• Governments too slow to act, warn central bankers
• CBI sounds warning over ‘worrying’ bad debt levels
Taxpayers around the world still face potentially large losses because governments have failed to act quickly enough to remove toxic assets from the balance sheets of key banks, the world’s leading central bankers warn today.
Despite months of co-ordinated action around the globe to stabilise the banking system, hidden perils still lurk in the world’s financial institutions according to the Basle-based Bank of International Settlements.
“Overall, governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks,” the BIS says in its annual report. “At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses.”
It comes as the CBI employers’ organisation reports that the British banking system remains under pressure, despite tentative signs of green shoots in the financial sector.
In their latest quarterly financial services survey, the CBI and PricewaterhouseCoopers (PwC) say many parts of the sector expect business volumes to rise in the next quarter after 21 months of falls. But despite these early signs of optimism, Ian McCafferty, the CBI’s chief economic adviser, cautioned that banking remains “under pressure”.
“Conditions remain challenging, particularly for the banks. Although demand looks like it is beginning to recover, it is doing so from a very low base. We can still expect lower profitability, significant job losses and cuts to investment in the coming months. The rising levels of bad debt are a further worry for the industry,” he said.
His note of caution chimed with the warning from the BIS. As one of the few bodies consistently sounding the alarm about the build-up of risky financial assets and under-capitalised banks in the run-up to the credit crisis, the BIS’s assessment will carry weight with governments. It says: “The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy.”
It also expresses concern about the dilemma facing policymakers on when to start reining in the recovery. “Tightening too early could thwart the recovery, whereas tightening too late may result in inflationary pressures from the stimulus in place, or contribute to yet another cycle of increasing leverage and bubbling asset prices. Identifying when to tighten is difficult even at the best of times, but even more so at the current stage,” it says.
The CBI survey confirms there are still problems beneath the surface, despite growing optimism. Respondents said the value of non-performing loans, or “bad debt”, increased at its fastest rate since the survey began in 1989 in the second quarter of the year and a similar rise is expected in the next quarter.
The survey also found that banks widened lending spreads to a record degree in the three months to June. That provides some support to banks’ profitability, which was broadly flat after six consecutive quarters of decline, but could choke off demand for loans from borrowers and weigh on recovery.
While optimism regarding the overall business situation remained firmly negative, according to the CBI, the rate of decline had slowed on that in recent quarters. However, business volumes fell at the fastest rate since March 1991, but are expected to start to rise over the next three months.
John Hitchins, UK banking leader at PwC, said: “The UK banking industry has seen a further decline in confidence but the rate of decline is slowing.” McCafferty warned the overall optimism in the financial services sector “masks” the fact that some sub-sectors, such as building societies, are still having a very tough time.
About 15,000 jobs were slashed in the financial services sector in the three months to June, compared with 17,000 in the first quarter of the year. The CBI expects a further 13,000 jobs to be chopped over the next three months. A total of 34,000 jobs were lost in the financial services sector in 2008.
Nearly all respondents agreed that it will take longer than six months for normal market conditions to resume.
Death of the super model
As Sweden takes over the presidency of the EU, the sad truth is that its famed social state is failing
The Swedes are coming. As Europe lurches to the right amid financial and climate meltdown, a horde of cool-headed Nordic warriors are riding to the rescue. Sweden’s EU presidency from 1 July will be greeted as a breath of fresh air after the Czech leadership, what with the latter’s antics on climate change and arousal chez Berlusconi. What the EU needs is a whiff of sense and reason. And who better to provide it than the social-minded, climate-conscious Swedes?
Sweden still sets hearts racing across Europe. The “Swedish model” might bring up thoughts of a nubile blonde rather than a strong social state, but it is in the latter incarnation that my home country stirs the passions of left-leaning Europeans. Whatever Sweden does must be right, or so reason progressive politicians and Guardian journalists – not to mention scores of Swedes. But beyond this blue-eyed vision lurks a darker reality. Sweden’s conservative coalition government has stood still as the financial crisis has engulfed the country. Jobs, social services and healthcare are eroding. The Sweden Democrats – the equivalent of the BNP – are on the rise. The social state is failing. The Swedish dream is no more.
Swedes were roused from this dream with the 1986 assassination of prime minister Olof Palme. Palme might have left behind “a country where no one was poor and no one had room for optimism” as Andrew Brown puts it, but it was Sweden’s homemade financial meltdown of the 1990s that finally killed off the dream. Poverty was added to the pessimism. Savage cuts hit schools, unemployment rocketed, the krona sank – leaving the social system in a disarray from which it has not recovered. The conservative government at the time has lately been praised worldwide for its handling of the crisis. Actually the bankers were rewarded, not punished, while the rest of the country is still reeling from the cuts, selloffs and dashed dreams the crisis provoked. But the idea of a well-oiled Swedish model insulated from the shockwaves of capitalism runs on like a Volvo. The reality, like troubled, Ford-owned Volvo itself, is more globalised and gloomy than that.
Take healthcare. Swedes do not enjoy free public care: it costs to see a GP. That is, if you manage to see one. Queues are long and scandals rack the system. Psychiatric care, the source of many such scandals, has a near-medieval penchant for authoritarianism with few European equivalents. People are locked up for months for not taking medicine, given no therapy, and spat out of the system into despair and destitution. The mentally ill die in wards and in outpatient isolation. And they do not even have charities to turn to because state-run healthcare is supposed to work: this is Sweden, after all.
Those who do enjoy Sweden’s second-rate public services are lucky. Undocumented migrants, who lack a “personal number”, are barred from day-to-day healthcare. Foreigners do not fit easily into a social system built on the postwar notion of the folkhem, or people’s home, whose rightful inhabitants are the native Swedes. Despite the xenophobic right’s lack of electoral success, Sweden is divided between those inside the system and those outside it – including the asylum seekers now deported en masse to Iraq. But migrants should be happy to be here. This is Sweden, after all.
Even being in the system is less rewarding than it was. Unemployment benefits are falling behind those of other countries, and access to social security involves Big Brother-style controls most Europeans would abhor. The state’s iron grip remains even as the care that used to go with it has gone. Swedes might lack Britain’s profusion of CCTVs, but their lives are scrutinised by an armada of bureaucrats. A new law lets authorities tap all phone and internet traffic crossing the borders. Norwegian lawyers have sued over privacy infringement, leaving the prime minister perplexed – because in Sweden, the state is there to help us.
Just as Sweden was in the vanguard of postwar social democracy, it has since the 1990s become a neoliberal experiment. The experiment has failed, though this fails to register in Sweden itself. No waves rock the stagnant pools of officialdom: strikes are almost unheard of and the tabloids are too busy flogging diet tips to bother. The Swedes cannot let go of their belief in the system. Nor can many on the European left.
Admittedly, Sweden might seem a haven of tranquillity compared with other European states. But in the hunt for a humane social model, Sweden no longer provides the blueprint. Europe’s progressives will have to construct something new. But to do that, those who let their minds drift northwards for inspiration first have to wake up: the Swedish dream is over.