Banks have been having a bad press recently. My views on the causes are probably better kept out of this article but don’t tar all banks, let alone bankers, with the same brush. Love them or hate them, we need them. In fact we have good reason to be very grateful to our own bank.
While banks have become nervous of lending, profitable companies have amassed large balances because they are equally nervous of spending. There is thought to be $2tn of surplus liquidity in US and European companies alone, held in bank deposits. Some estimates put it rather higher.
The big uncertainty is uncertainty itself. What will happen, will a company go bust, and most importantly since cross-border trade is everything, what will happen to exchange rates? That was meant to be dealt with by the Euro – at least in the 17 countries – but as we all know, this is in deep trouble. I have discussed elsewhere why but despite protestations from politicians, there remains the possiblity that some parts – or all – of the Eurozone will collapse. While companies crave certainty for planning and investment decisions and hence jobs, this circle has to be squared. Step in corporate banking services to cushion the problem.
Look at the figures. The current EUR/GBP exchange rate is about 1.3. Despite poor performance of the UK economy, a Eurozone breakup could see this rate rising almost to 1.7. Since a large part of our trade is with the Eurozone, this presents challenges to UK business because whatever the rate, companies need to be able to plan. This is where hedging and derivatives come into play – they offer stability to the client, albeit at a price. Wrongly labelled as casino operations, they are essential not only to international banking but also for domestic interest rates for example.
Within the Eurozone itself, there is uncertainty where there shouldn’t be any. Analysts suggest that if Greece, Portugal or Ireland drop out they will suffer a devaluation of 50%, 40% and 15% respectively into their new currencies. The real devaluations could be quite different and if an economy collapses completely, substantially more. How do businesses within the Eurozone deal with this unexpected scenario when their investments in Greece take a sudden 50% hit? It is the job of corporate banking to minimise the impact on companies of any such risks.
As the IMF has now admitted, a number of countries, particularly in Europe, are likely to continue in recession for quite a long time if they continue austerity programmes. Successful companies within these economies need to plan and invest or they will go bust, jobs will be lost and the world economy will take an even more serious dive. I am sorry to be a prophet of doom but without effective corporate banking this will become even worse.
I wonder, John, how all this affects the emerging economies of eastern Europe? There has been significant progress growing these economies over the last 15 years….I wonder if this is a speed bump or really hits them hard as well?
A very good question, @AJ. As you know we spend quite a bit of time in Bulgaria where I asked friends and relations about the effect, given the Greece is on the southern border and as like as not, some will want to move to Bulgaria. I was told that the unemployment had increased a bit but, to be honest, it looked like a thriving economy to me. OK our apartment is in the upmarket part of Sofia but we did travel around and things seemed to be OK.
The reason why, I surmise, is that Eastern Europe (which should really be called Central Europe of course) has a culture of full employment (even though that was under employment) and there is highly developed Western European concept of state benefits and early retirement. In this way I guess it is a bit more like the US. Inflation post 1990 has of course eaten into savings and pensions and in some countries like Hungary there was an explosion of Euro-denominated mortgages which has led to a lot of problems as Hungary is not in the Euro.
But the upshot is that the economic centre of Europe is likely to move eastwards, which is not IMHO a bad thing!
The only time I worry about a recession or economic difficulty is when it reaches me personally. I can not do anything about our lousy economic times. It did affect my investments for a while and my home value, but that appears to be over.
Well in the US it appears to be on the way to a solution – I see positive signs in the housing market there. But, as I have written before, the fundamental problem in the Eurozone is the structure – a central bank without the proper powers of a central bank, national banks which have no real role as far as I can see other than to stick their national oar in, and heavy interference from the political leaders who dreamed the whole system up without taking advice from people who knew how money works. Unfortunately for the world, the EZ is a massive trading block now and this affects global business. So it isn’t over – as they say until the fat lady sings!