HC Deb 30 July 1982 vol 28 cc1468-80 10.51 am
Mr. John Browne (Winchester)

I am grateful that my subject has been selected for an Adjournment debate and that I now have the opportunity to make the speech that I was unable to make when the business of the House unexpectedly collapsed about three weeks ago. Also, I thank my hon. Friend the Minister for having given up his valuable time to attend the debate.

I should declare an interest, because I am a director and adviser to companies within the United Kingdom's financial and banking industries. However, although I am associated with the United Kingdom's financial system, I shall not speak on behalf of any interested groups of people, and in formulating my speech I have not consulted potentially interested parties.

The United Kingdom's financial system is a vital part of our national economy in which it has played and continues to play a most important role. Indeed, the health of our economy is inseparably linked to the health of our financial system. As an international trading nation, both our financial system and economy are dependent on United States interest rates, on trends within the American economy and on the health of international financial markets. The serious and adverse pressures now being exerted on American interest rates, on the American economy and on international financial markets should cause grave concern to us in Great Britain. Our financial system is greatly affected by, and has to exist as part of, the international financial system.

In addition to the problems of past stagflation and the current deepening recession, the international financial system faces two new and major challenges. First, it faces the prospect of continued high, and even higher, American interest rates. Secondly, it faces the problems of Third world debt and the increased chances of major formal defaults. In short, the international financial system now faces serious threats not merely of illiquidity, but of insolvency. It is vital that we should not shrink from facing those problems. Indeed, it is our duty to face them and to prepare to deal with them.

I am particularly concerned that these outside threats affect the United Kingdom's domestic financial system. I shall press my hon. Friend the Minister for safeguards to ensure that our regulatory authorities are ready and equipped, both legally and financially, to deal with those potential problems.

The American economy is the largest and most influential in the world. The American dollar is the most widely-held and important currency, and American interest rates obviously affect us all. We are living at a time not only of historically high American interest rates, but of great volatility in them. That volatility is due largely to the American system of monetary-base control. However, international markets are constantly taken aback by the continued high and upward trend in American interest rates.

Naturally, I agree that very few trends occur in straight lines and any downturn in American interest rates—such as that experienced earlier this week—are eagerly read in the markets as a signal of a major downturn in those rates. Why are markets so keen to read a major change in the upwards trend of American interest rates? Obviously, massive profits can be made by those who pick the turn in a major trend in interest rates, and at these historically high dollar rates fortunes could be made if the turn was picked correctly.

However, my main contention is that the market and the media are focussing on the wrong basic figures. Today, the market perceives the size of the United States federal budget deficit as the main influence on American rates. There are, of course, other influences such as relative inflation rates, commercial demand for US dollar oil payments, tight money policies and so on. Nevertheless, it is generally believed that the main influence in the market place is the size of the American budget deficit. That deficit is generally believed to be a staggering $100 billion for the fiscal year 1983, having doubled during the past 12 months. In other words, the declared figure has increased from under $50 billion to more than $100 billion over the past few months.

I submit that the present American interest yield curve reflects that perceived deficit of about $100 billion. The devastating point is that if one looks not merely at the publicised deficit but at the detailed figures deep within part IV on page 10 of the American budget statement for the fiscal year 1983, one finds that the real—as opposed to the apparent—American deficit is at least twice that figure, or $200 billion. If all off-balance-sheet items are included, the figure is probably three times the presently perceived American deficit.

If today's United States yield curve is based on an apparent Government deficit of $100 billion, we must be greatly concerned as to what the yield curve would look like if it were based on the true American budget deficit of between $200 billion and $300 billion. I submit that uncertainty over the trend of American interest rates has been due largely to the fact that the financial markets and the media have wanted to believe that American rates would fall. That belief stems from the fact that, while many are able, few people have actually looked at the source figures for the American deficit. For the benefit of the House I shall illustrate what I mean by the real numbers, as they pertain to the American deficit.

Of course, I appreciate that there are no hard numbers in national budgeting—the figures are constantly fluctuating—but these are, to coin a phrase, the real, soft numbers. All of them are based on publicly available information in the United States of America. I shall cite the "Economic Indicators—May 1982" which was prepared for the joint economic committee and published by the Council of Economic Advisers of the ninety-seventh congress, second session. I refer particularly to page 32. I refer to "Special Analysis E on Borrowing and Debt" published by the Office of Management and Budget 1982, page 35; "Appendix to the Budget for the Fiscal Year 1983" part IV page 10; and "Special Analysis F—Federal Credit programs. The Budget of the United States Government 1983"—published by the Office of Management and Budget February 1982—pages 24 and 25.

I have taken the figures out of those books, and particularly from the references that I have given, which are based on February 1982 United States budget data with congressional revisions to June 1982. If one rounds them up for speed and simplicity, one could say that the actual United States federal deficit is not $103 billion as openly declared, but at least $211 billion with estimated allowances for it to go up to a possible $345 billion.

I have taken the regular United States budget deficit as published at $103 billion—although I hope to show later that even that figure is conservative and is beginning to be seen as such in the international press—and halve added three more key figures. First, if we take the net off-balance-sheet federal entities of about $19 billion we bring it up to about $120 billion. If we add the net federal guaranteed Government borrowing of entities such as the federal financing bank, federal guaranteed loans and national mortgage association, we add a further $44 billion bringing the total to about $164 billion. If we add the net borrowings of Government—sponsored enterprises—a further $47 billion—we have a total deficit of $211 billion.

Worse still, the conceptual figures that are openly written into the budget published by the United States Office of Management and Budget show a discrepancy of no fewer than $345Ċ7 billion between the estimated total of federal and federally assisted borrowing for the fiscal year 1983 of $1Ċ473 trillion and the gross federal debt or statutory debt ceiling of $1Ċ127 trillion.

As I said, I took the base figure of the regular budget deficit at $103 billion, but recent press reports have begun, at last, to show that this figure is somewhat conservative. In the Financial Times of 28 July there is an article by Anatol C. Kaletsky, in Washington, showing that the United States budget deficit in 1983 is likely to be between $141 billion and $151 billion, and the deficit for the next two years will remain in the region of $145 billion and $160 billion. That is corroborated by the International Herald Tribune, which published a report on the same day. The congressional Budget Office on the Tuesday preceding 28 July said: That budget deficits could reach a minimum of $140 billion for each of the next three years, far above even the revised estimate of the Reagan administration. Then we see in the Financial Times of 29 July: The US Treasury announced last night that it will need to raise a record $50Ċ5 bn during the third quarter of this year.". It is interesting that, on an annualised basis, this reaches the $200 billion mark.

Some people argue that those American figures have been doctored for political reasons, and that the Office of Management and Budget published deliberately high figures in order to alarm and so persuade the American Congress to cut back on federal spending. I find it not only unrealistic but outrageous to suggest that the American Government would deliberately publish misleading figures in their budget. That argument should therefore be discounted. Other people say that the United Stales Government can take corrective action to lessen their deficit. I agree with that in the long term, but what about the short term? The International Herald Tribune of 29 July said: President Reagan has determined that he should not have to adhere to the ceilings on military spending for 1984 and beyond that were imposed by Congress with White House blessing last month". That means that President Reagan is most unlikely to cut back on military spending.

The present United States interest rate structure tends to reflect, among other things, the perceived United States deficit of about $100 billion. However, I hope that I have illustrated that the United States deficit is actually between $200 billion and $300 billion. When that becomes apparent, surely it can be expected that United States interest rates will rise Naturally, many people in the United States of America feel that it would be political suicide for the Republicans to go for a mid-term election with interest rates at their current levls, let alone at higher levels. They believe that American politicians will reduce interest rates for political reasons. That assumes, of course, that it is possible for the American Government to reduce interest rates even with the co-operation of the Federal Reserve Board. Those who believe that it is possible point out that President Reagan could delay his proposed tax cuts for one year, raise the age limit for entitlement to certain social benefits and even cut defence expenditure and raise more taxation.

I have dealt with the possible cuts in defence expenditure, which appear to be unlikely. Even if it were possible to do any of those things, it is estimated that the total yield of all those possible actions would be only between $40 billion and $70 billion, or less than one-fifth of the upper estimated United States Government deficit for 1983, which starts on 30 September 1982—in two months' time.

This all leads me to the conclusion that the American debt deficit is effectively out of control, at least in the short term. Furthermore, if the American interest rate structure is currently influenced most heavily by the size of the deficit, then American interest rates are effectively out of political control in the short term. Therefore, they are likely not only to stay high, but to rise during the next six months to one year.

I believe that whilst few events such as interest rate movements follow straight lines—there are fluctuations—there will be no overall, upward trend in United States interest rates in the short to medium term. The effect of continued high interest rates will be to exert upward pressure on other international interest rates including sterling. The result is likely to be that the recession being experienced in the United States economy will deepen. That will adversely affect the economies of other trading nations. The recession in the United States economy is already causing serious strain in its financial community. Over 300 American financial institutions are currently under supervision, and conversations with American bankers show an alarming level of potential bankruptcies among United States corporations, even large ones, some of which are experiencing serious difficulties.

The other main threat facing the international community, of which we are an integral part, is the risk of major loan defaults.

Unlike the Korean war, which was financed by tax revenues, the American Government financed the Vietnam war by means of deficits. It was these massive United States dollar deficits that caused the considerable growth in the Eurodollar market or the market in United States dollars held by non-United States citizens. The oil hike, begun in 1973, added greatly to this growth of the Eurodollar market following the OPEC demand that oil should be paid for only in United States dollars. The result was a massive accrual of United States dollar deposits with Western banks. At the same time Third world countries needed more money for development because of inflation, and to pay for greatly increased oil import costs.

Furthermore, as industrial growth fell off in the Western world in the 1970s the demand for corporate loans began to ease in the Western economies. It was, therefore, tempting for Western bankers to pursue loan mandates in the Third world and to participate in syndicated lending to the Third world.

Most of the weight of petrodollar recycling was, therefore, carried out by commercial banks rather than by development banks which, because they are Government owned, with an access to a tax base, are assured of continued solvency. The route that the recycling should have taken—through development banks to sovereign borrowers—was a proven and solvent route, but, for some reason, the petrodollar recycling went instead through the commercial bank network which does not have access to tax and, therefore, always faces the risks of illiquidity and insolvency.

Furthermore, the bulk of petrodollar recycling was carried out largely by means of loans from commercial banks rather than by means of bond issues. There is one great disadvantage when sovereign borrowing is carried out in that way. In a bond issue, which is widely syndicated, the borrower is at arm's length from the lender or purchaser of the bond and is, therefore, under a firm obligation to fund the bonds. Any suggestion of default would ruin the borrower's credit rating in the market for bond issues.

On the other hand, when a borrower borrows by means of bank loans he is in direct contact with the lender or commercial bank and is thus in a position to exert pressure on the lender or even groups of lenders in lending syndicates. That pressure can be used to force lending banks to make additional, imprudent loans and to accept unwillingly arrangements such as rescheduling and moratoriums on existing loans and even rescheduling of interest, let alone of principal.

One of the great pressures is the prospect of the lending bank being helped to do more business in the country concerned. Obviously this can make things easier for the commercial bank. However, the real pressure that such countries bring to bear on banks that have already lent them a lot of money is the threat of a formal default. There is an enormous legal difference between an informal default and a formal default. A formal default carries with it far more serious financial implications in terms of accounting, reporting to regulatory authorities and the making of provisions than does an informal default.

As is widely documented, sovereign borrowing of Third world countries has risen at least fourfold in the past 10 years. I shall not waste the time of the House by itemising the borrowing of individual countries, but three examples are Argentina at $37 billion, Brazil at $85 billion and Poland $27 billion. Those are loans of staggering proportions in relation to the underlying economies of those nations.

The size of such loans in relation to the capital base of the financial institutions that hold them on their books as assets should give us cause for serious concern. The problems of normal debt service on those loans are serious enough, but the implications of a formal default give us even more cause for concern, not only for the liquidity of the international financial system, but for its solvency.

Throughout the past 10 years or so, the domestic regulatory authorities or central banks have shown little sign of exercising much control over acts of imprudence within the Euromarkets. It is fully appreciated that freedom from regulation was one of the main reasons for growth in those markets, but it is felt that they have grown to such proportions that any banking failures within them would have a substantial effect on our own and other people's domestic financial institutions.

It could be argued that the unregulated growth in the Euromarkets has occurred largely on the back of the underlying credit of the domestic financial institutions. Not only do such institutions stand liable for their world-wide branches, under the custom of ultimate parental responsibility, but it is often difficult for the managers of such institutions to know the true nature of their risk exposure, especially as regards sovereign borrowing. That point was illustrated vividly by the difficulty that certain banks had in itemising their exposure to Argentina when we froze Argentine assets earlier this year.

For example, a bank may have made direct loans to country A. In addition, it may have managed syndicated loans to country A or have participated in such syndicates. I term those as primary risks. More problematical are what I term secondary risks, where a bank has perhaps made loans to corporations that have commercial business with inherent political risk exposure to country A. In addition, the bank may have managed or participated in financing projects managed by reputable Western companies which also have an inherent political risk exposure to country A. Finally, the bank may have foreign exchange and short-term money market exposure to other banks with similar, but unknown—to the money market—exposure to country A.

The total profile of a bank's primary and secondary political risk exposure to country A is difficult to monitor and measure, even if all the loans are made from one head office or branch. The problem is magnified even more when one recognises that many international banks have exposure undertaken through a world-wide network of branches.

Furthermore, many Euromarket loans are either managed from, or booked to, branches of Western banks situated in offshore financial centres. The domestic head office is ultimately responsible for the activities of those branches, but the role of lender of last resort in many offshore centres is unclear, to say the least. The recent example of the Banco Ambrosiano is just one example. In short, much business is carried out in offshore financial centres on the back of the credit of domestic financial institutions.

When one considers the present economic situation facing the Western world, with zero growth predicted for 1982, and 30 million people already unemployed in OECD countries, one can see the true seriousness of an expected rise in United States and, therefore, international interest rates and its implication upon our domestic banking structures.

If one adds to that the enormous problem of international debt and distressed borrowing by major corporations within domestic economies, which often lead to an unexplained increase in money supply growth rates, one begins to see the emergence of a serious picture of potential illiquidity and insolvency problems among international financial institutions.

At the margin, which is often the critical area—the straw that breaks the camel's back—one also notices an accrual by Soviet countries of United States dollars that they have received in return for arms sales and so forth. It appears that many of those dollars are not being recycled to the Western financial system, but are being used for settlement within Comecon. If that is true, it represents an important net destruction of United States dollar liquidity at the margin, which could have serious consequences.

We must ensure that, in case such illiquidity and insolvency problems materialise, the Western financial system and particularly the United Kingdom financial system are as insulated as possible from them. That means that the Government must face the possibility of illiquidity and insolvency problems within the financial system and take appropriate preventive and protective measures.

I should like to ask my hon. Friend the Economic Secretary some specific questions. I am sorry that 1 have taken a long time and I shall understand if my hon. Friend feels that I have not left him enough time to answer my questions, but I should be grateful for written replies to these questions of which I have given him prior written notice.

First, do the Government agree that the major central banks—the group of 30—should ensure that they are both ready and legally able to deal not only with an illiquidity crisis but also with an insolvency crisis in the banking and financial industries? Does he believe that it would be advisable for the group of 30 to establish a major international safety net of usable liquid funds that could be deployed by central banks to mediate in problems of illiquidity and therefore avoid any risk of insolvency?

Secondly, will the Minister comment on the security of deposits in United Kingdom banks and the position of the Bank of England as lender of last resort both within our own system and particularly with regard to offshore branches of domestic British banks?

Thirdly, will the Minister comment on the custom of ultimate responsibility of British banks for their offshore branches and the responsibilities that their head offices should exercise, particularly with respect to major offshore financial centres where the local lender of last resort may or may not share the same criteria and sense of obligation as is shown by the Bank of England in Great Britain?

Fourthly, in return for commitments as lenders of last resort by central banks, will the Government support the motion that major central banks should exercise more regulatory control over the Euromarket?

Fifthly, in an effort to curb the headlong and unrestricted growth of high risk sovereign borrowing, would the Government support the notion that the group of 30 central banks should establish a quota system for Third world sovereign borrowers using the facility and credit of Western banks? I suggest that under such a system each sovereign borrower should be granted a quota by agreement among the central banks and the Third world borrowers could then raise its loans within their individual quotas by tendering from within the international banking community.

Under such a system, the group of 30 could force potential borrowers to disclose more relevant data and thus enable Western bankers to exercise proper due diligence before granting loans. It would also be possible gradually to reduce the loan exposure of Western banks to high risk sovereign loans and move it more towards development banks where it would be more correctly placed. Furthermore, any sovereign borrower who borrowed without being on the approved list or borrowed in excess of its agreed quota would do so with the lending bank knowing that loans made under such conditions would be rendered unprotected by the lender of last resort facilities from the central banks of the group of 30.

Sixthly, will the Government act formally to support the harmonisation of EEC financial accounting according to EEC document No. 1129/76 and press specifically for disclosure by banks with regard to reserves, for improved declarations of direct sovereign lending and a more realistic declaration of the status of loans—that is, whether they are non-performing or effectively in a state of informal default?

Seventhly, will the Minister comment on the status of the British freeze of Argentine assets?

Eighthly, will the Government support the establishment of a code of conduct to be observed by all IMF member banks in the event of their freezing the financial assets of another Government? Could such a code of conduct be designed to prevent extra-territorial claims, the right of set-off and the waiving of sovereign immunity as was exercised by the United States Government in the freezing of Iranian assets?

Ninthly, does the Minister agree that, although the international financial system now faces severe constraints, British banks have two major advantages—first, that they have been generally more cautious and financially prudent than many foreign competitors, and, secondly, that they have the outstanding back-up of perhaps the most experienced and sophisticated central bank in the world?

Tenthly, will the Minister agree to urge our right hon. and learned Friend the Chancellor of the Exchequer to avoid any further taxes like the recent windfall profits tax which serve to erode the capital base of and confidence in the British banking system in an extremely hostile and high-risk international environment?

Finally—looking back at those questions, I am glad that I gave my hon. Friend advance notice of them does the Minister agree that it would be in the interests of the Western economies to avoid any foolhardy and simplistic pressures to trigger a massive sovereign loan default such as that currently proposed in the United States by the Kasten amendment in relation to Polish loans, which seeks to force the United States President to trigger a formal default of all Polish loans outstanding to American banks? Does the Minister agree with me that that would be disastrous for the world?

11.26 am
The Economic Secretary to the Treasury (Mr. Jock Bruce-Gardyne)

I must congratulate my hon. Friend the Member for Winchester (Mr. Browne) on obtaining this debate and his achievement in putting his important views on these matters on the record—at, I believe, the fourth attempt. The matters that my hon. Friend has raised are of considerable importance, topicality and concern to us all. It would be foolish to deny the existence of anxieties about high real rates of interest on the international economy and on the stability of international banking system in particular.

I wonder, however, whether my hon. Friend is right to assume that the markets in the United States cannot peer behind the published figures for the federal deficit and draw the kind of conclusions that he drew about the importance of so-called off-balance-sheet items. I suspect that it is precisely the awareness of the extent of such items that has caused the reluctance of American interest rates to move downwards, notwithstanding the rather dramatic fall in the level of American domestic inflation. The published federal deficit as a proportion of the nation's GDP is very modest.

Mr. John Browne

I agree that the figure is apparently modest, but the savings rate there is much lower than that in Western Europe. As for other financial institutions looking at the figures correctly, I can only say that they certainly do not publish them. When they talk to their clients, American stockbrokers and investment banks always still focus on a figure between $100 billion and $140 billion, and although the information is published it takes a great deal of finding.

Mr. Bruce-Gardyne

On the ratio of the published deficit to the American savings level, my hon. Friend has anticipated me. I was about to make precisely that point. Although the savings ratio is low, one would have thought that with inflation down to low single figures there would be a tendency for the savings ratio to be reconstituted. I do not underestimate the anxieties expressed by my hon. Friend, which are widely shared, but I think that it is a mistake to assume that the American financial markets cannot make calculations of the kind that my hon. Friend has presented to the House today.

On sovereign borrowing, again, the anxieties that my hon. Friend has expressed are widely shared. It is not all that different from the old proposition that if a customer has an overdraft of £100 the bank owns him, but if he has an overdraft of £100,000 he owns the bank. It is true that the scale of indebtedness of some of these countries presents the possibility of pressures on the commercial lenders that it may not always be easy for them to resist.

I wish now to turn to the questions that my hon. Friend has posed. I shall endeavour to answer as many of them as time permits. Before doing so, I should put on record two propositions that I regard as background. It must be in the interests of all to see fulfilled the determination of the present United States Administration to prevent a fresh surge of inflation fuelled by excessive monetary laxity. The sheer weight of the United States economy means, as we saw to our cost in the early 1970s, that accelerating American inflation, fuelled by the manner in which the Vietnam war was financed, swiftly feeds round the international system.

While we in this country cannot hope to insulate ourselves from the impact of interest rate movements elsewhere in the world and especially in the United States, responsible fiscal and monetary policies at home give us some freedom of manoeuvre that would be denied us if our domestic stance was perceived to be one of budgetary laxity such as suggested by Opposition parties. The proof of the pudding is in the eating. At the beginning of this year, United Kingdom interest rates were two points higher than dollar rates, whereas today they are a point lower. Yet our effective exchange rate is stable and inflation is falling rather faster than most commentators were predicting even at the time of the Budget.

The moral of this experience is that excessive deficit financing is debilitating at home and potentially damaging abroad. I share my hon. Friend's concern about the size of the United States federal deficit on-budget and off-budget. I assure him that my right hon. and learned Friend the Chancellor of the Exchequer has voiced the sort of anxieties that he has expressed about the impact of very high real rates of interest resulting in New York, not only upon the prospects of recovery in advanced industrial countries but also on the indebtedness of less developed countries.

My hon. Friend asked about the case for the group of 30 to establish a major international safety net of usable funds that could be deployed by central banks. There has been a substantial development of co-operation among supervisory authorities in major countries. This in itself offers us considerable reassurances. It is not possible to tell in advance what response, if any, would be appropriate from the authorities in any case of insolvency of an individual institution, but the immediate risk of such an insolvency causing more general problems lies in its possible effects on liquidity. I agree with my hon. Friend. The governors of the group of ten countries have stated publicly that means are available for the provision of temporary liquidity to the Euromarket and would be used if and when necessary.

My hon. Friend asked about the security of deposits in United Kingdom banks and the position of the Bank of England as lender of last resort. Depositors with United Kingdom recognised banks and licensed deposit-taking institutions are covered by the deposit protection scheme under the Banking Act 1979. This provides cover for 75 per cent. of the first £10,000 of a depositor's sterling deposit with any of these institutions. It would be wrong, in our view, for the authorities to remove responsibility altogether from the depositor by providing 100 per cent. cover for deposits or blanket assurances of support regardless of circumstances. The Bank of England has acted as lender of last resort to the banking system in the past and will, I am sure, stand ready to do so where appropriate in the future.

Mr. Browne

rose—

Mr. Bruce-Gardyne

I hope my hon. Friend will forgive me. If he wishes me to answer his questions, I think that I should proceed. I am sorry, but I do not think that I have time to give way.

My hon. Friend asked about the ultimate responsibility of British banks for their offshore branches and the responsibilities that head offices should exercise, particularly in respect of major offshore financial centres. Our banks are legally responsible for the activities of their branches. The Bank of England, which has statutory responsibility for the prudential supervision of the British banking system, supervises British banks on the basis of their total world-wide business, including that of branches and subsidiaries. The Bank of England is confident that British banks are aware of their responsibilities in respect of their overseas activities.

My hon. Friend asked whether Her Majesty's Government would support the motion that major central banks should exercise more regulatory control over Euromarkets. The Euromarkets are already effectively subjected to supervision and control from a prudential point of view. Banks in all major banking centres and their activities elsewhere in the world are covered by one supervisory authority or another. My hon. Friend asked whether the group of 30 central banks should establish a quota system for Third world foreign borrowers. We do not consider that this is either appropriate or possible. It would not be possible for any one institution to say how much any country should be allowed to borrow. It is for the individual bank to ensure that it does not on-lend money to borrowers who cannot repay it. I realise that this is easier said than done. We do not think that it is either possible or appropriate for a particular institution to establish a sort of pecking order of sovereign borrowers.

Mr. Browne

rose—

Mr. Bruce-Gardyne

I am sorry, but I cannot give way to my hon. Friend.

My hon. Friend says that the IMF already does this. Of course the IMF has a role. It is crucial that it should have a role. We support the IMF in exercising that role, but it is different from the establishment of a specific quota system or a pecking order in which sovereign borrowers should be made to queue. We do not think that this is appropriate or possible.

My hon. Friend also asked about proposals for harmonisation of EEC financial accounting procedures. I take it that my hon. Friend is referring to the draft EEC directive on annual accounts of credit institutions. As my hon. Friend knows, the Government support the principle of harmonisation within the Community in this respect. Our attitude on hidden reserves is that the onus of proof is on those who wish to maintain them to make the case for doing so. I believe that my hon. Friend referred to these matters and also to direct foreign lending and the status of loans in the Second Standing Committee on European Community Documents a fortnight ago. My hon. Friend the Minister for Consumer Affairs told him in reply, I believe, that the Government were grateful for the suggestions and thoughts that he put forward and that they would be studied with interest and taken into account in deciding the United Kingdom's stance on the EEC draft directive.

My hon. Friend asked me to comment on the status of the British freeze of Argentine assets. This matter is currently under consideration. I do not think that it would be helpful for me at this stage to go into further detail.

My hon. Friend also asked about the establishment of a code of conduct to be observed by all IMF member banks in the event of their freezing financial assets of sovereign Governments. A code of conduct implies that financial asset freezes will become regular affairs. We do not foresee that. We do not wish it. Of course, there may be extreme circumstances when a freeze of financial assets has to be imposed. There have been two occasions in the past three or four years when this has happened. It would not be helpful to spell out circumstances in which such a freeze could or should be imposed or the method of its application.

Mr. Browne

Will my hon. Friend give way?

Mr. Bruce-Gardyne

I am very sorry. I cannot give way to my hon. Friend. There are still one or two more questions that he has asked. If he wants answers to his questions, he must allow me to complete what I have to say, and he has not left me much time to do so.

My hon. Friend asked me whether I agreed that, while the international financial system faced severe strains, our own banking system was a good deal more strongly and securely placed. It is fair to say that British banks have benefited from taking a relatively cautious view, and I have no doubt that the prudential supervision of the Bank of England has played a useful role in that. It is possible to argue that we had our experience with lending problems in the mid-1970s and that perhaps we have learned lessons from them.

Mr. Browne

May I put to my hon. Friend a brief point of information? On the code of conduct, I was not getting at conditions under which a freeze would be instituted. I was pointing out what must not be done in a freeze, such as right of set-off and waiving sovereign immunity.

Mr. Bruce-Gardyne

I have to say again that I do not think that it is practicable, possible or necessarily desirable to spell out the precise nature of the methods to be used in the case of a freeze of financial assets, not least because we do not want to establish the idea that this is to be part of the normal course of events. We hope very much that it will not be.

My hon. Friend asked about domestic banking taxation. I do not accept that the 1981 special tax on banking deposits had the effects suggested by my hon. Friend. I did not accept that when I was on the Back Benches at the time.

As for the future, my right hon. and learned Friend has made it clear that further thought needs to be given during the current financial year to the problem of how best to ensure a sufficient contribution to the Exchequer from the banking sector. He approaches this with an open mind. I can assure my hon. Friend that all the relevant factors are taken into account in this review, but I cannot give him any idea at this stage of the outcome. We are aware of the factors which my hon. Friend mentioned, and I assure him that they will be taken into account.

Mr. Browne

Will my hon. Friend give way?

Mr. Bruce-Gardyne

I cannot give way to my hon. Friend again.

My hon. Friend asked whether I agreed that it would be extremely foolhardy and against the interests of Western economies to adopt the proposal contained in the Kasten amendment for sovereign loan default in the case of Poland. We are entirely at one about that. That would be a very mistaken way of proceeding.

The world is passing through a transition from a period of very high and rising inflation rates to a period perhaps of much more stable money and lower inflation rates. Inevitably, there are financial transactions which in the previous period appeared to be good sense but which in the very changed circumstances of a much lower and more stable regime of inflation internationally are bound to look very different today. It is essential that we get through this phase of transition. It is not without risks and dangers, and I accept my hon. Friend's warnings, but the prospects for the world economy must be substantially better in the long term once we have gone through this transition and moved back to a period of much more stable prices and much lower inflation, as I believe we shall be doing.

The essential role of the Government is to act in concert with our allies and our trading partners to make sure that the sort of risks to which my hon. Friend referred are taken fully into account. At the same time, we should not indulge in exaggerated expectations or fears about the extent of the risks that we face.

We can at least feel with some reasonable confidence that we in this country, thanks to the prudent management of our affairs by Her Majesty's Government, are much more soundly and solidly placed than some of our neighbours, and we hope that they will take notice of our example.