Evercore Pan Asset

If Mr Brown needs to buy a coffee when he arrives in Washington for the G20 meeting he will discover what international investors and markets think of his economic rescue so far. Before he started buying up bank shares a $2.05 cup of coffee would have cost him £1. Today the same $2.05 cup will cost him £1.40.

Posing as the saviour of the world, and putting so much borrowed money into UK-based bank shares has entailed paying a huge price in devaluation. The 30% fall of the pound against the dollar is mirrored in a similar fall against the yen. We are also at a new all time low against the Euro, which has been a weak currency as well. The Prime Minister, if wise, would ask himself why is this happening? He would ask himself how easy it is going to be to borrow all the money he needs to borrow to buy the bank shares and pay for the expensive recession we are entering. If his fellow guests at the Summit were unkind, they would ask him who he thinks is going to lend the UK the extra money he now wants to finance the tax cuts.

In Mr Brown’s world, state money is easy come, easy go. He assumes – if he thinks about it at all – that the Chinese on much lower average incomes than ours will willingly put up more cash to lend to us to maintain our higher living standards. He assumes that there are enough rich people and companies left in the UK to dig more deeply in their pockets to lend the state what the state is not taking in taxation from them. Why stop at the £43 billion he forecast for this year’s borrowing? Why stop at the £63 billion the downturn will probably make that? Why stop at the £120 billion needed when you add in the purchase of bank shares and the Bradford and Bingley transaction with Santander? Why not add in some tax cuts for good measure?

A sensible money manager would be asking himself some basic questions, when he saw the value of his currency drop by almost a third in a few months against two of the other three main currencies of the world. He would see the need to be more careful about the financial risks he was running, and more careful about the amount he thought he could borrow. It has always been odd that he thinks you can solve a problem of over-borrowing in the private sector by over-borrowing in the public sector instead.

The G20 do need to discuss what further action they can take to limit the length and depth of the recession. Countries in stronger financial positions than the UK should cut taxes. Countries should revisit the measures they are taking to sort out the problems of the banking system. The best thing they could do would be to agree that the lower interest rates and more liquidity are beginning to work. It would be better to leave it to the banks to sort out their capital positions, without committing taxpayers to stump up risk money. Big banks in trouble should have access to short term loans and guarantees whilst they raise the money they need one way or another. The Paulson plan is being revised for the fourth time. Why isn’t the British plan being revised, as it is not easily affordable for British taxpayers?

The decision by RBS today to announce 3000 redundancies is a crude version of what needs to be done. I would rather RBS had announced a complete staff freeze so natural wastage could go to work, coupled with no bonuses for 2008 and a downwards review of pay for those on six figure salaries. They do need to make a big reduction in their costs, and that would be a better way of doing it than picking on 3000 for potentially costly redundancy. Taxpayers now have to help pay to sack people, which is going to annoy Trade Unions and upset left wing Labour MPs who were so keen on bank nationalisation. They should not be surprised, as taxpayers are already paying for large redundancies at Northern Rock.

The G20 would be well advised to reach agreement on more capital for the IMF. More countries are going to borrow too much and reach a point in currency and state borrowing markets where they can no longer raise the money on sensible terms. They will need to borrow from the IMF who will in turn make them cut back and get their borrowing under control.

The Europeans will be pressing for more regulation. What they should be pressing for is regulation that works. Their regulators failed to curb the lending by European banks in the easy credit years. They are now curbing it too much. If they want to set up a system which always curbs it too much, then they make the recession worse. What we need are some central bankers who can set interest rates sensibly, and regulators who demand more capital when things are heating up, and less capital when they are cooling down. Why is that so difficult

Here at Pan we remain concerned about UK assets. We think good value is emerging in the faster growing parts of the world where governments have stronger financial positions and currencies are likely to perform better than sterling. The big cuts in interest rates, the large amounts of new liquidity supplied and the possibility of fiscal stimulus on top will at some point start to turn things round in the stronger economies. Share markets will rise well before the recovery is visible in the rest of those economies. We remain worried about those countries where structural weaknesses are combined with high deficits, leading to more potential problems for their currencies and their long-term interest rates.