Another decade of economic pain?

‘So turns out what was a local US problem “contained” in specific lending sector turns out to be a broader issue once people realise that thanks to rapid monetary tightening, all banks will be holding some underwater bonds. Credit Suisse just has the bad luck to find itself at the epicentre of the “crisis” given its decade of personal woe and frankly irresponsible comments from SNB its largest shareholder on Monday. This is a “crisis” manufactured by policy makers. Central banks that have tightened monetary policy too fast are same ones that oversaw ultraloose monetary policy for the last decade. If memory serves, it’s also the same central banks that oversaw the loosening of regulatory policy in the decades leading up to the financial crisis. Hey ho.’

NO ONE likes a smart Alec, but this opinion of mine posted on LinkedIn on 15 March was echoed by The Economist online just hours later. And validated by the subsequent actions of the Federal Reserve and other central banks.

This Monday Ammar al Khudairy, chairman of the Saudi National Bank, who made the original comments that catalysed the fall of Credit Suisse, resigned.

For the last couple of weeks, the financial press has been awash with fevered speculation of a repeat of the financial crisis of 2008. The online ecosphere has been febrile, verging on feral. And to be fair, in that time, we have witnessed the second- and third-largest US bank failures in history.

But any read across for us here in Guernsey? I guess not. I haven’t yet seen any government commentary and clearly not according to Guernsey Finance’s rose-tinted spectacles.

With serendipitously unfortunate timing, on 14 March, the day of the failure of SVB in the US (and just days before Credit Suisse’s collapse), Guernsey Finance published its sentiment survey and espoused ‘confidence in the future of finance in Guernsey’, citing 92.9% of respondents having ‘healthy business development’.

This upbeat view jars a little with the real underlying economic numbers, where the finance sector has been shrinking over the last decade.

As the January report published by the International Sustainability Institute set out, the shrinking finance sector is the cause of Guernsey’s underlying weak economic growth since the global financial crisis.

Regular readers, both of you, will know that it’s been some time since my last contribution. For information, Tim Martin, I tend to appear on the last Thursday of the month, but in the first two months of this year there were exceptional circumstances. Namely the tax debate, hence changed publication schedules.

So, before moving on, do I have anything to add on the tax and spending issue that hasn’t already been said? Perhaps to comment on the formation of the two new sub-committees that were announced this week, because, after all, committees are something the States is clearly short of. Or maybe to comment and discuss the lunacy of the granularity and length of the resolutions that accompanied the end of the debate?

For those who don’t follow the machinations of Guernsey’s broken political process, the resolutions accompanying the end of that debate ran to 14 pages. Painful reading. SMH!

Not a way to try to run a government, methinks. And it would just be bad comedy if that was that. But carrying on the way things are is unsustainable. And not just because of demographics – there are underlying issues with our economy to address, specifically the finance sector, as suggested in the ISI’s January report. But back to the banking crisis.

‘And the band plays on. One that the hoi polloi on this side of the pond might have missed [reference to posting of link to story of bailout of First Republic Bank]. According to Bloomberg, banks borrowed $152.85bn from the Fed’s discount window in the week to Wednesday beating the previous record of $111bn during the financial crisis. Sloan’s law, things can be unsustainable for a very, very long time. But this convergence of factors this week suggests a turning point. When I was a Director of Financial Stability at the GFSC I would publicly grumble about the scale of global debt in the annual review. The perennial ticking sound.’

Yes, that’s me again on LinkedIn. On 17 March this time. So, what’s my point here then? That, in a roundabout way, even if the wheels haven’t quite come off again, the events of 2023 are similarly as seismic as 2008. So why not pose the question, what will this banking crisis v2023.0 mean for offshore finance? I’m thinking about the underlying secular level, not about the loss of an institution or two.

Despite our own propaganda, the long- run impact of banking crisis v2008.0 wasn’t that favourable. It wasn’t so much the immediate direct impact, it was the subsequent change of environment, policy and attitudes post 2008 that have done for offshore finance. So to the question of importance to us, it’s not over yet but what is the most likely impact of banking crisis v2023.0? Or rather subsequent global policy? Go figure, as our American allies say.

Guernsey’s finance sector can’t be thought of as a distinct economic entity. It’s too small, just 6,000 strong. It’s just part of a broader whole of offshore finance. And one must look to the consideration of the whole of offshore as an economic sector in any attempt to analyse the underlying health of the sector, as it’s here where the problem originates.

The scaremongers’ whispering campaign has it there’s a chance of Guernsey failing the impending Moneyval inspection. That would be a shame, a surprise, and a travesty. I can conceive of few other places whose regulation and supervision of international AML rules come close to ours. On appointment, the chair of the GFSC openly acknowledged that we’re held to higher standards. It hardly seems right or fair that the regulatory burden that results undermine the economics of the finance sector.

But across the piste, the application of international rules are designed to do away with competition from offshore finance. For example, time was the OECD would espouse low tax rates and tax competition as a good thing. But times change. Now as well as a near international consensus on minimum rates, there’s a whole myriad of transparency rules and reporting that truth be told have done nothing to increase global taxation revenues. But what they have done is increase administrative costs and the cost of international capital in the process.

Global policy and public opinion are not our friends. Since the last global financial crisis, the economies and economics of offshore finance have been under sustained attack. A period where capital and the principle of its free flow has itself been under political assault. A period of economic self-harm and economic stagnation brought about by monetary policy.

But the fallout of the banking crisis of recent weeks for offshore will in time be large policy helpings of more of the same. That is if nothing is done. The perception of offshore finance must be improved, otherwise the next decade will just accelerate the downward trend of the last.

The long-run survival of our finance sector rests on convincing the world of the merits of offshore finance.

It is one of our research programmes at the International Sustainability Institute for which we’re always happy to receive support. It’s an exercise that the efforts of government and promotional agencies of Guernsey, Jersey and the other centres have hardly touched the sides with over the last 10 years. There’s lots to do.