Sunday, June 10, 2018

Will the Credit Crunch Lay London Low?

For what it's worth, I almost exclusively follow global economic carnage on Bloomberg, not CNBC. Aside from the latter's mindless cheerleading, I also take exception to it describing New York as "the financial capital of the world." By far more yardsticks of trading activity, London and not New York properly holds that claim...or does it still? For good reasons, I deliberately chose to go to the (relatively) affordable second British city of Birmingham. It's significantly less expensive to live in than London, where the prices of so many things have been inflated by the presence of petrodollar-laden Mideast oilers, Russian oligarchs, and--at least until recently--fatcat bankers.

TIME now has a good report on how the masters of haute finance have been laid low in the Britsh capital. Heck, if it means a less expensive trip to London for me, it may not be all that bad. Still, one thing is left unmentioned here: I wonder how the the city's dwindling coffers will affect its hosting of the 2012 Olympic Games. They're hardly cheap, y'know. Estimates place the Games' cost to London at GBP 9B, with political wrangling now ongoing over these funds. Already, the Olympic village may require a bailout of a cool billion pounds as sources of private capital disappear. Anyway here's part of the article -
Over the past decade and a half, ever since its last protracted downturn, the British capital has transformed itself into Europe's indispensable financial center. Leaving Frankfurt and Paris in the dust and encouraged by the policies of Gordon Brown, the current British Prime Minister, it has become a magnet for people, jobs and investment from around the world. The big U.S. banks made London their international hub, and the major continental European banks moved much of their trading and investment banking operations there. About 70% of international bonds, one-third of the world's foreign exchange and almost half the total volume of international equities are traded in London, more even than New York, its only remaining rival as the world's financial capital. Hedge funds piled into Mayfair on the heels of private-equity players. Any self-respecting Russian oligarch has a Knightsbridge mansion, sends his kids to élite private schools and has listed his company on the London Stock Exchange. Affluent Chinese, Indians, Middle Easterners and many others are not far behind.

All this activity has made the City — the square mile around St. Paul's Cathedral that is the heart of the old financial district, and the gleaming towers of the new financial district in the docklands area — a powerful motor not just for London but for British prosperity. In 2007, financial services accounted for 10.1% of the U.K.'s gross domestic product, up from 5.5% in 2001. Add in professional services linked to finance, such as accounting, law and management consultancy, and the total rises to 14%. And that's for Britain as a whole. For London, finance has been even more important: It now accounts for almost one-fifth of the city's total output, and perhaps as much as one-third if professional services are included. That's far more even than New York, where financial services are about 15% of the local economy...

The City has been through enough slumps to know what to expect next: layoffs, shrinking bonuses for those lucky enough to keep their jobs, and a new frugality over expenses. This will inevitably have repercussions on housing prices, but also on other types of consumer spending that boomed along with the City. They range from fancy restaurants and overpriced cappuccino bars to pricey vacations, bespoke suits and aromatherapy massages that the financiers and their legions of support staff could once readily afford.

The coming downturn is already shaping up as different — and tougher — than some previous ones. That's because the financial crisis is taking place at the same time as a real estate downturn, a conjunction that is unusual; in the past, one has often followed the other, but it's rare for them to happen simultaneously. And the problems are being exacerbated by an explosion of household debt in Britain over the past decade, which now leaves people especially vulnerable. Buoyed by rising property prices, households ratcheted up their borrowing to a massive 173% of disposable income, vs. 106% in 1995. That's way above even that paragon of profligacy, the U.S., where household debt amounts to 139% of income.

Oxford Economics, which specializes in regional forecasts and advises the British government, expects 110,000 jobs to be cut in London between this year and 2010 as the city's economy contracts — although if the credit crunch is protracted, it predicts that the number could rise to almost 150,000 next year alone. Real estate is already reeling. Plans for two huge new skyscrapers in the City have been shelved, and the price of prime residential houses in central London has dropped by 12% so far in 2008, according to realtors Savills, while sales volume is down by 50% in some areas like Clapham and Fulham. That's just the start. Vincent Tchenguiz, one of the biggest property moguls in the U.K., believes the real estate downturn will last five to seven years. "It's obvious that with a crippled financial sector the consequences won't be too good," he says. "London was helped by strong international markets, but as they're now gone, we'll see some stress."

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