British banks are sitting on “£40bn of undeclared losses”. So says Pirc, the UK’s leading shareholder advisory group. What’s more, Pirc argues, the massive backlog of undisclosed bad debts is preventing our banking sector from making vital, growth-boosting loans to credit-worthy businesses and households.
It doesn’t surprise me that some of the UK’s leading banks are technically insolvent. What does surprise me is that it’s taken until last week for a respected professional body like Pirc to state the obvious.
Last weekend’s election results in France and Greece, we’re told, show that eurozone voters want “growth, not austerity”. In the UK, too, the deficit-cutting coalition government is being widely castigated for “lacking a growth policy”. In reality, though, “growth versus austerity” is a false and dangerous dichotomy, a misleading policy choice that has been formulated and fed to electorates in Britain and elsewhere by opportunistic politicians and their pet intellectuals.
“Economic growth” isn’t a decision a government can opt for. It is, instead, an outcome – an outcome we want and need, and which can be achieved in a variety of ways, none of which is guaranteed. There are, on the other hand, many ways to guarantee that growth won’t happen. One way is for country to borrow and spend far beyond credible limits so that, in the end, bond markets refuse to roll over their sovereign debts. Growth won’t happen in the midst of a creditors’ strike, when sovereign bond markets are in meltdown and interest rates spiraling out of control.
It’s easy to criticize Mitt Romney. The former Massachusetts governor and erstwhile runaway leader in the Republican nomination race has had a bad two weeks. First Romney learnt that, having “won” the opening Iowa caucus, he actually lost on a re-count. In the South Carolina primary, he was trounced by Newt Gingrich after a lackluster debate performance.
Romney then bungled his personal tax return, insisting he wouldn’t make it public for months, then releasing it anyway. This is bad timing for the man seeking to be the first Mormon President. The still-fluid Florida primary is this week. There’s just a month before “Super-Tuesday” – when Republicans in 10 states pick their candidate – and the Presidential election itself is only nine months away.
So, now we know what the latest euro-crisis summit has to offer. The fifth comprehensive effort to stabilize to eurozone in nineteen months, this latest Brussels gab-fest produced a slew of headlines and initiatives. But what did it really achieve? The single currency remains just as incoherent as it was last weekend, just as vulnerable to systemic collapse. The region’s banks and governments are still very highly indebted. Eurozone leaders are deluded if they think some diplomatic sticking plaster, and a lot of bluster, can hold together an inherently unstable structure.
What’s more, to use a combination of borrowed and printed money to bail-out cash-strapped governments, which are insolvent largely because they, in turn, are standing behind insolvent banks, is to treat the symptoms of the crisis, not the cause. This historic policy error – tackling the results of the problem rather than the problem itself – has characterized the West’s response to this sub-prime fiasco from the very beginning, not just in the eurozone but the UK and US too. Europe’s predicament is so much worse, though, given the restrictions imposed by the single-currency straitjacket.