LCH.Clearnet – who? what? why?

So, just to make sure I understand this straight: Italy’s current problems are the result of the hitherto-unknown (at least by me) LCH.Clearnet – essentially a clearing house for bond trading – deciding that traders in these things need to lodge more money up front with it to cover any prospective default, thus increasing the price of doing so and the rate of interest which the Italian government has to offer on such things to sell them.

This is despite the Italian economy being, generally speaking, in a healthy state, with low private debt, a level of public debt that is high but not unsustainably so, and a level of public expenditure which has been lower than taxation revenues in every year since 1992 (other than 2009).

A couple of questions, in the tradition of the simple laddie at the Emperor’s parade:

1. What exactly is LCH.Clearnet and to whom is it accountable?

2. How has it come to occupy such a central role in this whole business?

3. Are there, to coin a phrase, other clearing houses available for the trading of bonds, not just in Italian government bonds but those of other countries? If there are, is there any suggestion of a cartel?

4. And the evidently rhetorical – why do we give such organisations this sort of power over our economies? Or, perhaps more accurately, given the lessons of 2008, why do we continue to place such economic faith in the actions of financial institutions? To what extent does it make sense to give ‘markets’ (and here, we should be clear that this does not reflect an ‘invisible hand’ but the decisions of very powerful (but nevertheless completely invisible) individuals) this sort of role in the shaping of our economies? Not least when financial ‘markets’ (and individuals) are not exactly known for taking the long-term view which is critical in the circumstances in which we have been landed.

This really is the return of History (or, otherwise, perhaps the end of the End of History).


Private and public debt

I’m catching up late with this, but this is indeed an excellent post (and, indeed, blog) on the Office for Budgetary Responsibility’s revision of its forecasts on what is going to happen to private debt over the next few years. As public debt is being reduced, private debt is now likely to expand.

Inevitably, government cuts to public services will lead to people paying for them separately, thus squeezing household finances further and driving up household debt; while an economy actively flirting with depression will cause further problems to household debts as people lose their jobs, on top of the impact of the falling value of real incomes, as people seek to maintain living standards as far as possible. That’s not rocket science – except, it would seem, to a government intent on blazing a path back to the 80s.

This may well spell bad news for the 2012 pensions reforms: rising private debt, on top of household savings apparently resuming pre-recession trends, is likely to cause further pressures on peoples’ ability to save (more) for their retirement. At the same time, rising debt is likely to increase pressures for people to have access to their pension pots early. This has already been the subject of a Treasury consultation. Evidently, pensions are not savings per se – rainy days are what savings are for; pensions are for your retirement – but seeking to encourage people to save more while engaging in policies that are driving up their debts is an unhealthy and short-sighted combination.

At the wider, political level, we may well here be sowing the seeds of a future financial crash – but it is clear that the intentional driving up of private debt, despite the lessons of what the economy has been through in the past few years, itself underlines the sharply ideological nature of this government’s intensifying onslaught.

[Edit 1 April: And for living proof that, if you sit an infinite number of bloggers down in front of an infinite number of keyboards, you will get, if not the works of Shakespeare then more or less similar posts, within almost literally seconds of posting this, I discovered that Duncan Weldon over at False Economy had made most of the same points, and better, and with more links, too. Damn!]

Silver RPI demonstrates truth of switch to CPI

The charity Age UK has produced the ‘Silver RPI’, its assessment of the levels of inflation faced by older people.

Now I seem to remember that Steve Webb, Pensions Minister, argued back in July that the switch to the Consumer Price Index for the uprating of pension benefits was because the CPI was ‘a more appropriate measure of pension recipients’ inflation experiences‘ than RPI. In contrast, Age UK’s work demonstrates that not only is CPI a less relevant measure of inflation than RPI as regards older people, but that even RPI (which historically is about 0.75 percentage points higher than RPI, with the gap likely to be higher in the next five years) actually under-estimates the level of inflation experienced by the over-55s. Indeed, the experience of inflation rises with age: since the start of 2008, RPI has under-stated the level of price rises for the 55-59 age group by 1.8%; and by 4.1% for the over 75s.

The difference results from the effects of the fall in mortgage costs masking the effects of price rises elsewhere, with older people carrying less mortgage debt and, therefore, with expenditure patterns which are less influenced by mortgage costs, while older people are typically more exposed to rises in utility costs since a greater proportion of their expenditure goes on heating and lighting.

The difference to RPI for the ‘true’ rate of inflation for older people is costly and, therefore, the gap between CPI and the silver RPI will be even more so given how much CPI undercuts existing RPI.

If RPI is not an appropriate measure of inflation for older people – which clearly it is not – then Age UK’s work demonstrates just how much the switch to CPI was dictated not by a desire for greater stability, accuracy or any other such superficially ‘noble’ reason but by the simple desire to save money, and from a vulnerable group of people perhaps less able to mount a strong voice in opposition to it. A simply shameful exercise from a government with a bankrupt morality.

Banks benefit from £19bn tax gain

Nice piece of outrage on the main TUC website today – though not yet on its ToUChstone blog – that the banks are to gain around £19bn from offsetting losses incurred during the crisis against future profits.

It’s a well-established principle of corporation tax that losses can be offset against profits – but this is a different situation. Financial institutions caused this crisis and bailing them out has loaded plenty on to national debts, not only in the UK but globally; while economic stimulation packages leading on from banking failures, preventing economic freezing, have done the same. Banks have also, in several cases, been taken over by the state.

In this week of the announcement of the precise scale of the cuts envisaged by the ConDem government, this is a well-timed reminder by the TUC not only of what caused the crisis but also what might play a more important role in overcoming it – i.e. a greater attention to the tax regime, to whit: greater tax fairness. As regards financial institutions, a financial transactions tax would also go some way towards establishing financial responsibility for the crisis – in the continuing absence of which in the UK such further financial gains for the banks are simply amazing.

As the TUC points out, £19bn would go a long way towards ameliorating some of the cuts being proposed, including the switch of the basis of indexation of benefits from RPI to CPI, and on benefits generally. Furthermore, the direction of effective taxation among the banks, together with proposed corporation tax cuts, is likely to take the rate paid by banks, and other large companies guided by financial advisers, well below that of small companies.

Now, in the context of the need for economic growth, and in the light of today’s letter to the Telegraph by business leaders, now revealed as straight from Smith Square, that’s outrageous.

Mobile market share 2010

One of the uses of Ofcom’s 2010 Communications Market Report, whose publication I blogged about a couple of posts ago, is its publication of reliable stats on the state of the different market segments in the telecoms industry, including the mobile one. Over the past year, mobile has been a particularly interesting example of what happens next to markets in a pure state: market policy in the UK had striven for a competitive model and, outside of the new 3G operator, 3 UK, the other four operators had grown to a situation in which they were of a roughly, not exactly but nearly, equivalent size.

The result? Further growth in a market which has already 1.3 connections per person, via the addition of new subscribers, became increasingly difficult and more expensive, not in the short-term (it being easy to run short-term loss leaders) but to retain them in the long-term (although O2 seems to have done rather well out of its now-expired iPhone exclusivity agreement). Furthermore, regulatory action in the mobile sector has seen falling prices (as confirmed in the 2010 CMR, Figure 5.39 shows a 22% fall in average monthly retail voice revenues per mobile subscription between 2004 and 2009, while Figure 5.38 seems to confirm that mobile retail revenues have peaked).

All good for consumers – but somewhat less good for the operators. The effect has been for operators to seek merger – in the UK, T-Mobile and Orange have merged to form everything, everywhere; a merger which was allowed with fast-track approval and scant scrutiny at the EU level despite the wishes of consumer and indeed competition organisations in the UK.

Figure 5.46 of the 2010 CMR provides a current estimate of the market shares of the five mobile operators, which look as follows:

The merged everything, everywhere organisation thus has a market share of 42% – a market dominant operator has been created as a result of regulatory lack of interest among the competition authorities (at the EU level) in intervening in mobile operators’ wish for the market to reflect more of their interests – and in contravention of the direction of mobile market competition policy which had been to create the sort of perfect market that has now been disrupted.

The above figures include mobile virtual network operators, of which the most significant is Tesco Mobile (which uses O2) and Virgin Mobile (which uses T-Mobile) – though there are several others. Tesco Mobile has ‘more than 2m’ customers (p. 19), while Virgin Mobile has 2.2m pre-pay and 1m contract customers (p. 8). Tesco Mobile’s market share is about 2.5%, taking the share of O2 of direct subscribers down to 25.4%; that of Virgin Mobile about 4%, taking T-Mobile down to 17.5% direct subscribers (and everything, everywhere to 38.6%). Actually, network sharing arrangements between O2/Vodafone and T-Mobile/3/Orange have essentially split the mobile market into five (now 4) operators but just 2 networks.

An interesting perspective of what happens to a competitive market when it represents too good a deal for consumers and (therefore) an insufficiently profitable one for operators: the natural trend for those most affected (T-Mobile and Orange are the only two operators to have seen a decline in market share between 2004 and 2009) is to move away from competition and to seek market dominance not by organic growth but by merger.

The response of the other operators will be interesting with 3, the smallest operator, looking vulnerable as a relation of its size, with Vodafone, which merged with 3 in Australia as the two smallest operators in that market, already having been rumoured as a potential buyer, although its affiliation to the smaller of the essentially two networks which operate in the UK may help it fight off any such advances.

Ofcom 2010 Communications Market report

If it’s August, it must be Ofcom’s CMR – a regular part of my summer reading, stuffed as it is with facts and figures about the UK communications world. The 2010 version came out last week and I’ve been picking my way steadily through it: it’s the usual authoritative source of details and opinions about the changing ways in which modern communications is influencing our lives: as Ofcom’s press release points out, we now spend half of our waking hours connected to some communications device or other, be it TV, mobile or pc – often simultaneously, with the current phenomenon of social viewing – and we’re also doing a lot more networking.

All this demands increasing amounts of bandwidth, which places additional demands on communications network providers. Yet – as the press release also points out, broadband prices continue to fall, forming an unhealthy backdrop to what is an extremely costly investment and an illustration that markets occasionally produce misleading signals and are not always the efficient allocators of investment resource that they are claimed to be.

Here’s my illustration of the data contained in Figure 5.92, buried at the back of the section on Telecoms and networks, on p. 354:

From a communications provider’s point of view, it doesn’t look good: ever-increasing bandwidth at ever-decreasing prices (albeit that they are no longer falling as fast as they were). In fact, these years (set at constant 2009 prices) have seen a 33% fall in the monthly price we pay for bandwidth, while average connection headline access speeds have dramatically risen (actually, by 1,267%). Earlier in the report (Figure 5.64), Ofcom had reported that monthly household communications bills also continue to fall, with the fixed voice and broadband component (i.e. all household communications bills excluding mobile) falling in the same period by 17%, and fixed voice bills by over 26%. This is important since network providers looking to upgrade their networks and replace the old and increasingly redundant copper pairs with costly (glass-)fibre are having to do so on the back of falling prices, both in the direct market and in potential cross-subsidising ones. At the same time, the future – marked by falling broadband bills despite more and more bandwidth – is looking somewhat inauspicious from the point of view of building a convincing case around the scale of returns that can be made on that investment.

Apart, additionally, from the effects of any double dip recession in making any investment case even more uncertain.

Public policy seeking faster and better communications networks (and for all citizens) makes sense both economically and socially. Equally, however, we have to recognise that BT – the vehicle by which that public policy can most effectively be implemented – has not been in the public sector for some years and that private sector investment environments, not least of all those in regulated industries, tend to be fragile and frequently capricious things.

In this light, politicians need to recognise that carrots as well as sticks are a good tool; while regulators need to recognise that competition in the direction of achieving cheaper prices is not the be all and end all of regulatory policy – that investment is important and that it may be crowded out in circumstances where falling prices make the case for that investment harder to sustain. One reason to re-visit the dropped parts of the old Digital Economy Bill putting a new statutory requirement on Ofcom to take account of the impact of its decisions on investment, I think.

[Edit 27 August:  Analysys Mason comments this week that the average price of a fixed broadband bundle dropped by €5 per month across Europe during the past six months (despite an increase in speeds), but was still more expensive than mobile broadband. So, it looks likely that there will be further pressure on fixed broadband prices right across Europe – where all fixed line network operators are facing similar expensive investment decisions. And while mobile broadband is cheaper, it doesn’t deliver quite the same user experience, being slower, with more drop-outs and less reliability. And market forces dictate that fixed broadband prices need to drop further to compete, even though fixed network operators to invest to deliver quicker, more reliable connections. It’s a mad world out there.]