The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE
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Authors: Faisal Islam
I’ve got hugs for you,
If you were born in the 80s, the 80s.
C. Harris
,
2007
And for those born even later than that too, I dedicate this book to the incompetence of the generation of European political leaders born in the 50s and 60s
How the Euro Stole the Greek Sun
Of Fiscal Criminals and Bond Vigilantes
12/11: The Chinese Root Canals of Crisis
Three Funerals, Two Banking Systems and a Wedding
The Formula that Created the Shadow Banking System
Lent in Larnaca: The Cypriot Job
An Invitation from the Publisher
Economics is not meteorology. In Britain, and across Europe, the economy is not like the weather. Yet this is precisely what a long list of incompetent politicians would like you to believe. Economic downswings and crises ‘befall’ helpless nations just as might do a ruinous hurricane, tornado or tidal wave. It is an analogy that denies agency to the key decision-makers. It is an excuse. Economics is about choices. These are choices sometimes made on our behalf by politicians or central bankers. They are also choices made by societies. Most countries still feeling the grim underside of the aftermath of the 2008 crisis are doing so because of choices made a decade or so ago. The choices they are making now will loom over us and Europe’s youth in particular for decades to come.
This story, which I have called
The Default Line
, is about those choices. Default is fundamentally about debt: the act of borrowing and not repaying in full. People, companies, banks, nations, currency zones, systems and philosophies have teetered on the edge in this ongoing crisis. But the line of solvency is a thin one. Even when sovereign governments defaulted in the past few years, there have been denials and debates in committees and shades of grey. Debt is much more than a financial or economic phenomenon. Debt has social, political, emotional and religious connotations.
There is a moment in the inevitable descent into bust when boom-time exuberance suddenly flips and becomes an inescapable iceberg. A point when nations, companies, civilisations and people step over the mark. A snow dome in the Dubai desert. A future British finance minister wondering why his mortgage application required no proof of income. A leading banker proclaiming publicly that ‘Credit has been democratised, and that is a good thing.’ Greek football teams with three stadiums. A dog in Manchester offered a gold credit card. Banks funnelling superabundant credit at poor African-American communities in Baltimore, by paying commission to churches. A G7 leader starting his re-election campaign boasting about one of the world’s most expensive hospitals, despite the fact that not even a penny had been paid for it, and it would remain unpaid for into the 2050s.
These are the signs of being close to this invisible line. The flimsy barrier between lender and borrower, between being subject to the kindness of strangers, and actually being the stranger. It’s a line that runs through our cities, along our borders, within Europe and through fibre-optic cables responsible for the global $78 trillion trade in debt. And nations, banks, small businesses, politicians, families and people are unexpectedly finding themselves on the wrong side. It’s not just about debts and leverage in their financial sense, but morally and diplomatically too. Creditor nations such as China are using their loans as leverage on the world stage. Nations such as India believe the West has stacked up environmental debts that might dwarf even their monetary ones.
This journey across the line, from Europe’s gas control room in Moscow to Singapore’s parking lot of cargo ships, from New York trading floors to Newport market traders, from booming amateur landlords to impoverished young people, and from rebellious Greek tax inspectors to booming German forklift truck manufacturers, is one I have made in a decade of reporting global economics. Almost all of the story I have witnessed at first hand, a frankly incredible tale of winners and losers, or power changing hands, and a new breed of powerless. It is summed up in the existence of one man: the supervisory chairman of China’s national piggy bank, its sovereign wealth fund. He sits on $400 billion of reserves and he knows this weapon is so potent that he denies it is a weapon at all. Instead he happily meets with the Western governments, banks and companies desperate for this source of stable capital. And then he quotes Shakespeare at them.
That piggy bank in China was connected to the 125 per cent mortgage which indebted and nearly upended Esther, a young single mum from Surrey whom I interviewed in late 2008. I remember sitting in her living room with her children’s belongings boxed up ready for repossession, as I commentated on various elements of global financial crisis, including the sharpest collapse in world trade in a century. I thought: ‘How did we get here? Who let this happen?’ The answer was, a chain of disintermediation that started with savings in the East, and in particular in China. This book follows the root canals of Esther’s mortgage up through the securitisation department at Northern Rock, the shadow banking system centred on London, bad regulators, conflicted politicians, broken formulaic self-regulation emerging out of Basel, mistakes in the setting of interest rates by central bankers, concurrent problems in Spain, Cyprus, Iceland and Greece, and the prolonging of the crisis in a reluctant Berlin. I will take you around the table at Britain’s most expensive dining club, where several bankers were given billions to keep their banks going. There is a tale of the battle between banker and minister over the near nationalisation of one of the world’s biggest banks. I’ll take you into the cockpit of ‘Euro Force One’, what passes for a printing press for Eurozone nations without monetary sovereignty. We will go inside the European Central Bank, perhaps the world’s most important unelected institution. In Reykjavik you will hear what it was like to be inside a central bank just as it was going bankrupt, something that is normally impossible. On a real fault line in San Francisco you will hear from the hippyish man who wrote the formula which was said to have broken Wall Street, but is still being used to define the safety of the Western banking system, and may well be holding the world economy back. There’s the Indian motorbike magnate who thinks climate change is principally a colonial ruse. There are the oil pipelines that threaten the fracture of a fragile nation. There is the constant dance and fight between fiscal criminals and bond vigilantes that has led to curious and patchy austerity. There is the desperate need for central bankers to communicate control in uncertain times. And then there are the migratory journeys within China that were a proximate cause of everything. In Cyprus, all the strands – bad banks, bad politicians and a dysfunctional Eurozone – coalesced into three weeks of high drama in March 2013. Bank bailout turned into human bail-in. All around Europe the real default has been to the continent’s social model, rather than its banks or the stability of its currency experiment.
For a decade the economy was rather NICE –
N
on
I
nflationary
C
onsistent
E
xpansion on the back of cheap goods from our friends from China. It went bust spectacularly. And now in Britain, Europe and the USA, we are halfway through the CRUDER decade:
C
onsistent
R
ecession,
U
nemployment,
D
eleveraging
E
xperiment and
R
ealignment. This is why, as I write this, a new governor of the Bank of England is experimenting with radical alternatives for British economic policy. The old one, the inventor of the NICE concept, developed quantitative easing – opaque, little understood and rather redistributive, and yet in 2009 and 2012 it might have staved off depression. Abroad it was derided as a Weimar republic-style operation to fund a broke government. In Paris and Frankfurt the sense was that Britain and the USA were ‘cheating’, and would eventually pay for its accommodation of profligacy.
This book is also about financial tectonic plates shifting and impacting on and in Europe. In 2001, I jokingly predicted that by 2030 the headlines in British tabloid newspapers complaining about migration would be about young Brits being locked out of the Bangalore jobs market. I was wrong. It was beginning to happen in 2010.
All these factors are buffeting our lives in increasingly unpredictable ways. I pick out three patterns from this global, continental, economic, political and human journey:
• the mistakes made by incompetent politicians
• the dysfunctional relationship of some nations with property and housing
• the conscious use of complexity by nefarious politicians and financiers to try to blind voters and customers.
All three currents reappear throughout this tale.
To get back to that Surrey sitting room and the imminent repossession. Now, half a decade on, the same mother faces paying a different price, that of squeezed living standards from public-sector austerity. I am not the only economics journalist who wished they could have done a better job in reporting the forces that brought about the world’s biggest financial crisis, years before the bust. It was a large-scale journalistic default after having cried wolf on the unsustainable credit boom in Britain in 2003. This story has been seven months in the writing, a decade in the researching, and the result of hundreds of hours of interviews with the key players and their victims. I hope this book redresses some of that balance, and forewarns readers about some of the coming, man-made ‘weather’ that will nurture, upend and occasionally even bring sunrays to their lives in the coming years. I hope that for viewers, listeners and readers this book does repay part of a debt.
Each chapter of this book is a self-contained story, linked to concurrent goings-on around the world. I have made extensive use of cross-referencing to show the different impacts or perspectives in the same events when viewed from, say, Greece (Chapter 1) and Germany (Chapter 10). I thought that this would be a better use of dead trees and bandwidth than a lengthy unread index.