Tag: borrowing

With pressure on household incomes, many have had to forego spending on luxuries and travel is seen by many as just that – a luxury they can no longer afford. Add on to this some unexpected external shocks and it’s unsurprising to see a company such as Thomas Cook, the second largest holiday business in the world, in talks with banks. It provides some 19 million holidays per year, but has seen a relatively rapid deterioration in its finances.

Its debts total in September 2011 was some £900 million and the value of the company has declined significantly in recent times. However, the most notable decline has been since it emerged that Thomas Cook was in talks with its banks in preparation for tougher times to come. It is hoping to receive £100 million from a range of banks including HSBC and Lloyds, but on this news Thomas Cook share prices fell by some 75%. However, Thomas Cook has said that the company is simply requesting money as a cushion and that it is not in a desperate financial situation. As the Acting Chief Executive, Sam Weihagen said, ‘I think investors should have confidence in Thomas Cook’.

Many factors have contributed towards Thomas Cook’s current situation – volcanic ash clouds, political unrest and unkind weather, but also some internal strategic decisions, such as their continued focus on package holidays, despite the fact that data suggests 2 in 3 people that go to Spain (a popular package destination) are actually not on a typical package holiday. The key thing with travel is that it is very much based on confidence (as we have also seen with the banking sector). If confidence in a company declines, people stop booking holidays with them and so further financial issues are created. This issue is even more significant when a well known brand name, such as Thomas Cook is the company in trouble. Nothing else makes such great headlines as a well known brand in trouble. So, should holiday makers be concerned? The following articles consider the situation that Thomas Cook faces.

Thomas Cook makes it hard to see the funny side Telegraph, Alistair Osborne (22/11/11)
Thomas Cook dives on bank talks BBC News (22/11/11)
How Thomas Cook shares dive 75% on new of bank talks BBC News (22/11/11)
Thomas Cook reassures holiday makers after shares plunge Guardian, Simon Bowers and Patrick Collinson (22/11/11)
Thomas Cook risks customer exodus during bank talks after stock plunges Bloomberg, Armorel Kenna and David Altaner (23/11/11)
Fears for Thomas Cook after shares sink 75% Independent, James Thompson (23/11/11)
Thomas Cook shares crash after default warning Reuters, Matt Scuffham (22/11/11)


  1. Explain the reason why share prices have fallen for Thomas Cook. Use a diagram showing the demand and supply of shares to support your explanation.
  2. Distinguish between the internal and external factors that have contributed to Thomas Cook’s current position.
  3. Under which aspect of PEST and STEEPLE analysis would you place the above influences?
  4. In the Telegraph article, an industry source says: ‘In a business like this you need a very conservative capital structure because you don’t know what’s going to come and bite you.’ What is meant by ‘a very conservative capital structure’?
  5. What action can Thomas Cook take to try to improve its current financial position? Think about both costs and revenues.
  6. What type of good would you class a holiday as? Based on this, what sort of figure would you place on the income elasticity of demand for holidays?
  7. How likely do you think it is that other travel companies are also experiencing similar financial issues to Thomas Cook?

The growth in money supply is slowing. This is not surprising, given that the programme of quantitative easing, whereby the Bank of England injected an extra £200bn of (narrow) money into the banking system between March 2009 and February 2010, has come to an end.

Should we be worried about this? Has sufficient money been injected into the economy to sustain the recovery, especially as fiscal policy is about to be radically tightened (see the BBC’s Spending Review section of its website)? One person who thinks that the Bank of England should do more is Adam Posen, an external member of the Bank of England’s Monetary Policy Committee. In a speech on 28 September 2010, he argued that the UK was in danger of slipping into Japanese-style sluggish growth that could last many years. The reason is that capacity would be lost unless aggregate demand is increased sufficiently to bring the UK back up towards the potential level of output. Firms are unlikely to want to retain unused plant and equipment and underutilised skilled labour for very long. If they do start ‘disinvesting’ in this way, potential output will fall.

What, according to Adam Posen is the answer? With fiscal policy being tightened and with Bank rate as low as it can go, the only option is to increase money supply. But with CPI inflation at 3.1%, considerably above the target 2%, is there a danger that increasing the money supply will cause inflation to rise further? Not according to Posen, who sees inflation falling over the medium term.

Not surprisingly other economists and commentators disagree – including some of his colleagues on the MPC. The following articles look at the arguments on both sides. You will also find below a link to the speech and to money supply data. There is also a link to the latest Bank of England inflation and GDP forecasts.

Posen calls for QE to be resumed Financial Times, Chris Giles (28/9/10)
Weak lending data fuel debate on QE Financial Times, Norma Cohen (29/9/10)
Bank of England’s Adam Posen calls for more quantitative easing Telegraph, Philip Aldrick and Emma Rowley (29/9/10)
Posen pleads for new stimulus to save economy and democracy Independent, Sean O’Grady (29/9/10)
Bring back the usury laws Independent, Hamish McRae (29/9/10)
Rocking the boat on the MPC BBC News blogs, Stephanomics, Stephanie Flanders (28/9/10)
A Response to Adam Posen The Source, Alen Mattich (28/9/10)
Adam Posen is posing the Bank of England a tricky question Guardian, Nils Pratley (28/9/10)
UK economy: optimists vs. pessimists FT blogs, Chris Giles (29/9/10)
What should the Bank of England do next? BBC Today Programme, Stephanie Flanders and John Redwood (1/10/10)
Interest rates will rise, predicts former Bank of England deputy governor Guardian, Dan Milmo (4/10/10)
UK interest rates on hold at record low of 0.5% BBC News (7/10/10)

The Case for Doing More Speech to the Hull and Humber Chamber of Commerce, Industry and Shipping, Adam Posen (28/9/10)

Money supply data
Money and Lending (Statistical Interactive Database) Bank of England
Bank of England Inflation and GDP forecasts
Inflation and GDP forecasts (Inflation Report) Bank of England


  1. Summarise Adam Posen’s arguments for a further round of quantitative easing.
  2. How may changes in aggregate demand affect a country’s potential (as well as actual) output?
  3. What are the similarities and differences between the UK now and Japan over the past two decades?
  4. Describe what has been happening to the various components of money supply over the past few months.
  5. What might suggest that the Bank of England was wrong in believing that the trend rate of growth was about 2.75%?
  6. What are the moral arguments about personal and state borrowing? Should we begin the ‘long retreat from the never-never society’?
  7. Analyse the arguments against a further round of quantitative easing.

Over the past year, the world has seen a massive change in the fortunes of Dubai. At one time, it was as if Dubai was immune from the credit crunch. Property prices rose and then rose again. Credit checks barely existed and anyone seemed to be able to get on the property ladder, including a large number of foreigners. Indeed, 75% of property in Dubai is owned by foreigners.

However, those living their dream in Dubai have entered their worst nightmare. Property prices have already fallen by 50% and further falls are predicted. Debt levels are at about $85 billion, although some suggest they could be closer to $100 billion. Oil prices have fallen as a result of the situation in Dubai, although they have recovered slightly in the past few days, partly boosted by an announcement by the United Arab Emirates central bank that it was providing additional liquidity to banks. Share prices across the world have also been adversely affected, but these also have experienced a recovery.

Dubai has acknowledged the extent of its debts by asking to delay repayments, but whilst some hope that the worst has passed, others are speculating that further debts may be revealed. Dubai asked for a six-month repayment freeze on debt issued by Dubai World and its unit Nakheel, a property developer. The fear of Dubai defaulting on its debts has continued to affect global markets and how quickly Dubai is able to recover may depend on the generosity of Abu Dhabi, its oil rich neighbour. It might be that Abu Dhabi only offer help in exchange for more control over Dubai.

Read the following articles and try answering the questions about this new example of a global issue that highlights the increasing interdependence of economies across the world.

What spoiled the party in Dubai? BBC News (27/11/09)
Dubai says not responsible for Dubai World debt Reuters, Rania Oteify and Tamara Walid (30/11/09)
Oil jumps on positive US data, waning Dubai worries AFP (30/11/09)
Dubai debt crisis should be a lesson to us all Times Online, John Waples (29/11/09)
US shares slide over Dubai fears BBC News (27/11/09)
European shares fall on Dubai fears, banks slip Reuters, Atal Prakash (30/11/09)
Dubai Debt Worries CNBC (30/11/09)


  1. What are the main causes behind the debt crisis in Dubai?
  2. If Abu Dhabi does step in, what do you think it will demand in return?
  3. Explain why oil prices have suffered as a result of Dubai’s debt crisis. Why have they recovered slightly? Illustrate this using demand and supply – don’t forget to consider elasticity!
  4. What lessons should we learn from this debt crisis to prevent it from happening again?
  5. Following Dubai’s debt crisis, share prices fell around the world. What’s the link between debt levels and share prices?
  6. Having listened to the CNBC report, do you think that tourism is enough to rescue Dubai or will intervention be required?

With much attention focused on the UK’s rapidly rising public-sector debt, fiscal policy will have to be tightened once the economy is recovering. This will entail substantial cuts in government expenditure and possibly tax rises too, whoever wins the election next year. The danger, of course, is that if aggregate demand is cut, or its growth is severely curtailed, the economy could lurch back into recession. For this reason, it is likely that monetary policy will have to remain expansionary for some time to come. Interest rates will stay low and further quantitative easing could take place.

This was the conclusion of a report by the Centre for Economics and Business Research (see link below). The CEBR argued that Bank Rate will remain at 0.5% at least until 2011 and not reach 2% until 2014. “The forecasts show that the fiscal consolidation is likely to be matched with an unprecedented monetary relaxation. … Douglas McWilliams, one of the report’s authors and Chief Executive at CEBR, commented: ‘We are likely to see an exciting policy mix, with the fiscal policy lever pulled right back while the monetary lever is fast forward. Our analysis says that this ought to work. If it does so, we are likely to see a major rerating of equities and property which in turn should stimulate economic growth after a lag.’

The following articles look at the report and the implications of its predictions for economic growth and exchange rates.

Bank rate to ‘stay frozen’ for five years Times Online (11/10/09)
Mortgage rates to stay low until 2014 Telegraph (12/10/09)
Tax and spending squeeze to keep bank rate low David Smith’s EconomicsUK.com (11/10/09)
UK rates ‘to stay low for years’ BBC News (12/10/09)
Pound plunges as UK markets rally to year high Telegraph (11/10/09)
Tough times ahead as traders poised to offload their sterling Sunday Herald (11/10/09)

CEBR News Release (12/10/09)


  1. Under what conditions would a combination of a contractionary fiscal policy and an expansionary monetary policy be most effective in delivering economic growth?
  2. What would be the long-term effect on private-sector debt?
  3. How would such a policy mix affect the rate of exchange? Would this help to stimulate economic growth or dampen it?
  4. How will the size of these effects depend on the mobility of international financial capital?
  5. Explain the following: ‘Our analysis says that this ought to work. If it does so, we are likely to see a major rerating of equities and property which in turn should stimulate economic growth after a lag’.

The pound is regarded as an international currency. However, the financial crisis has caused the value of the pound to fall, reaching a four-month low against the euro in September. This recent weakening of sterling is partly the result of worries that the Lloyds Banking Group will find it difficult to meet the ‘strict criteria to leave the government’s insurance scheme for toxic banking assets’ set for it by the Financial Services Authority.

However, one of the main reasons relates to recently published figures showing UK debt (see for data). The UK’s public-sector net borrowing has now reached £16.1bn and the government’s overall debt now stands at £804.8bn: 57.5% of GDP. This represents an increase of £172bn in the past year. Over the longer term, this is unsustainable. The government could find it increasingly difficult to service this debt. This would mean that higher interest rates would have to be offered to attract people to lend to the government (e.g. through bonds and bills), but this, in turn, would further increase the cost of servicing the debt. Worries about the potential unsustainability of UK govenrment debt have weakened the pound.

But isn’t a lower exchange rate a good thing in times of recession as it gives UK-based companies a competitive advantage over companies abroad? The following articles consider UK debt and the exchange rate.

Pound plumbs five-month euro low BBC News (21/9/09)
Market data Telegraph (22/9/09)
Pound slides back against dollar and euro Guardian (21/9/09)
Pound drops as UK stocks fall for first time in seven days Bloomberg (21/9/09)
Public sector borrowing soaring BBC News (18/9/09)
Govt spending cuts ‘could help pound’ Just the Flight (21/9/09)
Pound dips to four month euro low BBC News (18/9/09)
Weak pound hits eurozone holidaymakers Compare and save (21/9/09)


  1. What is the relationship between public debt and the value of the pound? How do interest rates play a part?
  2. What is quantitative easing and has it been effective? How does it affect the exchange rate?
  3. What are the advantages and disadvantages of a freely floating exchange rate relative to a fixed exchange rate?
  4. If the UK had joined the euro, do you think the country would have fared better during the recession? Consider public debt levels: would they have been restricted? What would have happened to interest rates? What would have happened to the rate of recovery