re: Reverse Migration

Hi Robin

You make a very good point that the recent fall of the GBP vs Euro makes the UK a lot less attractive than it once was.

In effect this is a 15% reduction in the value of the money that EU migrants are able to send back home from the UK.

Of course, the other big people attractors - Ireland, Spain and perhaps Holland - are all inside the Euroland - and only Sweden continues as does the UK outside the Euro.

Therefore, the argument for a Pole to go to Ireland or stay at home - rather than head for the UK - is getting stronger.

And, I think this will be another dent in UK's growth and will strengthen the central Euroland economies of Germany and Austria - where reform will allow CEE workers to take up employment.

Either way, this is a significant way of 're-investing human capital' back into the CEE countries.

And, I think again, this is why we are looking a pretty dramatic slow downs in the Western Edge of Europe - but continuing strong (albeit slightly slower) growth in Central and Eastern Europe.

The credit crunch and its after effects seem to be less about a total collapse; rather a shift in power and growth from old to new.

And, those new / hot locations within the EU have to be the best bet - for precisely the reasons you've set out above.

Cheers
Neil

Neil

I think it's true that the weakness of the pound may put off some Polish would-be migrants. But, my view is that the wages are so much higher in the West that the availability of jobs will have a far greater effect than a weaker exchange rate.

That's why I mention slowdowns in Italy and Spain as being important - because, in Spain in particular, so many Romanians are employed in the rapidly constricting construction industry.

If a large number return home, that will be no bad thing in economic terms because it could well cool Romanian wage growth.

As for the UK in the longer term - again, I think, just as the squeeze is what many CEE economies need, so is a much weaker pound what the UK needs to drive up exports - and that's how the jobs will be created.

In the longer run, it's those currencies that stay relatively strong that will start to suffer - that's why I think we'll see the euro rate come down. So, lower euro interest rates and and a bit more inflation.

Cheers

Hi

Interesting to read reports of the World Bank's regular update on the EU8+2 CEE countries.

Seems they agree with our take that, these economies are fundamentally strong, have limited and indirect exposure to the credit crisis and where they are exposed - big trade imbalances and high foreign borrowing - a slowdown will actually be a positive because many economies have been growing at unsustainable levels.

Here are some excerpts:

'In 2008-2009, the region will take further, albeit shorter steps on its long road of catching-up to the EU15. GDP growth rates have probably peaked in many countries in the first half of 2007, even they remained robust in the second half of the year.

This deceleration is likely to continue through 2008. The slowdown is most pronounced in the Baltic countries. Growth should recover gradually in Hungary which has been undergoing a protracted fiscal consolidation and from mid-2007 has been struggling with weak GDP growth and relatively high inflation.

In some respects passing through the turning point in the business cycle is a good thing.

The rate of growth was clearly unsustainable in some countries, resulting in the buildup of internal and external imbalances. The challenge going forward is to ensure that this turning point marks the entry into a period of orderly adjustments. Success or failure in rising to this challenge will have an important bearing on the ability of the EU8+2 to continue along a steady income convergence path.

Current account deficits (CADs) stabilized in the Baltic countries but are still widening in Bulgaria and Romania. These CADs represent the greatest vulnerability to deteriorating international conditions and are particularly worrisome for those countries with high levels of foreign currency debt. The external imbalances may come down in line with slower GDP growth.

It is important however to look beyond the immediate market gyrations to see the bigger picture.

The ability of the EU8+2 so far to withstand the global turbulence is attributable to several factors.

Their banks were not as exposed to the subprime market. Their economies are
linked more directly to the EU than the US.

While credit has increased rapidly, private borrowers were under-leveraged to start with.

Still with expected global slowdown, exports may lessen as a driver of growth. Fiscal adjustments will therefore be needed to bring domestic demand under control. '

The article is interesting and I wonder if you would comment on the following.

The subprime write down to date is around £250 billion, the total sub prime debt written is £1.7 trillion according to a Barclays Economist I met recently in Oxford.

Now the economist was not suggesting that all this risk would be taken off balance sheets but it does underline what is left in the closet.

If you add to this the new Basle 2 criteria that all european banks have to adhere to when lending in the near future then we can expect higher cost of borrowing. In fact you can see this coming through as the 'buy to let' financing comes with a significant fee. A 2% charge on new 'Buy to Let' funding is not unusual, the actual payback rates are no lower ranging from 0.6 to 1.6% over BOE base.

Paragon a large lender in the investment sector is refusing to write any new business at all.

Even if supply is low and some parts of europe seem more attractive than the UK, if borrowing costs increase then markets will not move upward.

Many large lenders are looking at securitising and hedging their lending to customers as a revenue stream, not just plain old fashion lending.
Things will continue to get tougher for longer than we think.

Hi Rob

I don't think there's any doubt lending will be tighter everywhere this year and that pretty much all markets will slow.

The point is that in some cases - notably in some CEE economies (and property markets) that will actually be a good thing and just what is needed - at least for the rest of 2008.

The Baltics seem to be calming in an orderly fashion (so far), and (so far) there have been no significant attacks on their currencies that have destabilised them. That has to be a good omen.

The fact is that, despite some weaknesses, especially current account deficits in some economies, many CEE countries ( Hungary aside for now), still have the best momentum to see them through a tough year or so and their long term potential, which is what really counts, looks as solid as it ever did.

As far as the £1.7 trillion figure is concerned - I haven't seen one that high. Seems an unlikely amount though,
as it would be over 33% of all US mortgages - the market seems to be regularly estimated at around $10 trillion.

But, anyway, where will the next write downs appear?

Great piece from the D Telegraph a while back - the storm seems to be moving east....

"There is still $300bn of bad debt out there, and Japan could be hiding most of it.

Just as battered investors had begun to glimpse signs of recovery in America, the next shoe has dropped with an almighty thud in Japan. Echoes are rumbling across the Far East.

The Tokyo bourse has crumbled, suffering the worst start to the year since the Second World War. The Nikkei index is down 17 per cent since Christmas, and the shares of Japanese banks are leading the slide. Mizuho Financial, Mitsubishi UFJ and Sumitomo Mitsui have all been punished as hard or even harder than those US banks at the epicentre of the sub-prime debacle.

The nagging fear is that Japan's lenders - the conduit for the world's greatest stash of savings - have taken on a far bigger chunk of mortgage securities, collateralised loans obligations and other exotica from America's structured credit boom than they have yet revealed.

Americans and Europeans have so far confessed to $130bn of the estimated $400bn to $500bn of wealth that has vanished into the sub-prime hole. Somebody, somewhere, must be sitting on a vast nexus of undisclosed losses. We may find out soon enough whether the hold-outs are in Japan. The banks have to come clean under the country's strict new audit codes by the end of the tax year in March.

What we know is that Japan's economy - still the second biggest in the world by far - has fallen over a cliff since October. It remains joined to America's hip after all. The decoupling theory has failed its first test.

We tend to forget that Japan remains the world's top creditor nation by far, the shy master of fate. The country's net foreign assets of $3,000bn roughly match the net debts of the US.

Where have the Japanese recycled the quarter trillion dollars they earn each year from their surplus? Official data shows that their holdings in US Treasury bonds have not risen.

The Swiss offer us a clue, says Redeker. They are Europe's Japanese, champion savers looking for returns abroad. They devoured US sub-prime debt on a much bigger scale per capita than the Americans. Hence the $24bn in write-downs by UBS."

If this is the case -and it does all make sense - it will make Europe look like a safe haven.