Clearance sale
THE most sustained aberration in the banking history of the world — that is how the purists see the burden of debt, weighing equally on the thirty-odd coun- tries which will not meet their obligations, and on the banks which lend the money. They can now say that Citicorp, whose
example as an international lender led so many astray, is now leading them back to the path of virtue — those, that is, with the strength to reach it. It is no aberration (the purists say) when people borrow money and do not pay it back. That has gone on throughout history. What was aberrant was that the banks had left themselves no choice but to sit and suffer. Purist banking begins with the assumption that a bank's assets must be roughly matched to its deposits. So that a deposit can be repaid, an asset must be saleable. The banks' tradition is to finance their customers by holding their bills or bonds — securities which had their own guarantors, assets in which there was a market, and which could be sold, at a price. That would not in itself save the banks from the consequences of their follies. Witness London's first burst of Latin American lending, which ended in tears 152 years ago, as one of the bond- issuing countries turned out to be fictitious. The difference this time was that the banks provided the money as loans, sitting on their own balance-sheets, backed by their own capital, incapable of being turned into money to match a deposit's recall. Good management by the central banks and good luck all round have got us through the consequences. Of the world's biggest, only Continental Illinois has fallen victim to a classic run on the bank. For the others, their illiquid loans had one advantage. Since there was no market for them, no one could say for certain what they were worth. They and their auditors could take a view and, if they thought it right, make a provision. Now Citicorp has put an end to this make-believe. It is to use the new markets which have grown up as the banks have curbed their lending, as new credit has taken the form of tradeable securities, and as ingenuity has found ways of trans- forming debt into equity. It will sell off its loans for what it can get. Those who can contemplate following, will. It is the begin- ning of the end of the international debt crisis — a market solution for what the politicians found insoluble. The lenders can clear their books.
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