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Nov
23

WILL THE BANKS EVER LEARN? by CAMERON DUODU

Yesterday it was the mighty USA. Then Great Britain.

Financial institutions in these countries, which everyone had assumed were as solid as the oaken doors that keep intruders out of their premises, were suddenly flailing.

The hydra-headed octopus of a financial leviathan, AIG needed a cash transfusion from Uncle Sam. Lehman Brothers folded. The ageless Freddie Mac and Fannie Mae were placed under the probation of officials they would probably not have lent money to in the good old times. Royal Bank of Scotland was nationalised. Northern Rock crumbled at the feet of depositors seeking to get their money back — and woke up under the cold, steely eyes of Bank of England husbandry.

What could be happening? You put your money in a bank because you don’t want to place it under your mattress or in a freezer. And yet it is the trusted bank takes such risks with your money — and that of millions of people — as to make the danger of your not being able to get it back, suddenly real.

And so, the Governments step in. They throw taxpayers’ money at the banks and call it “quantitative easing”. They expect the banks to lend the new largesse to companies and individuals who are feeling the pinch of economic recession. The Governments are interested in keeping people in employment, not thrown on to the dole queues.

But the banks don’t take any of the expected, reciprocal actions. Instead, they take even greater risks with the money they’ve got from the US and British Governments (estimated at well over a trillion dollars). For they do want to be able to repay the Governments quickly. That is because the last thing they want is any Government supervising the way they do their business, especially, the sort of risky business that brings in huge ‘bonuses’. Dealings in ‘derivatives’. Hawking of ‘collaterised debt obligations (CDOs).

Now, so much has been written about all this that you would be justified in thinking that the fright taken by the banks and financial institutions of the United States and Britain would transmit itself to other countries. After all, this is a “globalised” world where if the big financial boys in Wall Street (New York) and the City (London) sneezed, the whole world would catch a cold.

Hahaha. The Greeks didn’t seem to have heard of the US-UK near-meltdown. Greece borrowed enormous sums of money to finance the Athens Olympics of 2004, and also to carry out public spending and even award pay increases. This reckless spending widened the Greek budget deficit enormously. And because Greece is a member of both the European Union and the Union’s Monetary System, it came under severe pressure from the rest of the EU, which believed that Greece was putting the financial stability of the entire EU at risk.

Greece eventually bowed to the pressure and began to cut down public spending, which led to its laying off many workers. Riots followed this in May 2010, and several people were killed. In the end, Greece went, cap in hand, to the IMF and the European Central Bank to borrow — a whopping sum in excess of $120 billion.

Meanwhile, next door to Britain, Ireland was happy, enjoying a “boom” that saw it registering GDP growth rates that were phenomenal in European terms — its economy grew from 5.8% in 1994 to a peak of 11.4% in 1997, before falling back to 6.0 in 2007. In nearby UK, the growth rate recorded in 2007 was only 2.6%.

But apparently, the Irish boom was largely a mirage. It was caused by borrowing — borrowing to build, and borrowing to buy the properties built with borrowed money. 100% mortgages were not at all rare and what with a large public sector borrowing requirement also undertaken to fund both current and capital spending, Ireland was, by late 2010, the “most indebted country in the world”. Its per capita external debt amounted to over $535,000.

The Irish debt comprised mainly lending by non-Irish banks to Irish banks , totaling $170bn, of which British banks had provided $42bn, German banks $46bn, US banks $25bn and French banks $21bn. By mid-November 2010, it had become obvious that Ireland would have to obtain a new injection of serious money or go under. Its banks, already distrusted by the populace because of scandals, were in danger of having a ‘run’ on their funds by depositors — something that Britons had experienced in 2008, in relation to Northern Rock Bank.

Yet the Irish Government pretended that it could ride the storm. Then, the IMF and the European Central Bank descended on it. On 20 November, 2010, the bubble burst: the Irish Prime Minister, announced that he had asked the IMF and the European Central Bank to lend Ireland about $100 billion, with Britain contributing a further $10 billion.

The way the banks led Ireland down the garden path has once again raised the question of how to control these institutions which cause so much trouble to governments and yet always stay on top, no matter what happens to the governments that failed to control them. After 2008, it had been hoped that bonuses paid to bank bosses would be pegged to how they “performed” — in other words, what sort of solid business they brought to their banks. But the banks have steadfastly refused to change the criteria they use to judge who is qualified to receive a bonus and if so, how much.

Robert Peston, the well-informed BBC Business Correspondent, for instance, wonders whether the bankers who lent money to the banks in Ireland would still be paid their bonuses. To which the answer would seem to be a resounding yes. After all, the IMF, the European Central Bank and the British Government are all giving money to the Irish Government, which the Irish Government will share with the banks! So, as far as the banks are concerned, lending money to Ireland hasn’t been anything other than normal business for them: they lend money to get it back with interest. How the money is eventually repaid is none of their business. So why shouldn’t the bank employees who packaged the Irish loans get their bonuses as usual?

Another question posed by Robert Peston is this: why should Britain, which is itself short of money, be giving Ireland a loan of $10 billion? Peston says the reason is that many British banks have lent enormous sums of money to Ireland, and so if the Irish economy goes to the wall, it will most probably take a few British — and other nations’ banks — with it.

Which British banks are at risk? asks Peston. His answer: “Well, according to new research by Morgan Stanley, total lending to Ireland’s private and public sectors is equivalent to 92.3% of the net assets of Denmark’s Danske Bank, 89.5% of Royal Bank of Scotland’s net assets, 60.2% of Lloyds’ net assets and 15.9% of t Barclays’ net assets. Those figures exclude bank-to-bank lending, but they indicate how exposed Britain’s banks are to Ireland’s woes (Royal Bank of Scotland is most exposed, as the owner of a substantial Irish bank, Ulster Bank”.

So everything the Western Governments and their financial arms do is essentially in their own self-interest, though that self-interest is often masked. That is why they cannot control the banks, for the banks share their booty with them. Martin Wolf of the London Financial Times, in a rather ingenious argument, says it is high time to take the bankers on. He thinks “it is a gross misallocation of resources to pull the most talented people into a business whose true ‘value added’ is modest, and many of whose activities are zero sum. For the UK it has surely been a catastrophe.”

Martin Wolf adds: “The more energetic and “talented” bankers are, the bigger the risks they will take. I no more want bankers to have such characteristics than I want those who run the electricity grid to have these characteristics. The reason even junior bankers make so much money is that they sit on the money flow, which is the result of the licence given by the state to create money.

“We should not give any support to the ridiculous idea that bankers really do deserve their pay in some objective sense…Special talent really isn’t needed in commercial banking. What is needed is trustworthiness, caution, scrupulousness and organisational ability. Everybody knew this until a couple of decades ago. They were right.”

But, Wolf adds, “intervention in the bankers’ pay system has to be subtle: it needs to focus on the structure of incentives and particularly whether there is any tendency to increase risk-taking.”

So if the scions of financial journalism, such as Robert Peston and Martin Wolf, are saying these things about the banks, why do they continue to hold so much power, especially, so much power to do harm to ordinary, hard working people who do not wish to be thrown on the dole queue any more than they want a hole in their heads? The answer is the politicians. They fear the bankers. Throughout history, politicians have sold the people’s interests short in favour of what will please the bankers. Harold Wilson, prime minister of Britain in the early 1970s, was the only one who wasn’t scared of them. He mocked them as “the gnomes of Zurich”. They punished him by forcing his Chancellor of the Exchequer, Denis Healey, to go crawling to the IMF in Washington to bring a deal to save sterling that was as bitter as it was humiliating.

Needles to say, Harold Wilson didn’t last very long in office after that. He resigned suddenly in 1974 for no apparent reason. Other politicians who want to last in office have learnt the lesson: don’t mess with the banks if you want to last in office. Indeed, the people of Ireland are just finding out exactly what reliance on the banks can do to a nation’s spirit — and its government — in the long run. (Ireland’s coalition government is on the point of collapsing, though elections have been promised for early next year. )

Does what happens in Ireland or Greece matter to us in Africa? Yes it does. The world economy is now so closely interwoven that one can never tell when a ‘little local difficulty; suffered by a bank in Ireland or Greece might not affect an international bank with which an African country is in negotiations over the financing of projects the African country is trying to implement. And, unfortunately, African governments do make themselves unnecessarily reliant on international banks.

Ghana, for instance, allows its Cocoa Marketing Board, which is in charge of its major industry, cocoa production, to finance its purchases of farmers’ harvests ANNUALLY through borrowings from international banks. These borrowings, of course, come with interest and other charges. Why can’t an arrangement be made for the Central Bank of Ghana to finance the purchases in carefully regulated “tranches”of local currency made available to the Cocoa Marketing Board, with a watchful eye placed on cash releases so as to avoid inflation? Only those intimately familiar with international financing “deals” can answer that question. But I wouldn’t be surprised if such “deals” are popular because they bring “bonuses” (that word again!” to those who “package” them.

Equally important, the dubious practices which some of the international banks engage in, such as speculating on the prices of African exports like cocoa, tea and coffee, can have a direct, often adverse effect on the livelihoods of millions of African farmers. In 1972, Ghana, under the National Redemption Council regime headed by General Kutu Acheampong, managed to obtain evidence linking some international banks with suppliers’ credits that had been issued in respect of fraudulent deals and had been the result of corrupt relationships between Ghanaian politicians and foreign businessmen.

So Ghana repudiated the debts it considered ‘tainted’ by corruption. However the ire of the IMF and the World Bank – which consider international debts as ‘sacrosanct’ – was spouted on Ghana like tons of water from a water-hose. After Ghana had been squeezed almost dry by shortages of petrol, medicine, books and food imports, General Acheampong caved in. Therefore African countries that walk happily into the credit vaults of international banks must be aware that if the plug can be pulled on Ireland or Greece, it can be pulled on them too. Only, in Africa’s case, there will be no European Central Bank, or friendly neighbours like Britain, to come to bail them out.

LATE UPDATE FROM GHANA
Ghana urges commercial banks to cut lending ratesFri Nov 26, 2010 5:22am GMT
ACCRA (Reuters) – Ghana has stepped up pressure on commercial banks to lower interest rates, as part of renewed efforts to ease credit to small and medium businesses, Finance Minister Kwabena Duffuor said on Thursday.
Average bank lending rates in Ghana are around 28 percent per year. That compares with a Bank of Ghana key policy rate that has fallen to 13.5 percent thanks to a total 500 basis points of rate cuts over the past year.

Duffuor described the high lending rates as unacceptable, blaming high overhead costs incurred by the banks mainly through excessive staff remuneration as they compete with each other.

“It came out clearly that overheads of the banks are going up astronomically and it’s just not right. But they are doing it, hence the decision to sit down with them and look at the situation seriously,” Dufuor told industrialists in Accra.

“The way we have managed our industry for the past years has created a huge problem for us,” he added.

Ghana expects economic growth next year to double to 12.3 percent as its first oil arrives from the Jubilee offshore field. But the country is still reliant on aid and is trying to promote employment in its local economy.

Duffuor said competition had intensified when in the space of just two years, Ghana registered seven banks to operate in the country, leading to the clamour for skilled workers.

He said that after poaching staff and offering them fat salaries, the banks became desperate to bolster their revenues by raising the cost of borrowing. They also pushed consumer loans on clients and saw many loans turn into bad debts.

Duffuor said his office would be holding discussions with the banks to ensure that lending rates go down in line with the government’s economy policy to ease credit for businesses.

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