor, the rate at which banks lend to each other, and the Bank of England base rate used to track each other fairly closely. Now, however, despite two cuts in the Bank of England base rate to 5.25 percent, Libor has shot up to 6 percent. Those customers with money to deposit can command a higher rate of return than in the past. The credit crunch is also hitting the corporate sector. Citigroup has cut more than half the 25 staff in its leveraged finance business, handling lending to companies with high debt, and Deutsche Bank and JP Morgan have cut 40 percent of their leveraged finance staff. Imperial Energy, a UK oil company, was last week forced to scrap plans for a debt financing because the rates demanded were too high. It was forced to resort to a US$600 million rights issue, at one point driving its shares down by 25 percent. The billionaire financier George Soros has predicted that the City of London faces a severe recession, which will drag the UK economy down with it. He attributed this to overvalued houses, personal debt of more than 1.4 trillion and a rise in unemployment, Soros warned not to expect a rebound in the near future, calling the crisis a ?historic event like the Great Depression? that would bring an end to 25 years of free-market thinking. ?I think we have come to the end of the road,? he said. ?To say that it won?t affect the real economy is untenable, because it affected it on the upside, so it will affect it on the downside. Recession in the US is inevitable. There will be implications for the globalised economy and the UK happens to be as vulnerable as the US, but in different ways. The finance industry is much more important to the UK because London is a financial centre and the industry is going through a painful process of deleveraging. The housing market in the UK has at least not seen the building boom that we have seen in the US and the supply of new homes has not gone up, but on the other hand, the indebtedness of UK households is actually even greater relative to income than in the US.?
A War of DecadesUKWatch.net - 12 Apr 2008The long, slow, perceptible if cautious bubble of optimism about the United States’s progress in Iraq has finally been punctured. It was the product of the measurable if limited progress in the security situation in Iraq in 2007 that was partly the result of the US military “surge” of February-July 2007; it was fuelled further by the wishful thinking of a country desperate for some good news after more than four years of grinding war, and by the driven ideological certitudes of neo-conservative commentators. The gathering mood in Washington had projected onto Iraq the idea that the new US strategy was making some sort of military victory possible; that a major drawdown of troops could be implemented from summer 2008; and (above all, in the conservative calculation) that Iraq would cease to be a burden on Republicans seeking victory in the November elections. A particular satisfaction to the ideological right was the conviction that George W Bush’s decisionto ignore what it saw as the “defeatism” of the Iraq Study Group’s report of December 2006 and choose instead to boost troop numbers in Iraq was in the process of being vindicated. A key moment in the bubble’s collapse was the testimony of David H Petraeus (the United States’s military commander in Iraq) and Ryan C Crocker (Washington’s ambassador in Baghdad) to two key audiences – the Senate’s armed-services and foreign-relations committees – on 8 April 2008. Republicans had earlier looked forward with confidence to the event, but the occasion went sour. The sudden violence of the two weeks before the hearings did not help the political mood, especially for a political culture so fixated on short-term thinking and positioning; but this was not the main factor in flattening any feelgood temptation (see “The Iraqi whirlwind”, 3 April 2008). For while the surge had certainly helped sharply to reduce military and civilian casualties and attacks across Iraq, its impact was already diminishing by early March 2008 – well before the more recent escalation of violence. An Iraqi report United States military sources estimate that there were 631 armed attacks in Iraq in March 2008, an increase from 239 in February. At the same time, there was scarcely any increase in attacks on civilians: from sixty-two in February to sixty-nine in March. In other words, almost all of the considerably increased number of operations was directed against US and Iraqi security forces (see Michael R Gordon & Eric Schmitt, “Attacks in Baghdad Spiked in March, U.S. Data Show”, New York Times, 8 April 2008). In a remarkable irony, the fifth anniversary of the collapse of the Saddam Hussein regime in Baghdad was marked by an all-day vehicle curfew across the city. In his testimony, Petraeus agreed that the progress was less than had been hoped, and argued against any further withdrawals of troops after the surge has ended. A forty-five-day pause from August to mid-September 2008 has been announced, but it is clear that this does not mean further withdrawals at the end of that time. As Petraeus said: “We haven’t turned any corners, we haven’t seen any lights at the end of the tunnel. The champagne bottle has been pushed to the back of the refrigerator. And the progress, while real, is fragile and reversible” (see Kristin Roberts, “Petraeus to halt Iraq troop withdrawals in July”, Reuters, 8 April 2008). In part, this may be the behaviour of a politically astute military officer concerned neither to provide hostages to fortune nor to be doing the work of the Republican Party. Even so, the signs on the ground in Iraq really are not good; the most worrying example being not the violence in Basra but the manner in which the fortified “green zone” in Baghdad has become so vulnerable to mortar and rocket-propelled grenade (RPG) attack. If Hamas in Gaza can manufacture crude home-made rockets that are sufficiently potent to cause the hardened Israel government real unease, then it is patently obvious that the safety of the green zone is even more of a chimera. It is, in effect, dependent on political decisions by Shi’a militias as to when that vulnerability is exploited. As the Israelis found in the war with Hizbollah in July-August 2006, no wall can be built high enough to prevent rocket-attacks from determined enemies (see “The war after the war”, 12 October 2006) In Washington, the frustration on Capitol Hill is palpable, not least because there is recognition among Democrats that they can do little to influence policy in Iraq in the remaining months of the George W Bush administration (see Karen De Young & Thomas E Ricks, “Frustrated Senators See No Exit Signs”, Washington Post, 9 April 2008). The true reference-point, however, is less the domestic electoral cycle than the combination of the conflicts in Iraq and Afghanistan; it is when the US predicament is seen in this context that Petraeus’s caution is so important. The Nato summit in Romania 0n 2-4 April offered small cheer to the United States in that France has now made a commitment to deploy several hundred troops in combat operations in southeast Afghanistan. This will serve to help keep the Canadians on board for the time being, and comes at a time when the US is deploying an extra 3,200 marines and the British are augmenting their own forces. This week, some 6,000 troops of Britain’s 16 air-assault brigade deploy to Helmand province for a six-month posting, and there are indications that the British could add several hundred more troops (see Alastair Leithead, “A ?different’ war in Afghanistan”, 9 April 2008). Republican analysts in the US doubt that there are sufficient troops, even with this increase. The American Enterprise Institute has called for three additional combat brigades, but this runs straight into the Iraq problem. The US defence secretary Robert M Gates has spoken several times of his hopes for a drawdown of US troops to 100,000 (see Yochi J Dreazen, “Petraeus’s Iraq Proposal is Likely To Roil Campaign”, Wall Street Journal, 9 April 2008). This would have been the lowest figure since the war began – entailing the return of 60,000 troops to the homeland, with around 30,000 following at the end of the surge together with a further 30,000 of the US’s regular deployment. Such a withdrawal would have at least partially eased the many problems of overstretch and might even have allowed for substantial reinforcements to be sent to Afghanistan. The evidence presented in Washington, and the nature of public debate there, now make that even more unlikely. As the president himself made clear on 10 April – even in proclaiming that “a major strategic shift” had occurred in Iraq – no prospect of a major drawdown is in sight (see “Bush backs Iraq withdrawal freeze”, BBC, 10 April 2008). An Afghan shift In Afghanistan itself, meanwhile, the violence has escalated in recent weeks. It is taking the form of numerous roadside bombs and attacks on “soft” targets such as road-construction crews; an example is the killing of eighteen security-guards protecting a road-building team on 8 April in Zabul province. That may well be the pattern for much of the summer, in a way that signals a shift of Taliban tactics towards a more flexible and less predictable military campaign (see Antonio Giustozzi, “The resurgence of the neo-Taliban”, 14 December 2007). The experience of summer 2007 was that major Taliban assaults became exposed to the intense use of firepower by western forces. The result was often to inflict civilian casualties that embittered Afghan villagers towards these forces; but also to damage Taliban units sufficiently as to diminish the movement’s readiness to wage frontal assaults during the rest of the year. It would be logical to assume that senior Taliban and al-Qaida strategists – who are highly intelligent and experienced individuals – will have carefully weighed the lessons of this experience and may well decide on quite different tactics. If so, they will rely on numerous small-scale guerrilla actions, making determined efforts to avoid major confrontations while embedding themselves much more thoroughly in the south and east of the country. This might present western forces with the semblance of success; but that could be hugely deceptive. From the perspective of the paramilitaries’ leadership, who will have been watching the Petraeus/Crocker congressional testimonies with a far greater intensity than most Americans, their aim will be to simply wear down the foreign forces. As so often before, the issue of durability is fundamental. For Taliban, al-Qaida and other jihadist militants, a year is nothing in a decades-long confrontation in which the main aim is to outlast the occupiers, forcing them to expend resources on burdensome defence budgets and into a mood of consuming war-weariness (see “Iraq: a far horizon” [25 October 2007]). This is where the 8 April 2008 hearings are truly significant. It is now unlikely that there will be major American troop withdrawals from Iraq until at least 2009, so the pressure on the west’s military forces in Afghanistan will grow. It took a decade to evict the Soviets after the Red Army’s ill-starred invasion and occupation in December 1979, and it might take double or even triple that period to evict American and allied troops from both Afghanistan and Iraq. This, however, is indeed the timescale that the United States and its coalition partners are involved in. In the perspective of global jihadism, the few months of an election campaign are not much more than the blink of an eye.
