First green shoots of fiscal recovery may have appeared

By BILL BLEVINS [email protected]

Bill Blevins is the Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK

America led us into the financial crisis – can we hope that it will soon start to lead us out? Some economists believe that green shoots may be appearing after moves by the US government seem to point to positive steps towards the beginning of the end of the global downturn.

The latest package announced by US treasury secretary, Tim Geithner, certainly drew optimism from economists and analysts and markets worldwide surged. The plan is to purchase up to one trillion US dollars worth of toxic assets held by US banks in order to get them lending again.

The US treasury said that it will commit 75 billion to 100 billion dollars to a public-private investment programme whereby the public sector will be encouraged to contribute to buying up troubled mortgages and securities held by the banks.  The funding would come from the 700 billion dollars Troubled Asset Relief Programme (TARP) which has already been approved by Congress. The Federal Deposit Insurance Corporation will inject its own finance to the public-private partnership that will in effect subsidise private sector purchase of toxic assets.

The Treasury described the programme as an effort to ‘repair balance sheets throughout our financial system’ and to ‘drive us toward recovery’. The bond investor who heads Pimco, a California fund manager, Bill Gross said: ‘This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically.’

Previously, optimistic remarks by Federal Reserve Bank (Fed) chairman, Ben Bernanke, had indicated that the recovery may have started. Commenting on the US economic decline, triggered by the biggest housing crisis America had ever seen, he said it will soon “begin to moderate and we’ll begin to see a levelling off”.

Talking in the first television interview given by a Fed chairman in 20 years, CBS’s 60 Minutes news slot, Bernanke said that the world had come very close to financial meltdown but disaster had been prevented by the intervention of governments and central banks. He stressed that no major bank will fail but if necessary banks could be safely wound down.

Appearing to be upbeat on the economy and forecasting that recession in the US will end ‘probably this year’, Bernanke said: “I think we’ve gotten past that,” referring to the possibility of the US sinking into depression, its first in 70 years.

However,  Bernanke warned that unless banks started to lend more freely and financial markets stabilised, recovery would not take root next year. “I do see green shoots – not everywhere – but certainly in some of the markets that we’ve been functioning in,” he said.

A report in the UK Times stated that  “Citigroup, the Bank of America and Barclays have all indicated that earnings have been rising since the start of the year, while figures suggest US retail sales may have started to bottom out after a six-month rout. “The financial melt-down and accompanying depression scenario has been taken off the table,” said Jack Ablin, chief investment officer at Harris Private Bank. “The heart of the problem is the banking system, and news coming out of that sector suggests that we may have turned a corner.”

The Fed is working with the government to strengthen the framework of regulation in the US that will better foresee potential problems in the banking industry.

1.15 trillion US dollars injection

The Federal Bank also plans to inject 1.15 trillion US dollars into the economy in a bid to kick start a turnaround. Following the Bank of England’s lead of ‘quantitative easing’, the Fed announced in March that it is to buy 300 billion dollars worth of US Treasury bonds over the next six months. In addition, the Federal Open Markets Committee (FOMC) aims to buy up to 750 billion dollars of additional agency mortgage-backed securities, on top of 500 billion dollars already earmarked.

Paul Dales from Capital Economics commented: “The sheer size of the measures suggests that they will do some good, thus increasing the chances of a decent recovery next year. At the least, no one can say that the Fed isn’t trying”.

Marco Annunziata, chief economist at UniCredit, said: “The Fed has now really stepped in with all guns blazing… I expect this to have a powerful impact on market sentiment, bolstering hopes that policy effort will help the economy find a bottom in the coming months, setting the stage for a recovery by year-end.”

Growth in housing market starts

The number of new houses being built in the US jumped 22.2 per cent in February. Work began on 583,000 homes, up from 477,000 the previous month, with a big leap in the construction of townhouses and apartments.

Early signs of growth in the housing sector follow the longest period of contraction in the American residential market for 18 years and the worst housing decline ever. It is a widely held belief that recovery in the housing market heralds an upturn in a slumped economy and many economists feel that this is a positive step on the ladder.

Dales surmised that it could indicate that the property market was near to rock-bottom and housing activity could be stabilising.

Those who have been considering investing should wonder if the time has come and that we may be approaching the bottom of the downturn. Advice from an authorised financial adviser who has successfully experienced previous recessions may give you the confidence to make your decision.

To keep in touch with the latest developments in the offshore world, check out the latest news on the Blevins Franks website by clicking the link on the right of this page.