Southern Cross scandal, raises the question should care homes be profit making companies?

9th June 2011

The Daily Mail reports that there is anger and outrage that so many lives have been thrown into turmoil through the actions of City venture capitalists.

The U.S. private equity firm Blackstone, led by Stephen Schwarzman, bought Southern Cross in 2004 for £162million and sold it three years later. It is believed to have quadrupled its investment, the report says.

32 thoughts on “Southern Cross scandal, raises the question should care homes be profit making companies?”

  1. “When you are in a hole don’t dig”

    Bravo Shaun.. put a smile on my grumpy face this morning. 

  2. James says:

    Great article as usual, Shaun.
    I think that there is a common theme here:
    1. There is only one sensible conclusion from the mess that we are in and that is that the Euro has created the conditions for excessive borrowing for a series of countries;
    2. The only solutions are printing money (vetoed by Germany), letting the Euro break up (vetoed by Germany), cross border Eurobonds (vetoed by Germany);
    3. The only really toxic solution is to slash public spending while not resolving any of the competitive strains of being in the Euro (supported by Germany).

    As a result of this gross stupidity, we are left with various versions of shoot the messenger:
    1. Let’s fire Papandreou and Berlusconi, with the obvious implicit threat to any other leaders not quite on message;
    2. Let’s make sure that there are no referendums;
    3. Let’s ban short-selling;
    4. Let’s have a financial transaction tax;
    5. Let’s ban the ratings agencies from commenting on bailed out countries’ debt.

    Oh, and while we are at it, let’s set up a politburo and call it the Groupe de francfort.

    If you look at the overall picture, therefore, I am not surprised that the half-life of hope has reduced. Everyone can see that the measures are in effect a coup by Germany and France to preserve the Euro. The sad side effect of forcing other countries into an impossible position seems to be of no concern to them.

    Dictatorships usually start with the best of intentions and a distrust of democracy as a way of achieving the end. We are well on that slippery slope now.

    1. Bkester says:

      An excellent comment and I agree with everything you’ve written except that remark about Germany vetoing the break-up of the euro. I really believe that Greeks, Italians, Spaniards etc. feel that leaving the euro would be a sign of failure and national shame, that they ‘didn’t make the cut’, ‘couldn’t stand the heat in the kitchen’ and other assorted cliches. This misplaced sense of pride is, in my opinion, doing more damage than any pressure that Berlin or Paris could ever exert.

      1. James says:

        good point well made. Another sign that politicians are seriously out of touch?

    2. Anonymous says:

      Default is a reasonable solution for Greece , but decried as unthinkable and impossible by the French. (including DSK, Lagarde, Trichet)

      France is starting to require the austerity medicine and French banks look shaky, will this have political consequences ?

      1. Zak says:

        I know what you’re trying to say ExpatInBG but really.. is default a reasonable solution for Greece? The government there currently spends far more than they bring in. Default would leave them out in the cold with no hope of borrowing any significant sums for years. I think default for Greece will be awful, but unfortunately as we all know it is also inevitable.

        The only reason the others treat it as unthinkable is because default leads to a banking collapse. That is the unthinkable part. They dont really give a hoot about the Greeks or the Italians or the Spanish. Its the banks that they seek to protect at ANY cost. The politicians just seek to hide that truth.

        1. Anonymous says:

          Yes default will be awful for Greeks who depend on government money, but this is not a good reason for poor Slovakians to pay tax for rich Greek tax evaders.

          Look at Iceland’s economy bouncing back with prosecutions in the pipeline for some bank directors. Creative destruction of failing banks and accountability for bankers is what Europe needs.

    3. Anonymous says:

      A good summary of the current impossible position. 

      Needless to say, the Germans don’t see things that way, and in fairness to them it was not their fault that so many southern EZ countries let rip on the cheap borrowings and splurged the lot on monster social programmes (Greece)  or tremendous housing bubbles (Spain). In the end there will be debt forgiveness, partial or full, for the problems of the past, though that will reveal the true size of the debt, which I think will be yet another big surprise. Spain in particular has not yet come clean on the quality of its very large construction debts. 

      Forgiveness might well be achieved over time by considerable inflation, notwithstanding German objections. The weak EU management was largely to blame for the total lack of discipline in most of the 17, including the large ones, and has to take responsibility for fixing the past. 

      The bigger problem is the future. Holding deficits to 3% will not be possible without quite drastic changes in living standards in many countries, unacceptable to those who only joined for the promised jump in standards. But not doing that means repeating the whole fiasco of overborrowing unless someone else is paying the bill. Merkel is wrestling with the very tricky task of allowing inflation into the German system and funding the future budget deficits of quite a few countries, all while pretending to her electorate that she is complying with the German constitution, laws and public opinion, and preventing the bond markets from vaporising. Quite a challenge I think. And shortly to be compounded by the arrival of all those nice new accession countries from the East, palms outstretched.

      1. Anonymous says:

        You make a good point regarding new accession countries. I live in Croatia (the next in line in 2013). Recently there was a newspaper article saying that for every €1 the government spends, it “expects” to get €3 from the EU. How this figure was arrived at I don’t know, nor what level of funding relates to “cohesion” but the underlying tale is one of “more handouts, please”! As you say palms outstretched (and ever-ready to accept).

        1. Anonymous says:

          Hi Ray

          I think that getting access to the EU pot of money was a big part of why countries wanted to join the Euro. That and seeing how Ireland and Greece etc had boomed. But I would suggest that the picture is already looking rather different and may look very different before this phase is over…

          It would be interesting to see the article by the way..

          1. Anonymous says:

            Shaun I agree there will be a huge amount of belt-tightening soon. I will try to find an English version of the article; how can I forward it to you electronically?

    4. Sovjohn says:

      Excellent comment here – Let me put things in perspective from someone living on Hell on Earth, The Ones Who Started It All, The Land of the Devil, et al – Greece:

      Beyond common populism, comparing the Germans with Nazis just because average Joe may see them this way, the situation seems quite grave indeed.

      Greece has committed many financial crimes, largely caused by its political class, and the “trickle down” mentality cultivated in the past 30+ years.

      A meaningful analysis will not serve much, let’s just say that the Greek translation for “austerity” has been on the cards for decades, used by politicians not to put affairs in order, but rather to feed their own clientele and “resisting” general rises in standards of living.

      Fun fact, for instance:

      Greek public sector has not received “across the board” pay rises for decades (save for inflation adjustments here and there). They did get pay rises, and in certain cases, very generous ones – in the form of “benefits” and “stipends”. Why? Because some public servants were “more privileged” than others, and had to justify being paid 3x compared to their colleagues in a “discreet” manner.

      I will not discuss corruption here – just salary politics / income politics, mind you.

      What happened in the end (i.e. now)? All “benefits / stipends” are stripped away, save for a few very specific and cheap ones (children allowance, et al – nothing much, mind), and their wages are stripped to “base salary values”.

      With “base salary values”, we find newly appointed teachers, say, forced to man the posts in far away areas, small islands, villages and the like, taking home 650 EUR / mo or so, and they are given that because they are university-educated.

      Considering that this sort of money has to help them survive in those remote locations, where presumably they don’t have houses of their own, and have to rent, this leaves hardly more than 150 EUR for their monthly expenses, post rent, heating, electricity, and the like.

      Food, clothing, entertainment (allow me to smirk here), everything for that kind of money.

      The situation is no better in the private sector, where “securing” any kind of job at the moment is nigh impossible, let alone the fact that living in major cities means that you are paying for everyday living the London way, not the Egypt way.

      I consider this situation completely unacceptable, and wouldn’t blame people to rebel en masse. I remind you that Greece has upwards of 18% unemployment right now, and this is “official” (i.e. people not showing up every month to renew their registration are not counted, and freelancers / shopkeepers etc cannot be registered as unemployed even if they shut down their shops permanently) – unofficial numbers would be far more chilling.

      So yes, Greece, the spawn of antichrist who has caused them all, contracts to no end and somehow is still standing.

      The other countries, PIGS or what have you (Portugal, Italy, Spain, Belgium, France, etc) are not nearly in the same predicament as Greece has been in the past couple of years. I sincerely believe that if what happens here took place in France, they would reminisce their traditions and throw Sarkozy and their politicians to Bastille, with guillotines to match.

      Germany (as always) attempts to be “the sensible one” and vetoes all meaningful solutions to this mess. Greece may be the black sheep, but surely if the black sheep eventually outnumber the white, something has to give.

      And I don’t foresee Germany on its own holding the line much longer. It’s make or break time.

      At some point not too far now, it will simply become “Enough is enough”. Whether this will lead to wars or chaos, I cannot say, but really – how can a supposed Union be governed by 2 (in reality, 1) member(s), I can’t fathom. At least I can’t see it being a sustained situation.

      Monetize debt by the ECB, offer 30+ yr repayments to countries, break things up and let everyone start anew. How can it get any worse?!

      PS: Greece is still being blackmailed about its 6th loan instalment, despite Papandreou leaving and Papademos being appointed. It will be approved in the nick of time, just to keep us busy with doom scenarios. Not even an ECB technocrat can satisfy EU officials now…

      What will happen in Greece’s 7th or 8th instalment, I dread to think. Perhaps they’ll “demand” the sculps of hundreds of thousands of populace to prove Greece is “cutting” (nutrition) “costs now”.

  3. Anonymous says:

    At what point does all the European gold get transferred to the ECB as custodian of the currency? Will that be a signal of new found stability or a sign of impending final disaster?

    1. Anonymous says:

      germanys’ gold isn’t even in germany its in america.. so i guess if the germans ask for it back and its not forthcomming then we know its bad!! .. 

  4. MajorFrustration says:

    Stress test anyone?

    1. Zak says:

      Lol. The only stress test needed is against the ECB where all those bonds are held at their real market value.

  5. Anonymous says:

    Interesting point kit but most of the german gold isn’t in germany its in america.. i guess we know things are really bad if the germans ask for it back and its not forthcomming!!   

  6. Anonymous says:

    Thank you Shaun, it’s relentless pressure. Turning to the European Banking Authority’s advice that all Eurozone countries should issue term funding guarantees for their banks and require suspension of bonuses and dividends whilst new capital is raised ( from God knows where) is this not all going to get more volatile?

    1. Anonymous says:

      Hi Shire

      I have to confess I had to remind myself of what the EBA meant by that and for anyone else looking for a refresher.

      Term funding guarantee schemeNotwithstanding the European Central Bank’s (ECB) support for banks short term funding needs, additional steps are required to restart the term unsecured funding market. This would help banks to continue their lending activities in 2012 and to avoid a spiral of forced deleveraging and the ensuing credit crunches, which would affect the real economy.

      To this end, public guarantee schemes should be set in place where appropriate to support banks’ access to term funding at reasonable conditions. A coordinated approach at EU level is needed, especially in terms of entry criteria, pricing and conditions. The EBA has been asked to work with the EU Commission, the ECB and European Investment Bank (EIB) to urgently explore options for achieving this objective.
      As far as I can see there are two main problems with this.
      1. They plainly have no idea how to do this in practice ( A clear danger here is too wide a guarantee like the Irish one of October 2008 which ended in catastrophe).
      2. If the support is counted as sovereign lending then fiscal deficts and national debt to GDP ratios will take another lurch in the wrong direction.

  7. Drf says:

    http://www.nber.org/~wbuiter/cr1.pdf  “This time is different: Eight Centuries of Financial Folly” summarizes the predominant issues.

  8. Drf says:

    http://www.nber.org/~wbuiter/cr1.pdf “This time is different: Eight Centuries of Financial Folly” summarizes it all.

     

  9. Zak says:

    Off Topic:

    does anyone else have problems viewing the comments on this site?

    The sequencing often seems muddled and frequently posts do not appear after I post them but then reappear 5 or 10 minutes later. I only ask because today I’ve also noticed several duplicated posts.

    Or maybe its just me ??

    1. Anonymous says:

      Hi Zak

      I will ask for it to be looked at.

    2. Anonymous says:

      Hi Zak,

      Sorry you seem to be having issues with the commenting system. I’ve checked with the tech team and there doesn’t appear to be any problems. A while ago another reader raised similar concerns, and he tried using a different browser which seemed to solve the issue. I use Firefox. Hope this helps.

      Thanks,

      Marco
      Community Manager

  10. Looks like the ECB intervened today and the bears came back with a roar late in the day. If the half life of an ECB intervention is not even half the day we’re in some hot water. France’s bonds also took a nice broadside. Me thinks The End Game approaches. Within weeks at this rate. I doubt hot air and grand pronouncements will suffice. 

  11. Anonymous says:

    Greece, Portugal, Ireland qualified for the Euro 2012. Croatia also, I would be worried in their case, very worried.

    1. Anonymous says:

      Vassilis – so true. The “thinking class” is extremely worried, but as there is no “Plan B” for Croatia as all the politico’s are 500% convinced it is the “right think to do” the vast majority will, as usual, just go along for the ride. A referendum on accession is due this year – watch this space for the results!!!

  12. Pauleade says:

    Great summary Shaun.I really do not understand why the Eurozone politicians and ECB cannot see,or  willnot act upon  the Tsunami heading towards them .Carnage is in the offing

    1. Anonymous says:

      Hi Pauleade and welcome to my blog.

      What you say has been true since the Spring of 2010. It might have been possible to hold the line back then if decisive action had been taken but instead hyperbole and bombast replaced plans and logic.

      In the end Ireland’s banks would have meant she needed a formal aid package but Portugal could maybe have kept out of its current problems with proper help. But as these things would have relied on confidence we will never know now.

  13. Buck says:

    Shaun, I’m curious as to why we have not heard more make light of the fact that Spain is having elections on Sunday, and the opposition PP is polling in the lead.

    http://en.wikipedia.org/wiki/Spanish_general_election,_2011

    Could we not see similar skeletons escape the closet, as they did when Papandreou become PM of Greece?

    1. Anonymous says:

      Hi Buck and welcome to my part of the blogosphere.

      It is hard to know what the effect of an election right now is. One could argue that it contributed to todays poor bond auction which led to Spain coming under more pressure. But right now governments are constrained in issues such as fiscal policy particularly if the wish to remain in the Euro, so one might argue that they should have less of an effect than normal….

      As to the skeleton in Spain’s closet it is likely to be the finances in her regions. There were problems after the local elections and could easily be more after a general election.

  14. BritinPhils says:

    Why not let the banks get on with it? And fail if necessary. And I am certain, far less banks would be declaring themselves in trouble (and then unburdening their mistakes onto us taxpayers) if they were faced with a stark choice of “put up or shut up”.

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