IT WAS another bad day on the stock markets yesterday.
Until recently, we had enjoyed more than a year of upward momentum, but now a combination of eurozone instability, sparked by the Spanish government’s bail-out of CajaSur, and Kim Jong-il’s sabre rattling, has sent the markets into a tailspin.
It’s hard to believe that Britain, the eurozone or even the rest of the world could be heading for a double-dip recession. Just a few months ago, we were all so sure that the risk of a return to negative growth was behind us. Just yesterday, the latest revision to UK gross domestic product estimates showed the economy grew by 0.3% in the first quarter of 2010. That’s a bit faster than the 0.2% first estimated.
The biggest stock market losers yesterday were mainly the banks, including the likes of Lloyds Banking Group, Barclays and RBS.
The doubts about the eurozone result from the fear that some nations may not be good for the huge debts on their books. Should they default, it would be the banks that lose out. They would be hit for billions.
Some have been drawing comparisons between the current woes affecting banks and the crisis of 18 months ago, which also caused their share prices to dive.
However, there is a big difference this time round. We know exactly how much each government owes, and therefore we can confidently predict the full impact of the hit. When we were worried about bad debt arising from the sub- prime market, the concern was in part driven by the sense that we did not have a handle on the scale of the problem.
Nevertheless, it is imperative, for the sake of Europe’s economy, that no government is allowed to default. Even if we can quantify the scale of the problem, it would be too bumpy a prospect to envisage.
It’s hard to believe that Europe and other interested nations, such as the United States, can’t between them find the temporary facilities to support the cash flows of a few, struggling, generally small creditor nations while they await a full-scale economic recovery in a couple of years’ time. It might be time to listen to the money men and dig deeper into our pockets.
AS ALISTAIR HOUGHTON’S adjacent article shows, Royal Liver faces some trouble ahead.
Bill Connolly, the mutual’s acting chief executive, talks with a refreshing candour about the problems and the likely outcomes.
But what was the cause of the problem?
It’s unlikely to have been any single issue, such as the problems at its Park Row subsidiary. The cause is something much more fundamental.
Royal Liver is small by the standards of many other mutuals, never mind most other financial service institutions. It doesn’t have the operation leverage to achieve adequate economies of scale that would allow it to compete. It is also an old-fashioned brand that must be struggling to win younger customers. To cap it all, the investment markets have, over the longer run, say 10 years, performed very poorly, hurting Royal Liver’s ability to build its reserves and pay dividends and bonuses to members.
It’s a great pity that Royal Liver is in this position. I am big admirer of mutuality. It’s about people using their money to secure their futures, rather than, as we sometimes get in the rest of the markets, gung-ho types seeking to line their own pockets with bonuses earned from ill-considered risk-taking.
The destiny of the historic mutual is in the hands of its members. Can they be persuaded to hand it over to a rival?
