By Colin Borland
There was a sketch in one of the early Comic Relief shows in which a banker from the 1970s explained the extent to which servicing their international debts had impoverished so much of the developing world.
“Let’s invest in countries,” he said, recalling the thinking of the time. “I mean, they can’t go bust.” But, of course, as functioning states, they pretty much did fold, to the point that they became unable to feed their populations.
By no stretch of the imagination am I an international financier, and I am sure there are many differences between the problems which beset parts of Africa then and those affecting the more colourful members of the Eurozone now. For one thing, Africa’s debt problem was pretty much allowed to persist until the G8 debt write-off deal in 2005 (which I know scarcely marked the end of the process), whereas, when it’s on our doorstep, European governments and institutions are moving heaven and earth to sort it out.
But the central fact remains: our institutions have bought supposedly rock-solid assets on which they could now make a loss. And, when banks make a loss in one place, they need to make it up elsewhere – which is where it really starts to matter to our households and high streets.
It's true that UK bank exposure to Greek sovereign debt is described as fairly modest (which is what you call £2.1bn if you’re running world financial markets). But, if you include private Greek lending (to borrowers other than the state), the last total figure I saw came to about £9.1bn.
Even then, worries go beyond banks hiking costs to cover losses. What could cause real problems is if Greece defaults and all their creditors lose their money. Then, we have been warned, we could see a domino effect in countries such as Portugal, Spain, Ireland and Italy, leaving banks with less money to lend and slowing the economy.
I’ll leave economists to debate how likely this scenario is – but I know one thing, for sure. This time around, we wouldn’t be heading into a credit squeeze off the back of a decade-long boom. We would be going in gripped by a downturn which has exhausted the reserves of many small businesses. The money for a rainy day has gone, costs are rising, margins are tightening and custom is falling. If sources of business finance become even more scarce, many firms – together with the jobs they sustain and revenues they generate – could simply run out of road.
Today, this might still be someone else’s problem. But the credit crunch started in US trailer parks.
– Colin Borland is head of external affairs for the Federation of Small Businesses in Scotland
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