The Smell of Fear

I wouldn’t bother looking at the TV news if I was you. It’s not very nice. Draw the curtains and make a cup of tea instead.
Over on the continent, you have a sovereign debt problem about to be turned into a banking crisis by political incompetence. Which, I guess, is what happens when you try to get a room full of chalk and cheese to agree on anything.
Over in the USA, the Republican Congress’s determination to turf Barack Obama out of the White House means both sides can't agree on any long-term solution to the USA’s gargantuan budget deficit before the 2012 Presidential vote. Which is certainly brave, but may turn out to be stupid.
With those two elephants in the room, do we even need to talk about the UK’s flat-as-a-pancake GDP? Thought not.
Much as I’d like to dismiss the problems over in the Eurozone – and the political turmoil in particular is a gift to Europhobes – it presents a clear and present danger to our frayed economy. Despite all the talk of China, India, Russia and Brazil being the Next Big Thing in exporting, the amount of money we earn from them is dwarfed by what we routinely rake in from the likes of Ireland, France, Germany, Holland, Belgium etc.
They are our closest trading partners in every sense, and we need to do more with them.
So, imagine a situation where your business partner on the continent says he can’t pay you this quarter and isn’t currently able to finance any new orders. Unfortunately, that scenario is no longer completely in the realms of fantasy land.
The Eurozone crisis is a story of world financial markets ruthlessly chasing down governments and banks who haven’t given a straight answer to the question ‘When are you going to pay off your debts?’. Greece borrowed so much that, whatever the eurozone might pretend, markets have already decided it can’t pay.
So the next question is what happens to the people it and other debtor nations owe money too? That’s where some European banks come in, and they now find themselves in the same situation that UK banks did in 2007-2008: carrying huge debts that they do not have enough of their own capital to cover.
This, though, isn’t the problem. That lies with European governments. Between them, they can decide to let Greece default on its debts and provide banks with all the funds they need to cope. It won’t be pretty, but it can be done in an organised fashion.
It can, but will it? European institutions are not used to taking decisions quickly, when you dissect those decisions they often turn out to be fudges open to localised interpretation, and there is a history of allowing exceptions through opt-outs or different groupings.
What do world financial markets do when confronted with the failure to answer serious questions about debtors? They take the decision themselves.
That’s what is happening at the moment. When indebted European banks go out into the money markets and seek routine funding to support their cash flows they are being told ‘Fine – but the price has gone up’.
This is exactly what happened here in 2008 when the London Interbank Offered Rate – what banks charge each other for lending money – shot up overnight. UK banks responded by clamping down on lending out the money in their own accounts, and the results of that are still being seen in our own dismal GDP figures.
You’ve seen the Bank of England announce today that it will drop another £75 billion into the UK economy through further quantitative easing. That will help us in the medium to longer-term, and may assist some measures of business confidence.
But only when the European question is answered will we be able to look forward.
The Eurozone may yet get cajoled, pushed and kicked into a categorical pledge to support financial institutions come what may and to accept that Greece won’t pay back some of its debts.
That in itself won’t be a get-out-of-jail card. But the alternative is…well, if the alternative happens I’d send the TV set back.