HSBC is a familiar feature of many high streets in the UK and this is hardly surprising, given that it is the largest bank in Europe. But could this be about to change? With uncertainty surrounding the UK’s in-out vote on the EU, the future of the banking levy and HSBC’s desire to reduce the size of its operations, the UK high street might start to look quite different.
In the UK, 26,000 staff are employed in its retail banking sector, with 48,000 workers across the whole of its UK banking operations. HSBC has plans to downsize its business globally, with expected job losses in the UK of 8000 workers and a total of 25,000 jobs across the world. This would reduce its workforce by around 10%. This could have big implications for the UK economy. Although many of the job losses would not be enforced, given that HSBC does have a relatively high staff turnover, it is likely to mean some forced redundancies. With job creation being one of the big drivers of the UK economy in the last couple of years, this could put a dampner on the UK’s economic progress.
A further change we are likely to see will be the renaming of high street branches of HSBC, as new government rules are requiring HSBC to separate its investment and retail banking operations. Much of this stems from the aftermath of the financial crisis and governments trying to reign in the actions of the largest banks. Ring fencing has aimed to do this as a means of protecting the retail banking sector, should the investment banking part of the bank become problematic.
However, perhaps the biggest potential shock could be the possibility of HSBC leaving the UK and moving to a new base in Hong Kong. A list of 11 criteria has been released by HSBC, outlining the factors that will influence its decision on whether to stay or go.
The UK’s decision on Europe is likely to be a key determinant, but other key factors against remaining in the UK are ‘the tax system and government policy in support of [the] growth and development of [the] financial services sector’. HSBC pays a large banking levy, as it is based not just on UK operations, but on its whole balance sheet.
HSBC’s Chief Executive, Stuart Gulliver, has said that the discussion on the potential move to Hong Kong is based on the changing world.
“We recognise that the world has changed and we need to change with it. That is why we are outlining the following… strategic actions that will further transform our organisation… Asia [is] expected to show high growth and become the centre of global trade over the next decade… Our actions will allow us to capture expected future growth opportunities.”
Leaving the EU will have big effects on consumers and businesses, given that it is the UK’s largest market, trading partner and investor. Whether or not decisions of key businesses such as HSBC will have an impact on the referendum’s outcome will only be known as we get closer to the day of the vote (which is still some way off!). It will, however, be interesting to see if other companies raise similar issues in the coming year, as the referendum on the EU draws nearer. We should also look out for any potential change in the UK’s banking levy and what impact, if any, this has on HSBC’s decision to stay or go and on the future of any other banks.
Has HSBC already decided to leave the UK? The Telegraph, Ben Wright (10/6/15)
HSBC plans to cut 8,000 jobs in the UK in savings drive BBC News (9/6/15)
The Guaridan view on HSBC: a bank beyond shame The Guardian (10/6/15)
HSBC brand to vanish from UK high streets Financial Times, Emma Dunkley (9/6/15)
HSBC job cuts should come as little surprise Sky News, Ian King (9/6/15)
HSBC in charts: Where the bank plans to generate growth Financial Times, Jeremy Grant (9/6/15)
HSBC’s local rethink can’t shore up global act Wall Street Journal, Paul Davies (9/6/15)
Can George Osborne persuade HSBC to stay in the UK? BBC News, Kamal Ahmed (9/6/15)
Questions
- What is the UK’s banking levy and why does it affect a company like HSBC disproportionately?
- Look at the list of 11 criteria that HSBC have produced about staying in the UK or moving to Hong Kong. With each criterion, would you place it in favour of the UK or Hong Kong?
- Why is the banking sector ‘not a fan’ of the government policy of ring fencing?
- What impact would the loss of 8000 UK jobs have on the UK economy?
- Why does it matter to a bank such as HSBC if the UK is a member of the EU?
With talks ongoing about resolving the Greek debt crisis, it is clear that there is no agreement that will satisfy both sides – the Greek government and the troika of lenders (the IMF, the ECB and the European Commission). Their current negotiating positions are irreconcilable. What is needed is something more fundamental to provide a long-term solution. What is needed is a ‘deus ex machina‘.
A deus ex machina, which is Latin for ‘god from a machine’, was a device used in Greek tragedy to solve an impossible situation. A god would appear from above, lowered by a crane, or from below through a trap door, and would put everything right. The tragedy would then be given a happy ending.
So what possible happy ending could be brought to the current Greek tragedy and who could be the deus ex machina?
The negotiations between Greece and the troika currently centre on extending credit by €7.2bn when existing debts come up for repayment. There are repayments currently due to the IMF, or by the end of June, of €1.5bn and more in July, September and December (another €3.2bn). There are also €6.7bn of Greek bonds held by the ECB, as part of the 2010 bailout programme, that are due for repayment in July and August. Without the €7.2 billion bailout, Greece will be unable to meet these debt repayments, which also include Treasury bills.
But the troika will only release the funds in return for harsh austerity measures, which involve further cuts to pensions and public expenditure. Greece would be required to run a substantial budget surplus for many years.
Greece could refuse, but then it would end up defaulting on debt and be forced out of the euro. The result would probably be a substantial depreciation of a newly restored drachma, rising inflation and many Greeks suffering even greater hardship – at least for a period of time.
So what is the possible deus ex machina? If you’re looking for a ‘god’ then it is best, perhaps, to look beyond the current actors. Perhaps the Americans could play the role in finding a solution to the impasse. Perhaps a small group of independent experts or politicians, or both, could find one. In either case, the politics of the situation would have to be addressed as well as the economics and finance.
And what would be the ‘fix’ to satisfy both sides? Ultimately, this has to allow Greek debt to be sustainable without further depressing demand and undermining the fabric of Greek society. 
This would almost certainly have to involve a large measure of debt forgiveness (i.e. debts being written off). It also has to avoid creating a moral hazard, whereby if the Greeks are seen as being ‘let off lightly’, this might encourage other indebted eurozone countries to be less willing to reduce their debts and make demands for forgiveness too.
Ultimately, the issue is a political one, not an economic one. This will require clever negotiation and, if there is a deus ex machina, clever mediation too.
Videos
Greek PM Tsipras warns lenders bailout plans ‘not realistic’ BBC News, Jim Reynolds (5/6/25)
Greece defers IMF payment until end of June BBC News, Chris Morris (5/6/15)
Greek debt talks: Empty shops and divided societies BBC News, Chris Morris (10/6/15)
Potential Grexit effects Deutsche Welle (13/6/15)
Articles
It’s time to end the pretence: Greece will never fully repay its bailout loan The Guardian, Andrew Farlow (9/6/15)
Greek exit would trigger eurozone collapse, says Alexis Tsipras The Guardian, Phillip Inman, Helena Smith and Graeme Wearden (9/6/15)
The eurozone was a dream of unity. Now Europe has turned upon itself The Guardian, Business leader (14/6/15)
Greece bailout talks: an intractable crisis with three possible outcomes The Guardian, Larry Elliott (2/6/15)
Greece needs an economic defibrillator and a debt write-off Financial Times letters, Ray Kinsella (25/3/15)
Greece’s new debt restructuring plan Times of Change, Peter Spiegel (5/6/15)
Eurozone still in denial about Greece BBC News, Robert Peston (3/6/15)
Greece bailout talks – the main actors in a modern-day epic The Guardian, Phillip Inman, Ian Traynor and Helena Smith (9/6/15)
Greece isn’t any old troubled debtor BBC News, Robert Peston (15/6/15)
Greece in default if debt deadline missed, says Lagarde BBC News (18/6/15)
Burden of debt to IMF and European neighbours proves too much for Greece The Guardian, Heather Stewart (17/6/15)
Paper
Ending the Greek Crisis: Debt Management and Investment led Growth Greek government
Questions
- To which organisations is Greece indebted? What form to the debts take?
- To what extent is Greece’s current debt burden the result of design faults of the euro?
- Would it be possible to restructure debts in ways that make it easier for Greece to service them?
- Should Greece be treated by the IMF the same way it treated the highly indebted poor countries (HIPCs) and granted substantial debt relief?
- What would be the effects of Greek exit from the euro (a) for Greece; (b) for other eurozone countries?
- What bargaining chips can Greece deploy in the negotiations?
- Explain what is meant by ‘moral hazard’. Where in possible outcomes to the negotiations may there be moral hazard?
- What has been the impact of Greek austerity measures on the distribution of income and wealth in Greece?
- What are the practicalities of pursuing supply-side policies in Greece without further dampening aggregate demand?
Let’s say that the world slides back into recession, or at least, the eurozone, the USA and other major economies. This is not unthinkable, given the determination of many countries to reduce public-sector deficits and debt, concerns about slowing growth in China and other major developing countries, and worries about various geo-political developments, such as conflict in the Middle East and the possible exit of Greece from the euro and the shock waves this might send. If it happened, what could governments and central banks do to stimulate aggregate demand? The problem is, according to the linked articles below, the world has largely run out of policy instruments.
In normal times, the main policy instruments for stimulating aggregate demand are cuts in interest rates (monetary policy) and increases in government expenditure and/or tax cuts (fiscal policy). But with interest rates currently at virtually zero, there is little scope for further cuts. And with governments attempting to ‘repair’ their balance sheets by cutting deficits, there is little appetite for increasing deficits again.
It is possible that central banks could engage in further quantitative easing. Indeed, the ECB is only just starting its large QE programme, involving monthly bond purchases of €60bn until at least September 2016 (totalling €1.14tr at that point). But QE leads to market distortions, such as increased asset prices (e.g. share and house prices), made higher and more unstable by speculation. By providing ‘cheap money’, it also encourages potentially risky investments.
The articles below considers the dilemma and looks at six possible options for policy makers suggested by Stephen King, chief economist at HSBC. But are they realistic? Read the articles and then consider the questions.
Financial crisis fixes leave policymakers short of ammo for next recession The Guardian, Larry Elliott (31/5/15)
How to get the economy working for us Guardian Letters, Mary Mellor; Colin Hines; Martin London; William Dixon and David Wilson (2/6/15)
HSBC’s Stephen King Outlines “Economic Nightmare” ValueWalk (14/5/15)
HSBC: Central Banks Are Running Low on Ammunition Bloomberg, Julie Verhage (13/5/15)
If the US economy is signalling an iceberg, bad news: we’re out of lifeboats The Guardian, Nils Pratley (13/5/15)
Policy makers lack the firepower to fight another US recession Financial Times, Stephen King (18/5/15)
The new surrealism Global Economics Quarterly, Stephen King (Q2, 2015)
Questions
- What are the risks to global recovery?
- Why has recovery from the 2008/9 recession been slower than that from previous recessions?
- What are the traditional instruments for combatting a recession?
- Why might central banks be wary of engaging in further rounds of quantitative easing?
- What is meant by ‘helicopter money’? Would this be a better solution to a recession than quantitative easing?
- Go through the other five policy options identified by Stephen King and discuss the suitability of each one.
The eurozone has been suffering from deflation: that is, negative inflation. But, the latest data show an increase in the rate of inflation in April from 0% to 0.3%. This is still a very low rate, with a return to deflation remaining a possibility (though perhaps unlikely); but certainly an improvement.
The eurozone economy has been stagnant for some time but the actions of the European Central Bank (ECB) finally appear to be working. Prices across the eurozone have risen, including services up by 1.3%, food and drink up by 1.2% and energy prices, albeit still falling, but at a slower rate. All of this has helped to push the annual inflation rate above 0%. For many, this increase was bigger than expected. Howard Archer, Chief European Economist at HIS Global Insight said:
“Renewed dips into deflation for the eurozone are looking increasingly unlikely with the risks diluted by a firming in oil prices from their January lows, the weakness of the euro and improved eurozone economic activity.”
Economic policy in the eurozone has focused on stimulating the economy, with interest rates remaining low and a €1.1 trillion bond-buying programme by the ECB. But, why is deflation such a concern? We know that one of the main macroeconomic objectives of a nation is low and stable inflation. If prices are low (or even falling) is it really as bad as economists and policy-makers suggest?
The problem of deflation occurs when people expect prices to continue falling and thus delay spending on durables, hoping to get the products cheaper later on. As such, consumption falls and this puts downward pressure on aggregate demand. This decision by consumers to put off spending will cause aggregate demand to shift to the left, thus pushing national income down, creating higher unemployment and adding to problems of economic stagnation. If this expectation continues, then so will the inward shifts in AD. In the eurozone, this has been a key problem, but it now appears that aggregate demand has stopped falling and is now slowly recovering, together with the economy.
It is important to note how interdependent all aspects of an economy are. The euro responded as news of better inflation data emerged, together with expectations of a Greek deal being reached. Enrique Diaz-Alvarez, chief risk officer at Ebury said:
“The move [rise in euro] got going with the big upside surprise in eurozone inflation data — especially core inflation, which bounced up from 0.6 per cent to 0.9 per cent. This is exactly what the ECB wants to see, as it is proof that QE is having the desired effect and removes the threat of deflation in the eurozone from the foreseeable future.”
One of the key factors that has kept inflation down in the eurozone (and also the UK) is falling oil prices. It is for this reason that many have been suggesting that this type of deflation is not bad deflation. With oil prices recovering, the general price level will also recover and so economies will follow suit. The following articles consider the fortunes of the eurozone.
Eurozone inflation shouldn’t shift ECB’s QE focus Wall Street Journal, Richard Barley (2/6/15)
Eurozone deflation threat recedes Financial Times, Claire Jones (2/6/15)
Eurozone inflation rate rises to 0.3% in May BBC News (2/6/15)
Eurozone back to inflation as May prices beat forecast Reuters, Jan Strupczewski (2/6/15)
Boost for ECB as Eurozone prices turn positive in May Guardian, Phillip Inman (2/6/15)
Eurozone inflation higher than expected due to quantitative easing International Business Times, Bauke Schram (2/6/15)
Euro lifted by Greek deal hopes and firmer inflation data Financial Times, Roger Blitz and Michael Hunter (2/6/15)
Questions
- What is the difference between the 0.3% and 0.9% figures quoted for inflation in the eurozone?
- What is deflation and why is it such a concern?
- Illustrate the impact of falling consumer demand in an AD/AS diagram.
- How has the ECB’s QE policy helped to tackle the problem of deflation? Do you think that this programme needs to continue or now the economy has begun to improve, should the programme end?
- To what extent is the economic stagnation in the eurozone a cause for concern to countries such as the UK and USA? Explain your answer.
- Why has the euro risen, following news of this positive inflation data?
The US economy has been performing relatively well, but as with the UK economy, growth in the first quarter of 2015 has slowed. In the US, it has slowed to 0.2%, which is below expectations and said to be due to ‘transitory factors’. In response, the Federal Reserve has kept interest rates at a record low, within the band 0.0% to 0.25%.
The USA appears relatively unconcerned about the slower growth it is experiencing and expects growth to recover in the next quarter. The Fed said:
“Growth in household spending declined; households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined.”
Nothing has been said as to when interest rates may rise and with this unexpected slowing of the economy, further delays are likely. An investment Manager from Aberdeen Asset Management said:
“The removal of the Fed’s time dependent forward guidance could be significant. It means that any meeting from now on could be the one when they announce that magic first rate rise.”
Low rates will provide optimal conditions for stimulating growth. A key instrument of monetary policy, interest rates affect many of the components of aggregate demand. 
Lower interest rates reduce the cost of borrowing, reduce the return on savings and hence encourage consumption. They can also reduce mortgage repayments and have a role in reducing the exchange rate. All of these factors are crucial for any economic stimulus.
Analysts are not expecting rates to rise in the June meeting and so attention has now turned to September as the likely time when interest rates will increase and finally reward savers. Any earlier increase in rates could spell trouble for economic growth and similar arguments can be made in the UK and across the eurozone. The following articles consider the US economy.
Federal Reserve keeps interest rates at record low BBC News, Kim Gittleson (29/4/15)
Shock stalling of US economy hits chances of early Fed rate rise The Guardian, Larry Elliott (29/4/15)
US Fed leave interest rates unchanged after poor GDP figures Independent, Andrew Dewson (30/4/15)
Fed could give clues on first interest rate hike USA Today, Paul Davidson (28/4/15)
Fed’s downgrade of economic outlook signals longer rate hike wait Reuters, Michael Flaherty and Howard Schneider (29/4/15)
Five things that stopped the Fed raising rates The Telegraph, Peter Spence (29/4/15)
Questions
- By outlining the key components of aggregate demand, explain the mechanisms by which interest rates will affect each component.
- How can inflation rates be affected by interest rates?
- Why could it be helpful for the Fed not to provide any forward guidance?
- What are the key factors behind the slowdown of growth in the USA? Do you agree that they are transitory factors?
- Who would be helped and harmed by a rate rise?
- Consider the main macroeconomic objectives and in each case, with respect to the current situation in the USA, explain whether economic theory would suggest that interest rates should (a) fall , (b) remain as they are, or (c) rise.
HSBC is a familiar feature of many high streets in the UK and this is hardly surprising, given that it is the largest bank in Europe. But could this be about to change? With uncertainty surrounding the UK’s in-out vote on the EU, the future of the banking levy and HSBC’s desire to reduce the size of its operations, the UK high street might start to look quite different.
However, perhaps the biggest potential shock could be the possibility of HSBC leaving the UK and moving to a new base in Hong Kong. A list of 11 criteria has been released by HSBC, outlining the factors that will influence its decision on whether to stay or go.
Leaving the EU will have big effects on consumers and businesses, given that it is the UK’s largest market, trading partner and investor. Whether or not decisions of key businesses such as HSBC will have an impact on the referendum’s outcome will only be known as we get closer to the day of the vote (which is still some way off!). It will, however, be interesting to see if other companies raise similar issues in the coming year, as the referendum on the EU draws nearer. We should also look out for any potential change in the UK’s banking levy and what impact, if any, this has on HSBC’s decision to stay or go and on the future of any other banks.
