Turmoil in the Markets
City bonuses, and maybe jobs, are under threat. How exposed is the rest of Britain?
More than a month into the credit crisis, there's no sign yet of the dust settling. To the contrary, the situation seems to become more confused by the day.
Most of the big banks have attempted to reassure investors that their exposure to losses is either limited or non-existent, but, significantly, few have yet had the confidence to repeat these reassurances formally in a stock exchange pronouncement.
In fact, the banks simply don't know what their exposure is – and so the rumor mill continues to grind while the markets plunge. As Unicredit's chief economist Marco Annunziata told the FT: "the main lesson... is that, unless and until the information crunch can be eased, financial markets will not stabilise.
With the business pages so full of apocalyptic predictions, there was a certain irony about reports that City bonuses hit a record high this year, increasing 30% to £14bn. In practice, it's clear that bonuses that looked in the bag six weeks ago are starting to evaporate.
Most in the City are looking at cuts of 10%-20% even if the markets level off. If the turmoil carries on into the autumn, the reductions will be much greater; a further catastrophe could wipe them out completely. As City headhunters point out: during the lean year of 2002 your bonus was to keep your job.
Yet the fact remains that Britain's overall prosperity is heavily dependent on this single, highly advanced sector of the economy. Finance shapes the UK economy more than in any other member of the G8. Together with supporting business services, it brings home more than a third of Britain's national income, compared with just a fifth in the US.
The upshot is that the UK is more exposed to the gyrations of world markets than any other leading economy. The capital's dominance over the hinterland has always caused problems and resentments. Couple it with an economy prone to the kind of mood swings in international finance the world is now witnessing, and things look not only unbalanced but downright precarious.
These are dangerous times indeed. During the eerie calm that has recently prevailed, it looked as if we'd narrowly avoided the massive meteorite that seemed headed our way. Now, however, all bets are off and we are still not at the point of realisation whether it is going to hit or miss.
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