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Fall of banks paints bleak future for Scotland’s economy
“Meltdown Monday”, which saw the effective nationalisation of both Royal Bank of Scotland and HBOS, and the downfall of failed banks’ leaders such as Fred Goodwin and Andy Hornby, was a cataclysmic day for Scotland’s place in the world and the future of the Scottish economy.
It is not only Scotland’s short-term economic future that looks bleak as a result of the extraordinary events of recent weeks, with 38,000 job losses forecast in financial services alone.
Longer term, and given the ending of three centuries of banking independence, the outlook could be bleaker still. People are going to have to come to terms with the fact that a paradigm shift has occurred, and the halcyon (or were they?) days of bountiful, cheap and easy credit may never return.
In the wake of the implosion of the derivatives-fuelled early-21st-century banking model, the so-called Great Deleveraging is already underway. This is going to be painful for individuals, companies, investors and governments. All are going to have to learn new ways of working — to save more, borrow less, share more and learn to live within their means.
The effect of this deleveraging is already making itself felt in the “real” economy in Scotland. The Lloyds TSB Scotland Business Monitor report last week predicted a 28% drop in turnover for Scottish businesses in the next six months. The next phase is unfortunately going to be a wave of corporate bankruptcies, which will ratchet up the unemployment figures further.
The scenario that is being repeated from Dumfries to Dornoch and from Coldstream to Lochinver is that businesses of all shapes and sizes are discovering that that nice banker who last year was able to lavish loans on them has changed his spots and turned into a menacing mafioso, issuing horrible threats unless loans are renegotiated and credit lines curtailed.
It is also going to be much more difficult for leveraged buyout supremos such as Sir Philip Green and Sir Tom Hunter to create the mirage of great growth through excessive borrowings.
For the first minister Alex Salmond, the demise of the independent Scottish banks is perhaps even worse news. It has revealed Salmond’s idea that he could lead the country into independence by 2011 to be a romantic dream.
Successive governments have seen financial services as a finely tuned engine that would drive Scotland’s future economic growth. Now that the banking part of that engine is broken, the life insurance and fund management components of the motor are suffering the risk of contagion. As stock markets plummet, they could find they run out of fuel and come spluttering to a halt — or at least a misfiring slowdown — at some stage over the next six months.
Unfortunately Salmond, who at times seemed too beholden to high profile bankers such as Fred the Shred, does not seem to have had a plan B. If he’s going to avoid a long and painful recession, he’s going to have to find a new engine for Scotland’s economic growth sharpish. And it’s going to have to run on a more sustainable type of fuel.
The sad truth is that Scotland’s pretensions to being a world-class banking centre were little different from those of Iceland. The thing could only last as long as the banks could keep borrowing money cheaply. In international financial circles, Scotland has become a laughing stock.
Fall of the titans
Within a few years, I’m willing to wager that neither RBS nor HBOS will exist in any recognisable form. The two banks’ “success” was ultimately based on a mirage and the fund managers, analysts and financial hacks who willingly suspended their disbelief have much answer for.
A taster of this came from the former Credit Suisse First Boston investment banker, Stephen Hester, who takes over as chief executive of RBS next month. At a press conference last week, he said there are no “sacred cows” at RBS. Eventually Hester will dismember much of the empire put together by Goodwin, with just a rump UK clearing bank remaining. At Abbey National Hester employed a similar “slash and burn” strategy before selling the bank on to the Spanish bank Santander.
Once the two Scottish banks emerge from the taxpayer-funded intensive-care ward, they are going to be unrecognisable, emasculated and at risk of being unable to retain their independence.
Lamented prophet
There’s a strange symmetry in the fact that Ian Rushbrook, the very talented Edinburgh-based fund manager who has been predicting the banks would crash for years, died last Sunday.
Ian came in for a lot of flak while the debt-fuelled consumer party continued apace. More bullish investors couldn’t get their heads around Ian’s conviction that the party couldn’t last. Now the bust that Rushbrook predicted several years ago is with us, he has been utterly vindicated.
At the Personal Assets Trust AGM in July 2007, Ian said: “Is the financial world sleepwalking into disaster? No. It’s worse than that. It’s walking into disaster, wide awake . . . Charles Kindleberger, author of Manias, Panics and Crashes, explains this by quoting the Roman writer Petronius: ‘Mundus vult decipi: ergo decipiatur’ — ‘the world wants to be deceived, so let it be deceived.’
The Scottish Agenda column was published in the Sunday Times Scotland on 19 October 2008. Read on Times Online