THE ECONOMY
Another message from the sandwich-men
JOCK BRUCE-GARDYNE
any years ago I was approached by a farming constituent of mine with a problem. Five and a half years before he had borrowed £15,000 from his friendly neighbourhood bank manager to finance the purchase of the adjacent farm to his. He had set his name to a five-year repay- ment schedule. But times — so he told me — had been hard. When the five years were up the previous spring he had not contrived to pay a penny piece of principal or interest. He had then gone back to the friendly neighbourhood bank manager, Whom he had persuaded to part with another £5,000, on condition that the lot — £20,000 of principal plus accrued interest — should be repaid by the ensuing Martin- mas. Martinmas was nigh upon us, and he had not the wherewithal to pay. Yet if the bank foreclosed, as it was threatening to do, he would be obliged to sell both his farms, and even then the bank would not get its money back. Could I please ask the bank for extra time on his behalf?
I duly wrote. And by return received a handsome assurance that time would in- deed be forthcoming. Ever since then I have harboured the suspicion that bank managers are not always wiser than we lesser mortals are when it comes to dishing out the credit: and also that the more foolish the loan, the more helpless the lender to refrain from sending good money out to join the bad.
For three years and more the bankers of the world have been living beneath a great black cloud called 'sovereign debt'. Mean- while, down here in the street, the prophets trundle to and fro with their sandwich-boards proclaiming that 'the end of the world is nigh'. Some, like Mr Heath, see no escape at all, since 'there were giants in days of old' who sat round tables and resolved these little local difficulties by the application of their collective wisdom; whereas now there are but pygmies left. Some, like Mr Denis Healey, somewhat spoil the effect by pasting 'Tuesday week' across their sandwich-boards, and then having to paste a different date on top when Tuesday passes and the roof does not fall in. Some, like Lord Lever, are more constructive. Once a year, or maybe more often, they come out with a leaflet to explain how death and destruction may yet be averted. The latest, Debt and Danger (Penguin, £2.95), is a joint production from the pens of Harold Lever and Christ- opher Huhne, of the Guardian newspaper.
It is all reassuringly familiar. In a sane and ordered world, they tell us, capital flows from the richer countries to the poorer, not only from altruistic motives, but also because the poorer are capable of achieving a faster rate of growth, and hence a higher return on their richer neighbours' money. The northern hemi- sphere, in short, like Tom Lehrer's old dope-peddler, 'does well by doing good'. But since the early 1980s the world has turned up side down. The capital has been flowing northward. As a result the have- nots are being made to scrabble like fury to export more to pay their debts, and 'indus- tries in the advanced countries have to make way for Third World exports and resist the adjustment by ever more strident appeals to protectionism' (one or the other, surely, but not both?). Any day now one or more of the deprived will go on strike and declare default on its debts. That will bust the commercial banks in the North which made the loans to be de- faulted on. So the governments will have to step in and nationalise them wholesale, or we'll all be up the spout. Since the capital- ist world does not presumably want to nationalise its banks it had better stir its stumps and get the money flowing south- wards once again. How? Well apparently — and this, I think, is a novel suggestion — by getting the US Export-Import Bank and the UK Export Credit Guarantee Depart- ment to guarantee the additional new loans from the commercial banks.
Now one doesn't want to indulge in nit-picking, but is it really true that the poorer countries are being driven to des- titution by the obligation to service and repay their debts? Somehow it doesn't quite look that way, since the creditor banks are desperate (like my former con- stituent's bank manager) to provide them with the cash to enable them to pretend the loans are 'performing'. To the extent that there is a net northward flow of funds is this not — in large part, at least — because the gentry who run the economies of the 'Le Shakespeare nouveau est arrive.' poorer countries are themselves busily engaged in shoving any cash that they can lay their hands on to safer havens further north? Moreover is it transparently ob- vious that it must be far better for the welfare of the poorer countries to be the recipients of cash inflows for their leaders to 'recycle' out again than for extra em- ployment to be created locally by the acquisition of export markets in the indust- rial world? Undoubtedly it is far more comfortable for the advanced industrial countries to build steel plants for the starving millions than to have the starving millions sell them back their steel. But that is a rather different proposition.
As for the suggested remedy, the prob- lems arise, as with the not dissimilar scheme put forward by US Treasury Secretary Baker to call in aid the World Bank, when you ask 'and who will guaran- tee the Ex-Im Bank and ECGD?' To which the answer, presumably, is you and me. So it would boil down to nationalising the banking system anyway., To which the authors would retort that this sort of complacency and reliance on 'muddling through' will be the death of us. And certainly it is fraught with hazard. There is the very real hazard, as they point out, of competitive protectionism. There is the very real hazard — which they do not point out — that default by the one country for whom the commercial creditors may well be too scared to arrange 'reschedul- ing', namely South Africa, could set off a chain reaction. There is also the hazard — to which, again, our authors do not draw attention — that the sort of malarkey the commercial banks are now getting up to in their own domestic financial markets to take the place of the loans to 'sovereign' borrowers of the 1970s, the junk bonds, leveraged buy-outs and other fancies, may also end in tears.
Sadly there is no such thing as a financial market without hazard. Solutions of the Huhne/Lever type might indeed get the money flowing once again in the right direction. But they would in all probability take us back in short order to the hyper- inflationary turmoil of the 1970s. 'Mud- dling through' could be de-railed by de- fault, protectionism or another and more international secondary-banking-type fias- co. But handled with flexibility and a bit of luck it could yet achieve that 'soft landing' from the inflationary excesses of the pre- vious decade towards which we have been groping since 1981. Worth a try, anyway.
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