UK Quagmire
Former UK Prime Minister Harold Wilson once said that a week is a long time in politics, well, if that rings true then the past year in financial services has been an eternity.
Looking back to the collapse of US-bank Lehman Brothers, it is frightening how close the subsequent banking crisis came to instigating a meltdown of the global financial system.
The situation at the Royal Bank of Scotland (RBS) and HBOS banking group was so serious over one weekend in October last year that the regulator was close to preventing the banks from opening on the Monday, had a rescue plan not been put together in a frantic bid to keep the banking system working.
A headline in Britain’s Observer newspaper said the ‘UK was hours from bank shutdown’ last October.
This illustrates how deep the banking crisis was, not just in Britain but elsewhere, as over-stretched banks ran out of credit and were forced to seek government help.
And as the UK economy is more dependent on financial services than its neighbours, it is no surprise reports state that it will be slower to emerge from recession than them, given the scale of the banking crisis.
The banks want to shore up their balance sheets and are doubtless concerned about further bad debts, given a weak housing market and a lacklustre economy.
This means corporations are likely to see their credit restricted, further limiting economic growth.
This in turn is irritating to the government, which now has controlling stakes in several banks, but it cannot, or will not, force the banks to lend more and it to is facing restrictions on how much more it can pump into the economy.
Another factor, which is less talked about, is the fact that the UK has kept the pound and stayed out of the euro zone.
In the past, this was seen as a sensible move, given the strength of the pound and many UK commentators expected the euro, as a political, rather than economic, project, to struggle.
Now a weak pound should help UK exporters, but at the same time, higher import prices could hinder a recovery.
While there are still considerable obstacles to joining the euro, such as the euro-scepticism of many political leaders and elsewhere, in time this may diminish.
One noted economic pundit once told CoreData that the UK would inevitably join when a future crisis, or economic failure, made staying outside just too unattractive; perhaps this day is closer than we think.
The current state of the UK economy then, is that the initial relief at surviving a severe banking crisis is wearing off; now a long, slow road to recovery lies ahead and the size of problems such as low growth and a weak currency are becoming apparent.
