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12 | International finance
result, banks couldn’t give away mortgages
and loans quick enough, lending to almost
anyone, including those that could ill-afford
to borrow.
When the debtors couldn’t repay their
debts, the assets became ‘toxic’ and this has Banks couldn’t give away
been allowed to happen on a massive scale.
These toxic assets are sitting on banks’
balance sheets like black holes. Since the mortgages and loans quick enough,
banks can’t see each other’s balance sheets,
they have no idea how many toxic assets their
competitors are holding. While banks once lending to almost anyone, including
lent freely, their lines of credit have now all
but dried up. The banks are refusing to lend,
not only to each other, suspicious that they those that could ill-afford to
won’t be repaid. But they also refuse to lend
to legitimate borrowers and businesses with
long histories and strong financial or trading borrow
records, which now need support in the face
of the recession created by the very banks are
refusing to lend to them. up the banks are understandable, as the whole outcomes, actually be rewarded for doing so?
economy now depends on their survival, a Bank shareholders and senior staff are reaping
Credit crisis purely top-down approach has not worked huge rewards, while tiny SMEs, who effectively
Worse still, in many cases banks are reducing and will not work. The fact is that banks were built the banks businesses up with genuine
or withdrawing facilities that SMEs, in created by the effort and energy of productivity, are expected to lose everything
particular, are critically dependant on: entrepreneurs and business owners creating to bolster banks balance sheet further.
overdrafts, business loans and even credit business, then jobs, and thereby requiring
card facilities. Entire divisions of new jobs more and more banking services. Conclusion
have been created inside banks to “remove” In a recession, most businesses look to It is important to recognise the contribution
these toxic businesses, causing further jobs to reduce costs to compensate for falling trade. that SMEs make to society. Given capital and
be lost. This in turn means that less and less With massive fixed costs and assets, the huge credit, this sector will use the money to
clients are available to purchase from SMEs, multinationals (and global banks are no increase output, contribute and bolster the
thus making the actions of the banks exception) need to make reductions. All too economy, instead of bolstering the balance
effectively a bullet to their brain. As the final often this means cutting back on the assets sheets and improve share price like the banks
straw, the uncontrolled lending by banks has they can dispose of, such as labour, which are doing. SMEs would also use these funds to
led to an artificial inflation of property prices, they have done despite all the government sustain or increase employees, pay suppliers
a bubble which has now burst. SME owners backing - huge numbers of staff have been and outstanding tax.
who today beg for credit are required to put laid off, further fuelling the recession. Simply put: more needs to be done. One
up the entire equity of their home AND their Of course, SMEs are not immune to the proposal is the construction of a National
business as security, and if that fails they lose global turmoil and they need to make cuts Small Business Committee (NSBC) to
everything and the bank makes more profit too. Usually, however, they adopt a different administer funds directly to SMEs as grants.
from the collapse. attitude towards staff. While for large Those grants should be calculated as £500 per
At the recent G20 summit in London, the corporate labour is apparently disposable, for employee multiplied by number of years in
governments of the most powerful nations SMEs the staff are often indispensable, and at business. The NSBC would consist of
decided to throw over US$1 trillion at the the very heart of the business. Employees are government, industry, treasury and private
ailing financial system. Along with previous expected to be flexible, take on more sector experts.
commitments, this will take the total to over responsibility and work harder to drive small It is important to challenge the UK
US$5 trillion spent on propping up some of businesses through a recession, acting as a government to adopt a different method of
the biggest of those banks, institutions and catalyst for recovery. fiscal stimulus. Growth and recovery should
financiers that have failed us so spectacularly. If these forgotten SMEs are allowed to fail be stimulated by providing resources from the
Yet even these vast sums seem to have been because they cannot access financial support, bottom up, rather than rely on a discredited
swallowed by the banks to shore up their the consequences would be every bit as dire as banking system to distribute wealth.
balance sheets, as they are still failing to allowing the financial institutions and The recent budget failed to address the key
support the small and medium enterprises multinationals at the top of the food chain to issues for these ‘entrepreneurial’ companies
which are the lifeblood of the UK economy. fail. For example, in the UK economy SMEs currently surviving on a day-to-day basis.
The value of the goods and services they account for some 65% of new patents and Small businesses are society’s foundation for
produce are equivalent to 60% of the UK’s technical innovations. More than 70% of new employment, productivity and culture. Trade
domestic GDP, and they also account for product research and development are realised pounds, through Bartercard, provide liquidity
some 70% of the country’s jobs. by these SMEs, yet due to the global financial and new trading opportunities to SMEs but
Instead of trying to paper over the deep crisis, they don’t have access to finance. the government also needs to support SMEs
cracks in the global financial system, everyone How is it that the service industry designed directly, not through a tainted banking system
should be aiming to rebuild a more to support businesses – banks - now rules that has proven to fail them and the UK.
democratic and fairer global economy. While them? And how is it that banks are able to Fresh thinking and a new approach are
the government’s motivations for propping accumulate and, with disregard for economic required.
July/August 2009 Investment International www.investmentinternational.com
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