§ 7.38 p.m.
§ Lord Lever of Manchester rose to ask Her Majesty's Government what are their policies in relation to international deficit finance and the banking activities relating to it.
§ The noble Lord said: My Lords, in a sense. I feel deeply apologetic that so mighty a subject should be confined to such a small space, at such a late hour. Nevertheless, it might act as a warning for a future occasion when we may be able as a House to discuss the subject more volubly and more spaciously than is possible tonight. I want to discover from the Government what is their response to the dangerous threatened banking crisis in the world and the general monetary instability that exists throughout the world. I also want to know what proposals they have for their contribution to easing some of the anxieties and threats which beset us.
§ I hope that the House will forgive me if I go into a little past history. How did we get into this position? The central reason is that the twentieth century offers ever-sharpening choices to the peoples of the Western world particularly. Are they going to learn how to co-operate prosperously together, or are they going to regress into the kind of chauvinist unilateralism that brought so many disasters that shamed our great continent in the pre-war period?
§ Every so often the regression to chauvinist insularity takes over from the good sense which ought to have dominated us in the post-war period, because we started on the right lines. We came to recognise that. in a world of ever-growing and indeed accelerating interdependence, we had to build bridges between legitimate national decisions and the world global commitments on which we all depend for our prosperity.
§ In the financial area and in the economic area we built two great bridges between the interdependent requirements required to protect our global interests. The two great bridges were the Bretton Woods monetary system and the GATT trading system. This danger and difficulty with which the world is now faced arises primarily—and I shall have to put it briefly. I cannot go into the details of it. much as I would enjoy doing so—because the leaders of the 665 world, as the 1970s approached, chafed under the disciplines of the co-operative systems of Bretton Woods and the GATT and a mighty tendency to regression to an insular chauvinism took over, under the misguided belief that we would somehow add to our autonomous powers of lifting our standards of life if only we could escape from the restrictions that the international disciplines imposed upon us and upon our parities and our trading principles.
§ This is the short-sighted view of the one-eyed man. As the character in Dickens said, "He had but one eye and the popular prejudice runs in favour of two". My prejudice continues for both eyes. You have not only to look at national interests but at the global interests which are crucially necessary in a modern world to preserve your national interest, and an integral part of it, if we are to prosper. Our leaders, to their shame and to our danger—and to our injury, from which we are already suffering—kicked down the Bretton Woods bridge and started to undermine the GATT bridge between national decision and the protection of global interests involved in interdependence.
§ In the early 1970s they finally destroyed Bretton Woods. They pledged firmly and solemnly that they would put something better in its place—rather like those internationalist friends of mine who want to tear down the European system of co-operation only in order, of course, rapidly to build a new, better and flaw-free edifice. Of course, none has appeared. There was no new system. We had, in effect, a leaderless financial situation in which currencies yo-yoed up and down, reached parities up and down that nobody would have dreamed of bringing about as policy and nobody could have dreamed of as related to economic fundamentals, while Governments, enthralled by their own doctrinal complacency, would prate about how sound it was for the market to decide on these matters without the clumsy and unknowledgeable interference of Governments—with becoming modesty, which, alas, they tend to confine to the areas where they ought to be more active; a modesty not often very much in evidence in many other areas. They said that the currency must be left to yo-yo about, whatever the consequences to our standard of life, whatever the consequences to world trade and the like.
§ This is the context in which we now have the banking crisis. Very briefly, the immediate occasion was the formation of the OPEC cartel. It created an urgent need for the poorer countries of the world to receive some finance to enable them even to maintain their meagre standard of life by importing the oil necessary for their modest economies and to allow for some possible expansion. Everybody recognised the need for it and no Government was willing to take any of the thoughtful and collective actions required to bring it about in an orderly and sustainable way.
§ While Governments were casting about, a bright thought occurred to them that all this could be done painlessly through the Eurodollar market. I do not have time to expand on the Eurodollar market. It is a market which escapes very largely the kind of regulations which would impede the flow of funds required to channel the idle funds of the world in precisely the growing inter-dependent situation which I have described; so that it has a positive purpose. But if you put upon it tasks which it is not capable of 666 fulfilling and if you allow it to fulfil any of its tasks without that minimum structural bank regulation which every civilised country enforces on its own domestic banking system, you are asking for trouble.
§ Now we have got it. Everyone was very pleased about this when hundreds of billions started to move in this way. Governments were happy. They did not have to examine their complicated budgetary mechanisms to see how they could accommodate with the crucial needs of the 20th century. That is one of the things that most treasuries all over the world try to avoid; that is, any scrutiny of their 18th century and 19th century ideologies which would need to be brought up to date if they were to meet the real tasks of the 20th century. The treasuries were relieved that they did not have to strain themselves in this agonising way.
§ The bankers, on the other hand, were making (on paper, at any rate) what seemed like large profits; so that everybody was happy. And the leaders of the Western world, whose reflexes always favour thoughtless inaction, gratefully sat back and felt that nothing more was required to deal with this crucial problem of financing the deficits of impoverished countries caused, in the first instance, by the OPEC cartel. What could be more satisfactory? Why should they do anything? What could be more enjoyable than the financial conjuring trick which transferred hundreds of billions, and met the economic and political purposes of government, on the one hand, without offending a single treasury shibboleth on the other? And treasuries that would have reacted with implacable hostility if somebody had put up to them a rather rash demand for a £3 million factory in the United Kingdom, watched benignly while £50 million to £80 million were subscribed to put them up in Zaire. Zambia or in the middle of the desert. As long as the funds were moving the treasuries were happy. All this was done so agreeably by mirrors, and without pain.
§ There is a great flaw in all this. This money was not lent because these people were creditworthy; it was based upon need and appetite, a dangerous conjunction, if I may say so, in the circumstances in which this money was turned loose by the hundreds of billions. So the money flowed. With the lack of creditworthiness, why did they lend—these shrewd, tough bankers, approved by their shrewd, tough, and thoughtful Governments? They lent because they said, "That is quite all right. Sovereign borrowers never go bankrupt; they just go out and borrow the interest and borrow the repayment money from somebody else". They would all be like the old lady who said, "Thank God, I have just borrowed enough money to pay off all my debts".
§ This chronic condition, they believed, could go on forever. But there is a snag in it. It depends on credibility. The trouble was that the people they were lending to did not only have to borrow year in and year out to get the money to pay the interest, and to pay the money back; they were all running chronic deficits and had nothing to pay the interest with. They had to borrow new money to sustain the fairly pitiful standard of life that they were then enjoying. They found, to their amazement, eager bankers of the Western world hurling themselves at them with hundreds of millions indiscriminately.667
§ Let me point out that the trouble was made worse by the high interest rates and the brutal adverse change in the terms of trade which the long recession brought about. Let nobody persuade themselves that this ramshackle lending, predicted and predictably due to collapse one day, would not have collapsed anyway, but would have collapsed somewhat later. That is the best that you can say. If we had deferred the high interest rates and if we had not had these adverse terms of trade because of the recession, the structure of the lending had a built-in self-destruct of rising incredibility which doomed it from the day it started and guaranteed that, whether it be three years, five years or 10 years, it had to collapse in the end.
§ I venture to repeat what I said the other day. that the whole of the lending system, based not upon credit but credit-worthiness of the borrower and the ability to go on borrowing ever ballooning sums, is precisely the structure of the chain letter, and not surprisingly has the ultimate stability of that system. It is strange that it should be applied to lending on this scale internationally and should have been approved by Governments for so many years. Governments brush aside the criticisms, but reality has broken through. Huge defaults threaten: banks are no longer prepared to keep the chain letter going. Banks are trying to rescue the money that they have going in. and they are finding that not only can they not rescue the money that is going in but they can only preserve its apparent value in their balance sheets by lending new money.
§ So we find that the banking system of the western world has become hostage to its impoverished debtors. That is a strange situation. One has to ask why the Governments encourage this. They accept an intellectual indolence and an unwillingness to tackle the problem in the only way it could be satisfactorily tackled, which is internationally and co-operatively. It is a measure of their resistance to return to international co-operation that they were prepared, instead, to sanction this manifestly dangerous system.
§ Do not forget this, that it is very easy to criticise the banks, but if the banks had not stepped in the Governments were in no condition to do so. If this lending had not taken place we would have had disaster eight years ago. Although I am not without severe criticism of the banks for accepting for so long the Governments persuasions—not to mention arm twistings—that went on in those days, and is still going on now, the Governments are now in a most ambivalent position. On the one hand, they keep saying, "The bankers are very reckless, stupid chaps; everyone know that is a reflex of bankers; they are stupid chaps; they have lost money, and that is too bad." At the same time, with another voice they are going round saying to them: "Please lend more or there will be a ruinous slump in the world and a very grave series of political disasters to go with it". That is a very strange position for the Governments.
§ But we now find that we are facing the following dangers—and I am sorry to be terse in summing them up. The banks are facing a highly dangerous combination of deposit withdrawal and non-performing assets. At best, that will lead to sharp pressure on their cash flow and to a sharp contraction in their lending, not 668 only to the less developed countries of the world but throughout the world in their international lending and even in their domestic lending. So, far from expecting even the puny recovery which is being predicted in the leading Western countries for next year, if this goes on we shall have a deepening of the recession.
§ However, that is the best case. I dare not contemplate the worst. Assuming that Governments were to continue at the abysmal level of reaction which they have shown in the past eight years—I do not believe that they will, and there is very good evidence for believing that they will not because of the American Government's reaction, but if they were to go on as they are doing—we would face the dangers of a world trade collapse, a serious danger to the banking system and the destabilisation of every one of the borrowing countries politically, economically and financially.
§ But let me say this. In the best case, if we shovel together enough money to keep the old charade of the money that has already gone looking all right, and if we do not provide an adequate flow of new lending, then any abrupt reduction, in the flow of lending, however well justified on economic grounds and on the grounds of profligacy in the past, any abrupt withdrawal of funds to these fragile political and economic systems in South America, Africa and Asia, will absolutely guaranteee to destabilise their economies and their politics. Any withdrawal has to be a phased withdrawal and has to be based upon collective international decision, which means that at whatever level we require the funds to go it should be dependable and based upon conditions which are in the interests of those countries as well as protecting the legitimate political and economic interests of the West. They are not in conflict with the welfare of those countries.
§ In the past, no kind of restraint was placed upon the bulk of these funds, these hundreds of billions. They financed steel mills in South America and elsewhere to add to an already difficult steel situation. They added subsidised steel production more incompetent than any that existed in the world. I am not talking about the Far Eastern steel mill finance, which was profitable and was well run. But it is haphazard and ramshackle in its method, and haphazard and ramshackle and damaging in its consequences. Far from helping the world to cope with the restructuring process which is always going on in the world—and today it is at an accelerated pace—it actually made it worse.
§ What are we going to do about it? The remedies must be stated. The House would not share my ecstasy if I were to continue in detail on the mechanics, but I have to say this. No piecemeal panic solutions that are being employed at the moment will do more than postpone the crisis. All that will happen is that the crisis will build up further. You have to replace an intellectually indefensible system for financing a third world deficit and a poorer countries" deficit with one that makes sense. The only one that makes sense is a co-operative world effort, and it is to that that I hope the Government will respond. You have to stabilise past lending and ensure a future flow of lending on a basis which makes sense, because it will enjoy a surveillance which will both discipline and support the banking system in so far as it has a role to play.669
§ That brings me to my conclusion. I beg the Government to respond to Secretary Regan's magnificent change of heart. He has called for an international co-operation that will deal with this crucial deficit problem in the only way that it can be dealt with safely, and has also quite rightly related it to an attempt internationally not to create a rigid system of parity control or management but to eliminate the grosser distortions in parities which result in ludicrous rates of interest unwillingly forced on even a Government like the present one. anxious to bring down interest rates but being caught in the eddies of the market and forced to send them the wrong way.
My final words are these. Clemenceau said:
Courage is when fear makes you run forward rather than back".
§ I am delighted that Secretary Regan and Secretary of State Schultz are fearful, and I am even more delighted that their fear has given them the courage to go forward, to overthrow their old, repeated shibboleths. I hope passionately that they will find a response. I have been rather saddened that it has been so late in coming, but I am sure we shall have it, and have it soon.
§ 8.00 p.m.
§ Lord Soames
My Lords, I am sure the House will be most grateful to the noble Lord, Lord Lever, for having introduced this debate, short as it has to be, on these vital subjects. When my noble friend Lord Cockfield spoke in the economic debate on the Address, he addressed himself essentially to the position of our economy here at home, and his only reference to the outside world was one of making some fairly threatening noises to some of the more advanced developing countries.
I think that that was perfectly understandable in the context of the particular debate, but what I think is important is that it should not lead us to forget that we live in an essentially interdependent world, not just in matters of trade—we have all realised that many years ago—but also in all that concerns the economic climate of each of our countries in the Western world, and indeed between the Western world and the developing world. For instance, if the industrialised countries were to try to pull the world out of recession by each and every country seeking, as it were, "to do its own thing" by exporting more and importing less, that would get us into a worse situation than we are in at the present time. I think that this debate will serve to concentrate our minds on a vast and vital subject, in that it will lead us to look essentially at the problems of the world economy.
My Lords, do you not sometimes think how extraordinary it is that we allow ourselves to be taken in on these matters by our own rhetoric? One or two years ago, was it not common parlance to say that if only we could get inflation down and if only United States interest rates would come down to single figures, then the United Kingdom's interest rates would follow them down and everything in the garden would be lovely and rosy, and at least we should be seeing signs of the end of the world's recession?
In fact, all this has come to pass; but in spite of it the economy of the United States and indeed the economies of countries throughout the industrialised 670 world remain stubbornly stagnant and there is still no sign of any general increase in demand sufficient to pull us out of this recession. Meanwhile, as the noble Lord, Lord Lever, said, we continue with exchange rates moving as violently as ever, continuing to defy accepted economic theories—for when inflation in the United Kingdom was nearly 20 per cent. the pound stayed high; yet with inflation now at 7 per cent. the pound is much lower than it was then. So surely we must see by now that just to reduce interest rates and control inflation—useful and highly necessary actions in themselves—simply is not enough to get the world economy moving again. I have often said before—and I referred to this in the speech I was bold enough to make to your Lordships in the debate on the humble Address (at col. 276 of Hansard on 10th November 1982) and I was very pleased to hear the noble Lord, Lord Lever, make almost the same remarks this evening—but perhaps I may repeat again that we shall not get back to the growth rate we need, we shall not bring the recession to an end, we shall not remove the risk of moving from a recession into a world depression unless we tackle the roots of the problem.
First, we have to get some semblance of discipline into a new international monetary system. Secondly, we have to create again a mood of liberalisation rather than restriction of international trade. That is why I said then that I thought the big benefits of the 1950s and the 1960s—those golden years of growth—were due largely to the existence of the Bretton Woods system and the liberalisation of trade which flowed from different rounds of the GATT.
And of course, the two poblems are closely related. Take, for instance, the habit of petro-dollars of floating around the world like an oil slick at the mercy, as it were, of wind and tide, polluting first one international currency and then another, carrying what the noble Lord, Lord Lever, I think called "not properly used funds", and with a lot of speculation riding on their back and the movement of exchange rates totally disconnected, with internal economic factors following thereon. When they rise too high, industries become less competitive and that feeds the protectionist moods and inclinations. This is indeed what we are seeing today.
Superimposed on these two problems of parity movements and international trade, we have also to contend with a comparatively recent but none the less real problem to which the noble Lord devoted himself for most of his speech. It is commonly known as a banking crisis, but I prefer to refer to it as "a borrowing and lending crisis". What it must not turn into is a crisis of confidence in the banking system. Banks which have been too permissive will of course have to pay for their lesson and countries which have been too profligate in their borrowing and spending will need to draw the correct lessons and conclusions therefrom. But—and here I would support so much of what the noble Lord said—we must not go from one extreme to another because it would be a tragedy if sovereign loans from commercial banks to developing countries were to dry up.
The Western banking system has to sustain its confidence and arrangements have to be made of an international character to help it so to do. Ways have 671 to be found around the problems of existing indebtedness in the third world and new money for sovereign loans has to be found, albeit with much greater stringency than in the past. Industrialised countries will need, if we are to get out of this recession, the demand which the markets in the third world can generate, just as developing countries need our markets for their manufactures and raw materials.
These are the problems which have to be resolved, if the world is to heave itself out of recession. We have to sustain our liberal trading system, we have to get some measure of discipline back into international money markets and we have to encourage sensible growth, which is necessary for social stability in the third world. I believe that we now have a chance. We have a chance principally because more people are thinking along these international lines and because of the imaginative recent thinking and actions of the US Administration—in particular, Mr. Regan, Mr. George Schultz and the Federal Reserve—in two important areas.
First, ever since this Administration came into power, they have said that the money supply was their principal concern. They minded more about that than anything else. In 1982. their money supply targets—Ml, M2 and M3—have all been overshot consistently. Yet during 1982 their interest rates have been considerably reduced and it seems that they are continuing along that course. I presume that Her Majesty's Government will welcome this action of the United States Administration—indeed, I hope they will—as an endeavour to get demand going again, and that the US lowering their interest rates will enable other countries such as ourselves to follow in their wake.
For interest rates today are no longer what they were and should remain; namely, a reflection of the health of the economy of a country. We have got to the point where, with all this money floating around the world, we are not bring down our interest rates unless the other fellow does, for fear of too much money flowing out into some other home. So I hope that we shall be able to follow this. I shall be grateful if the noble Lord, Lord Cockfield, feels able to confirm this when he replies.
Secondly, Mr. Regan has expressed a desire to put a cap on the explosive exchange markets—I put it no higher than that—and has given a strong hint of wanting to discuss with his colleagues in the Group of Five the possibility of another conference to this end, for which, in shorthand, he used the concept of another Bretton Woods conference. Hooray! At last! May it proceed with all speed, and I hope that it will get a very positive reaction from Her Majesty's Government. Thirdly, I believe that we can see the international approach to the banking problem for which the noble Lord called. I believe that this is possible and likely to be forthcoming.
So I repeat that I think we have a chance, provided that all countries concerned are sufficiently international in their thinking. Of course, if countries were to pursue policies of competitive devaluation and were to announce ahead of time, as the Labour Party has done, that if it got into power it would have a 30 672 per cent. devaluation, then we should be lost. Others would do it, it would be highly catching and we could kiss goodbye to any prospect of recovery at all.
There is always a fear that, as recession continues and creates more havoc within our economies, some governments will be tempted to turn in upon themselves even more, to become more chauvinist, more insular, more unilateral and more protectionist in their thinking and in their policies. We want no more of that. We want that like we want a hole in the head. On the contrary, the need is for countries in the developed world, particularly those with the responsibilities of leadership by virtue of the importance of their currencies, to become more internationalist in their attitudes. I hope to see Her Majesty's Government in the van of this movement. Why? Because only thus will the world get through this dark tunnel in which we hve lingered too long, largely from lack of ability to master the fundamental problems that oppress us.
§ 8.16 p.m.
§ Viscount Chandos
My Lords, last week it was suggested in your Lordships' House that companies' accounts, although appearing dull. in fact contain within them great human drama. The subject which the noble Lord, Lord Lever, has introduced tonight could be seen as even more esoteric and incomprehensible, but it also contains within it human drama on the highest scale. Indeed, a number of my fellow bankers have found even richer pastures than the profession of banking, in writing best-selling thrillers about economic armaggedon brought on by the collapse of the international banking system. Even cinema audiences have been shown the tightrope which international banks have to walk and the consequences of the system breaking down.
While this essentially terrestrial subject may have caught the attention of only comparatively few people. there is nevertheless an awareness among customers of banks throughout the world of the problems which now confront them to a greater extent than at any time during the last 50 years. For that reason, not only your Lordships but many other people will be grateful to the noble Lord, Lord Lever, for raising this Question at a time when each edition of the newspapers, and not just the financial ones, brings more news of sovereign Governments acknowledging their severe financial problems.
The attention which I believe may be fixed on this evening's debate, and the task of following both the noble Lord, Lord Lever, and the noble Lord, Lord Soames, give rise to a feeling of awe and in view of the late hour at which the debate has begun. I propose to make few points. I should say at this stage that, while I hope I may speak not only for my noble friends in the Social Democratic Party, but also for my noble allies on the Liberal Benches. I do not in any way express the views of the bank for which I work.
The desperate plight of many developing countries means that many of your Lordships may connect such countries, first, with the problem of international deficit financing. I should like to suggest, however, that, important though this aspect of the problem is, 673 the question is wider still. Some of the most industrialised and developed countries in the world currently have major international financing requirements. France and Sweden are two obvious examples and, before any of the noble Lords on the Benches opposite attempt to draw conclusions. I think it would be fair to say that both countries had substantial requirements under their previous Governments. Indeed, there can hardly be anyone better than the noble Lord, Lord Lever, himself, in understanding the problems of financing a developed country's deficit.
We may in this country, therefore, be able to look at the problems now and consider them in some respects with detachment, thinking only of our position at the hub of the international financial system. But this Government, or a future Government of whatever political hue. may well find that it is looking at the question from a different angle, not necessarily through any fault of its own, but because the different economical cycles of countries give rise to substantial variations in their balance of payments, both on current and on capital account.
These ebbs and flows which apply also to the smaller and developing countries are, in my view, an infinitely preferable economic environment to that which we saw in the early 1970s of economic convergence. The coincidence of expansionary economic cycles in all the major economies in the world gave rise to an overheating of the world's commodity markets—not only that of oil but of virtually all the other major natural resources—with whose inflationary consequences we are still grappling. We are perhaps now in danger of economic convergence of another sort, with all major economies heading into deeper and deeper recession and Governments fearful of expanding demand precisely because the balance of payments consequences may be so difficult to resolve in these nervous times. We must not, therefore, in trying to resolve the current problems, impose constraints on the system which would unnecessarily inhibit it from smoothing out the financing requirements of developed and developing countries alike, not only because this would lead to those countries currently in greatest need being put under appalling hardship but also because we and other countries currently in surplus may well require a flexible and accommodating system for our own purposes in the future when we move into more favourable cycles of economic growth.
I should say that this point does not rule out the co-ordinated expansion which my right honourable friend Roy Jenkins in another place has advocated because, within a general co-ordinated expansion there will none the less be significant differences of timing so far as the effects and consequential financial requirements are concerned.
The Prime Minister said recently in another place that:countries which have over-spent and over-borrowed must reduce their spending and their borrowing".If the Government are obdurate about their domestic economic policies, nevertheless I beg them to be more flexible in their attitude towards the international economy.
674 With 10 further speakers tonight, I shall not prolong my own contribution. There are two problems to be considered: a short-term one and a long-term one. In the short term, we must assist those countries currently in greatest financial trouble without forcing unacceptable deflation and consequent suffering upon their populations, which would at the same time indirectly bring further deflation to our own countries—as the noble Lord, Lord Soames, has pointed out. This will involve in some cases either an increase in aid programmes or a subsidy for those countries' interest costs, at the same time as a significant deferral of repayments. Therefore, governments must, on a co-ordinated basis, give direct help to the countries concerned and simultaneously assist the private commercial banks to maintain and, where necessary, increase their lending.
Unlike the noble Lord, Lord Lever, who suggested this in his recent Churchill Lecture. I do not believe that a further international agency is necessary or desirable to act as a lender of last resort to the international banks committed to financing the deficits of sovereign governments. It has been suggested that commercial banks have exceeded the limits of normal prudence in the loans they have made in recent years. I believe that this docs some injustice to the banking community, in view of the scale and unavoidable nature of the problems faced since 1973. But the introduction of another lender of last resort—or should one say of absolutely last resort?—seems to me to be an invitation to banks to suspend their critical judgment and embark on precisely the type of lending for which they are now to some extent unfairly being criticised.
It must be better for each central bank to give assistance, where needed, to the commercial banks for which it is responsible and for the existing supranational agencies to have their scope widened to provide additional support through the co-financing of problem countries and the provision of facilities direct to the central banks supporting their commercial banking brood. While I believe that the commercial banks have on balance behaved responsibly in the face of extraordinary problems, where they have not it is far easier and more appropriate for their own central banks to judge and apply the correct conditions and sanctions while providing the necessary support.
In this context, I should like to raise a specific point and in doing so to apologise to the noble Lord, Lord Cockfield, for not giving him notice of the question. Countries in financial difficulties do not, for understandable reasons, actually go into technical default in the way in which companies do but often negotiate rescheduling of their repayments and payments of interest without default actually being declared. For this reason, it is often even more difficult to say whether a sovereign loan is actually recoverable and therefore worth anything than is the case with a company where a receiver, and ultimately a liquidator, may be appointed. None the less, it is still sensible and prudent for banks to provide against such doubtful loans in the same way as if they were due from an insolvent company.
Unfortunately, the Inland Revenue is currently indicating that it will not accept such provisions against sovereign loans for tax relief in the way that it 675 would for similar provisions on corporate debt. It must be said that, in legalistic terms, since the loans have not formally been declared in default, the Inland Revenue is correct. Moreover, I should be the last person to suggest that the tax burden on the banks in this country has been overwhelming, although its application has been haphazard. But an essentially pedantic interpretation of this problem by the Inland Revenue would be counter-productive to the efforts being undertaken to resolve the problems of international deficit financing and, indirectly, would substantially undermine British banks' ability to finance their domestic, industrial and retail customers. I hope that the noble Lord, whose previous responsibilities will give him such personal understanding of the problem, will make the strongest possible representations to his colleagues in the Treasury.
In the short term, therefore, the Government must, in concert with the other major OECD countries, enable deficit countries to overcome the current crisis and also assist the commercial banking system to provide the necessary new facilities without compromising their vital role in the financing of their domestic industries. In the longer term, the most important single change, which the noble Lord, Lord Soames, put so well, must be an improvement in the level of worldwide demand and trading activity, since that alone can enable countries to service the debts incurred over the last decade.
After that, it is important that funds should be provided to countries, through international agencies and commercial banks alike, on terms which give them some protection from future fluctuations of interest and exchange rates. Most developing countries have no access to funds at a fixed rate of interest, except from such international agencies as the World Bank. As a result, many countries are now suffering from the crippling effects of interest accumulated over recent years at rates of 20 per cent. or even more. Even though such rates may have been low in real terms, in cash flow terms they have imposed an almost overwhelming burden. The commercial banking system has recently developed techniques which enable borrowers, unable to tap the international bond markets in their own name, to insure themselves effectively against future changes in interest rates. I believe that this represents an innovation of real significance for developing countries, to which I hope the Government will give every encouragement.
I should like to conclude, therefore, by joining the noble Lord, Lord Lever, in urging the Government to throw themselves into the task of developing a concerted international approach to this problem, directly and through our membership of the European Communities. The EEC has already established the precedent of helping to finance its own members' balance of payments deficits, through the facilities granted to Italy and Ireland in 1976 and 1977. A revival and, indeed, an extension of such a facility to help non-members as well would be a lead from Britain and from Europe which would do much to overcome the lacklustre reputation of the Community. I ask the Government to apply every pressure to the European Community to take such a positive step.
§ 8.30 p.m.
§ Lord O'Brien of Lothbury
My Lords, I should like, as other noble Lords have done, to express my appreciation to the noble Lord, Lord Lever of Manchester, for giving us the opportunity to discuss this vitally important topic this evening. The noble Lord has never been in awe of professional opinion, or of the conventional wisdom of professional opinion I expect he would call it, in the financial field and he has always been a most thoughtful and provocative speaker on such topics. In fact, keeping up with his nimble mind was one of the more exhilarating occupations I had while I was at the Bank of England. That is already a long time ago but my noble friend Lord Cobbold was at the bank long before even then—more than 20 years ago. I am sure he will recall that in the last five years of his governorship, he saw across the Atlantic a United States growing at a reasonable rate for a developed economy, having a reasonably low level of unemployment, and having stable prices—and, with that economy, providing a background to a world which was becoming increasingly prosperous and having, in most countries, a reasonably low level of unemployment.
In 1962 all that began to change. The Americans. for reasons which seemed reasonable to them, became involved in the Vietnamese war. which grew more and more expensive. The shortage of dollars in the world. which at one time we thought was to be everlasting, began to disappear. We had a plethora of dollars, because the Americans had discovered that their dollars could be employed outside the USA at higher rates of interest than they could be employed inside the USA due to the effects of Regulation "Q", which limited the interest American banks could pay on deposits with them. It was in that way that the Eurodollar market was born. Once it was born other currencies were added to it, and it grew quickly.
That growth was much increased by the successive oil crises, which produced such large surpluses in the world and such large deficits to match them. Then, as the noble Lord, Lord Lever of Manchester, said, there was this great mass of money washing around the world and being employed by the banking system in activities which were increasingly international. In those 20 years the banking system has become revolutionised. We have now an international banking system with domestic appendages; before those 20 years, it was the other way around. Some of the biggest banks in the world earn more of their profits in international operations than they earn domestically, in one or two cases, notably.
This market came into being and we found that it was beyond the control of national authorities. A large part of it came to rest in London. We knew that if we sought to control it. which itself would be an extremely difficult task, it would simply "up sticks" and go elsewhere to some place where they had no interest in attempting to control but a great deal of interest in deriving the profits from the market. In many ways, that market has served the world well during a very difficult period, but individual banks get deposits and secure even more deposits as these great surpluses grow. Arabs who have large surpluses of dollars want to put them somewhere where they will earn money. 677 They put them into the banks and the banks, having secured these dollars and having to pay interest on them, had to earn even more interest to make it worth while. So the business was nourished, unavoidably so.
It is true that the banks were perhaps unduly competitive. They certainly lent at inadequate margins all too often. I will not say that they lent unwisely in the sense that they took on a lot of bad risks. On the whole, they appear to have been good risks—particularly as the noble Lord, Lord Lever of Manchester, said, the sovereign risks. But the whole corpus and multitude of these funds became too great.
Let us return for a moment to the USA. The dollar shortage came to an end in the early 1960s and by the time we came to 1971, the great mass of dollars in the outside world had made it very difficult for the USA to honour them as they were required to do under the Bretton Woods system, by converting them into gold. They were unwilling to raise the price of gold, which in 1968 I considered they should have done. Therefore in 1971 the USA had to destroy the system. They destroyed it because they did not see why the world should not be content with a dollar standard. After all. theirs was the most powerful economy in the world and the world should be content to take dollars—what better currency was there to have? But the world did not feel that way about it and was not prepared to take dollars at a fixed rate. So the USA had to break the rate and in so doing, they broke the Bretton Woods system.
In succeeding years there were efforts to provide a store of value which would take the place of gold. The SDR—Special Drawing Right—was formed but has never flourished since. Whether it will flourish one day one does not know. All that illustrates that the beginning of our problems was the predominance given to internal economic aims over external balance. The Bretton Woods system required that countries which got into external deficit should take steps to correct that deficit. The International Monetary Fund was there to help them and to show them the way in which this might be done. But with the breaking of the fixed rate system, and with the multitude of floating exchange rates, countries felt that they were able to follow their internal aims regardless of external consequences; those consequences were shown simply in the exchange rate and not in any other way that was particularly harmful to them. I believe this was the genesis of the problems in which we now find ourselves.
The countries which are now causing us trouble—and I shall mention no names although we all know that most of them are in South America—are by no means the poorest countries of the world; far from it. But they have become far too ambitious about what they wish to do internally and have assumed far too much debt. They have not been half careful enough about their external balance. I see the problem we now have as being basically an economic problem, and that the banking problem is merely a facet thereof.
The success with which the banking system finances these great deficits, arising from the equally great surpluses, took the minds of Governments off the need for sounder arrangements in financing. That was a very great pity. I remember Mr. Denis Healey trying very hard to achieve enlargement of international 678 facilities in order to provide help for deficit countries, and he was rebuffed. It is only now when a real crisis is confronting us that Governments—and particularly the Government of the United States of America—are beginning to feel that something more radical is required to cure our troubles.
The noble Lord, Lord Soames, spoke about the role of interest rates. Interest rates have become very high indeed in nominal terms, but we have to remember that there is a real interest rate and a nominal interest rate. There is a great deal of difference between the two. The other evening the noble Lord, Lord Kaldor. asked one of the Ministers a question. He said that since our economic circumstances now are very-similar to those which existed in the 1930s, why is our bank rate not 2 per cent.? What he forgot to mention was that between 1929 and 1939 prices actually went down slightly. What has happened to prices over the past 10 years is totally different and explains the difference in interest rates.
There has been a great deal of talk about the evils of monetarism. I believe that this Government did themselves a disservice in getting themselves too closely hooked on Mr. Milton Friedman—but, in any economy, a sensible monetary policy appropriate to the circumstances of the time is absolutely indispensable. One has only to look at an economy which provides an inappropriate monetary policy, as I must say was provided by Mr. Heath in the latter half of his Adminsitration, for reasons which appeared to him to be sound, to see the inflation which follows. But an appropriate monetary policy must be backed up by an appropriate fiscal policy. As you will have seen in the United States in the last year or two, it is very hard to persuade oneself that the fiscal policy adequately supports the monetary policy. Therefore, the monetary policy has to be unduly severe.
I get back to the fact that this is a question of economic good sense. Certainly, if we could now have a conference which would get us back to the economic good sense which originated the Bretton Woods system and the disciplines associated therewith the world would be a much better place and the chance of growth would reappear. Meanwhile, we have this banking crisis. As a banker, of course, one does not want to be too melodramatic about it, but it is there and it has to be dealt with. I believe the noble Lord, Lord Lever, has suggested mechanisms and formalities which might help. I myself do not believe that they are runners. My experience suggests that it just could not be done.
What I think must be done is what is being done. First of all, the commercial banks must agree to reschedule the arrangements which have already been put to them; and they must be willing to add a little new money in order to help the liquidity of the countries engaged in correcting their affairs. The International Monetary Fund must back them up by providing medium-term money which will take loans out of the bank books as time goes on. And the central banks must, of course, perform a co-ordinating function. As I can tell from my monthly visits to Basle—I came back only yesterday from the last one; I am something of a bystander nowadays, but I see what is going on—the central banks have this question 679 very much under their belts. But they can only provide short-term bridging money, and they can only do it to any considerable degree if their Governments back them up, as I believe they are doing.
It is that piecemeal way, with constructive action on all fronts, minimising the risk of a break in confidence, which will get us out of this. I believe we will get out of it because I believe the degree of co-operation on all sides is now very much greater that it was many years ago, and has been growing all the time. So although I agree with the noble Lord, Lord Lever, that we have a crisis—and I agree with him that something must be done to produce sense and co-ordination out of the whole system, the economic system——
§ Lord Cobbold
My Lords, before the noble Lord sits down, may I ask him whether he does not agree that the best way to take an international and co-operative look at this situation—I am talking about the exchange situation particularly—would be to strengthen the International Monetary Fund, both in the amounts at its disposal in one way or another and in the discipline it may be able to hold over the rest of the monetary world?
§ Lord O'Brien of Lothbury
My Lords, the noble Lord has said what I certainly would have said. That is the first thing. The International Monetary Fund is there, and it has exercised a very beneficial influence on very many countries, including our own. With greater resources its power would be all that much greater.
§ 8.43 p.m.
§ Lord Ardwick
My Lords, it is just over a month since we had our last debate on economic affairs. We were debating the Address and the Autumn Statement, and this did not give us nearly enough scope to discuss the British problem in the context of the world economic problem. We could only touch on the wider issues, but touch on them several of us did, and got away from the assumption, on which too many economic debates are based, that we live not just on a geographical island but also on an economic island, master of our financial fate, captain of our commercial soul. On that occasion I said that we needed a broader debate, and today we must thank the noble Lord, Lord Lever of Manchester, for giving us such an opportunity. But I wish he had been able to lay his hands, as he himself does, on a better instrument of discussion than an Unstarred Question coming on late in an evening just nine wassailing nights before Christmas and when, outside, there seems to be the last Act of King Lear, being enacted, judging by the thunderous noises we have heard.
The noble Lord has quite rightly restricted his Question, but this is a matter that will not stay within bounds. Every voter knows that there is a world recession and that the current political question is 680 whether the Government are making the best or the worst of the adverse conditions in which they find themselves. To most people under 30 the recession is the mysterious visitation of a malevolent spirit, once the subject of their father's boring old fireside lectures. The effects of the recession and the Government's inept handling of it are presented on the television screen and on the front pages of newspapers: but the causes of the recession and the possible cures for it are buried in the arcane columns of the financial pages. The result is that we are in the midst of this banking crisis of which the general political world remains uninformed.
Only now, as elections are near, are Governments of the western system realising that they cannot much longer convince people that there is nothing to do but deflate and wait—wait until the tide turns. Only now, indeed, are the opposition parties presenting positive alternative policies. Yet a purely national remedy can only alleviate the problem and avoid maximising it, as I am afraid this Government seem to have done.
What are the prospects of an international attack on the recession? Even in the past few days hopes have begun to stir. The American Administration has at last seen the light to which some Europeans, including my noble and prophetic friend Lord Lever, have been pointing for months, indeed years. The United States cavalry are not yet galloping to the rescue, but Captain Donald Regan. Secretary of the US Treasury, has ridden forth to spy out the land and work out a strategy for deliverance. The United States, in a remarkable U-turn, has shed its obsession with its inflationary problems now that those problems are much diminished. It is becoming vividly aware of the effect of its domestic policies upon the world. It has seen the western world, of which it is the leader, threatened with possible financial catastrophe. It has seen that its high interest rates have been putting a terrible strain on good American companies: that these rates, coupled with a strong American dollar, were making life impossible for the heavily indebted countries of the third world, further burdened as they are by the low prices of the commodities they export. And not only are the creditor banks facing default and the world financial system put at risk; world trade is threatened still further as the debtor countries are forced to cut imports to balance their external current accounts.
Nothing can have stirred the United States so deeply as the realisation that so much of the debt hangs round the necks of Latin American countries and could threaten the political stability (if you can so call it in that part of the world) of a part of the world which is regarded as indispensable to United States security.
So the United States has relaxed its monetary targets and interest rates and the dollar are weaker. The feeling has grown, even during the past few days, that the banking system is not after all likely to be faced with widespread default. But this is just the beginning. There is no certainty of what is going to happen. The actual management of the debt problems is still ad hoc. There is not the beginning of the system, not even a strategy. I gather the noble Lord, Lord O'Brien, does not think that there should be a system or strategy, but there should be some sort of method. I think he was suggesting.
681 How are the third world countries to be not only rescued from their commitments but helped to carry on and restore their economies as well as their finances? I leave it to my noble friend Lord Hatch of Lusby to dwell upon that particular part of the subject.
There is virtual agreement now that the IMF should gradually increase its resources, but that its traditional conditions that its borrowers must aim at a quick restoration of their current balance of payments could make the world recession worse. The problem is to do some kind of justice to those countries and at the same time to exert some kind of creative discipline upon them. The United States has also seen that if its world is to prosper we must find our way back to a new and more flexible version of Bretton Woods, or some other system of stable exchange rates—something which may start with an effort to harmonise the monetary policies of the leading OECD countries.
American commentators are warning us not to hope for too much too soon. United States growth in 1983 may be only 3 per cent., and that starting from a low level, too. The EEC will be lucky to get 2 per cent.
I ask the noble Lord, Lord Cockfield, what are the Government's thoughts on all this? What are their ideas? What are their policies, not only on deficit finance but on the whole range of possibilities opened up by the United States during the past week or two? Do the British Government intend to make a positive contribution to the new thinking? What are their views on the co-operative international effort that is needed to lead the world out of the depths and back to work and prosperity? I hope that the noble Lord will dare to think aloud when he comes to wind up.
§ 8.54 p.m.
§ Viscount Eccles
My Lords, I intervene in the debate for only a few moments because I want to support the noble Lord, Lord Lever, in his campaign for international action to try to get out of the exchange mess and the mountain of international debt. Like other noble Lords I was glad to see that Mr. Regan, the Secretary of the United States Treasury, appeared to be making a move in the direction which some of us in the debate a month ago on the humble Address hoped he would. I only hope that our Prime Minister and the Chancellor of the Exchequer are urging him forward. It is quite obvious, as the noble Lord, Lord O'Brien, said—and I agree with so much of all he said that there is hardly anything left for me to say—that since Bretton Woods the floating exchange rates have led to a volume of speculation that has been the enemy of steady growth right throughout the world.
I believe that the political factor in determining the various cross rates of currencies has not been given sufficient weight. The leader writer of the Financial Times, my favourite newspaper, I believe on the 4th December, wrote that,Exchange rates have often moved against reality, depressing the yen while Japanese exports swept the world and pushing first sterling and then the dollar to ever more uncompetitive heights".I think that is an out of date use of the word "reality". The writer means that reality in this world is only connected with the balance of payments, but that is nonsense. In the exchange markets the reality is the balance of demand and supply, day after day and week 682 after week, and that demand and supply is now influenced very much by other causes than the settlement of what one might roughly call trade debts. First, there is the movement of money in response to interest rates, which is a very big factor. But I am inclined to think that the more fundamental factor is the political factor. That is to say, it is the judgment whether this or that country is a safer or more acceptable place in which to have one's money than another country. The United States is safer than a country that has a frontier with the communist bloc. The yen, on the calculation of economists who are always wrong because they do not take the political factor into account, is said to be absurdly cheap. But if people do not want to have money in Japan the economists will always get their calculations wrong.
I remember in the early years of the war taking Ambassador John Winant to see Dr. Salazar in Lisbon. Winant said to Salazar. "You know, Portugal would be much more popular if you declared war against Japan rather than Germany". Salazar said. "Why do you think that?" Winant replied, "Can't say, just don't care for those Japs". As a matter of fact, that is the kind of thinking which is extraordinarily powerful in the world today because we do not have a system of disciplined budget-keeping which was required when we had the Bretton Woods system.
Take our own currency, sterling. It may be said by the economists to be over-valued, but we have the Prime Minister and the Chancellor of the Exchequer. If we exchange them for Mr. Foot and Mr. Shore, sterling would very soon be under-valued, and that is nothing to do with the economists. It is getting the politics right that matters. We have spent far too much money on schools of economics and professors of this and that, statisticians and all the rest of it, but we do not seem to have got the right politicians who would make the right decisions and then have some chance of a more stable world economy. I agree with other noble Lords that the lesson from this is that we want an alliance of prudent and courageous Governments who will give each other undertakings that they will not overspend. I cannot imagine anything more disastrous than if we had the sort of overspending programme that noble Lords on the Benches opposite are beginning to talk about. Unless we all behave properly, no money will be worth having.
§ 9 p.m.
§ Lord Hatch of Lusby
My Lords, along with other noble Lords who have spoken, I should like to add my thanks to the noble Lord, Lord Lever of Manchester, for introducing this debate, short thought it has to be, and to join with them also in the hope that we shall be able to debate these issues at greater length on another occasion. If for no other reason than to listen to the speech of the noble Lord, Lord Soames, this debate has been worth while. Frankly, I was amused by the beginning of his speech because he appeared to be virtually quoting from the Conservative Party manifesto and outlining the policy which the Government followed when he was a member of it by insisting that high interest rates must be brought down; that inflation must be reduced and that then everything in the garden would be lovely. He will remember that there were some noble Lords on this side of the 683 House—indeed, the whole of this side of the House—who told him at that time that he was wrong, and I am glad that he has found that out.
As regards the issue of devaluation as part of the Labour Party's proposed policy, there may have been a forecast that a new Labour Government would reduce the exchange rate by 30 per cent. However, I would remind the noble Lord that, as he says, exchange rates have become the toys of speculators and that, during the life of his Government, the exchange rate has gone up and down like a yo-yo and certainly has been reduced by much more than 30 per cent. over the past 12 months. Is it not better to do it in a controlled way than by this kind of speculation?
On the other hand, it would not be fair for me to pass the noble Lord's speech by without saying that I heartily agree with the bulk of it, particularly the part in which he emphasised the importance of internationalism in economic affairs. I would only say to the noble Lord. "Yes, we have to be internationalists, but we must also find out the way in which to be internationalists". He emphasises the importance of bringing the third world countries into the market place, and we must find out how we do it. It is upon that issue, and that sole issue, that I wish to dwell this evening.
The noble Lord, Lord Lever of Manchester, in his introduction, and the noble Lord, Lord Ardwick, both mentioned the issue of commodity prices. It seems to me as a layman that, when people talk about there being a financial crisis, it is very much a form of double talk. Are we living in a Hatter's Castle world? As I understand it, money is chasing customers as it has done ever since the petro-dollar years of a decade ago. I understand that there is something like 1,000 billion dollars chasing customers around the world. Is it not our specific duty to connect those dollars with the wealth-producing process? Is not that the real crisis rather than the computer figures that are thrown around the financial papers? For example, the IMF is searching for 100 billion dollars this year, but if it gets it—and it has not got it yet, and the United States is certainly dragging its feet and our Government seem to be following the United States on virtually everything—that only covers three years of the interest payments of Mexico, Brazil and the Argentine. I repeat: it covers the interest payments. That is the scale of the problem that we are facing. It is no radical socialist who has said recently that the world is facing the most serious threat to its entire economic and social system since the Second World War. The man who said that was Karl Otto Poehl, the head of the German Central Bank.
What I am trying to bring again to the attention of the noble Lord the Minister who will be replying is that the crisis that we are facing is not so much a crisis of figures, not so much a crisis of banking, as a crisis of how to relate the needs of the people of the world to the structure which can produce the wealth to sustain those needs.
We have become accustomed over the past 10 years to money being available, first in petro-dollars and now there is the money that cannot be used by the industrialised world because of the recession. It is 684 because a great deal of this money had been lent to third world countries that there is such a debt problem today. It is not a problem of production; it is a debt problem.
I would be the first to admit—indeed, it would be patronising not to admit—that a great deal of this money has been misspent. Expressways have been built instead of feeder roads to markets; office blocks have been built when homes were needed instead of shanty towns. There has been lavish consumption in the towns and starvation in the countryside. All that I admit; but I would add the caveat that, with the advertising techniques, with the thrust that there has been for the past 10 years by the banks to lend, with the persuasive methods that there have been, the small and very largely urban élite which has controlled the conduct of the financers of the third world countries, has fallen into many of he traps laid for it by the outside. But these debts are of direct importance to us and they should always be related to the wealth-producing process, because it is they which reduce the purchasing power of the third world countries which could be our major customers.
As I have said to the noble Lord many times before, we are caught in a vicious circle. Previously, noble Lords have spoken about low commodity prices and. incidentally, those low commodity prices have greatly helped this Government to bring down inflation. When you add to the low commodity prices—and I totally disagree with the noble Viscount. Lord Chandos, that we are still suffering from the overheating of commodity prices—the high interest rates that have had to be paid on those loans and the constantly rising import prices that those countries have had to pay, then you can see why at least a third, and probably nearer a half, of the population of the world has such a low purchasing power. As its purchasing power has gone down—and it has indeed gone down over the last 10 years—so those countries have had to cut their imports. They have had no option.
A country in which I have spent the last two years—Zambia—has no foreign exchange. It has to sell copper and with the money it gets today for copper it may be able to buy something tomorrow. As a consequence, they have had to cut their imports. But when they cut their imports, what happens? They reduce employment in the export industries in this country, so our recession is not only created but is deepened. What do we do? We then cut overseas aid: we cut investment in the third world countries: we cut loans to the third world countries; and we tighten up institutions like the ECGD. So, again, purchasing power is cut and, again, the whole process continues until that recession becomes, as I quoted from the German banker a few minutes ago, a world-wide depression.
It is in these circumstances that many people would say, "That is what the IMF is for". Oh yes, provided that the IMF works in such a way that it can increase the purchasing power of the inhabitants of third world countries. But since it introduced the process of conditionality and since it apparently agreed with most Western governments that good housekeeping means cutting down government expenditure, the impact of the IMF in third world countries has almost 685 always been to reduce purchasing power still further, particularly in those countries—which are virtually all third world countries—where the government is the major employer and the major investor.
What do the Government have to say about this situation, which I do not think is an unfair description of the way in which we can see the world today? So far as I can see, even though the British economy is going uphill, the Government's remedy for that is to put the brakes on. In overseas aid, in their operation of ECGD, in their reactions to the Brandt Report, in their actions at the Cancun Conference, even yesterday in the Multifibre Agreement Statement that the noble Lord made, in their operations within GATT, in their participation in the EEC's agricultural import policies, their policy appears to be still more strictly and more rigidly squeezing the purchasing power of those to whom we wish to sell our goods.
I would ask the noble Lord to tell us what is the policy of the present British Government on their influence towards the future of the IMF and the funds of the IMF this year. What is their attitude to the United States policy towards the funding of the IMF and the operation and control of the IMF? What is their attitude towards the International Development Association, where, again, I believe that the United States has spread its contributions of three years over five years?
This is an issue which, as the Brandt Report so clearly portrays, brings together the needs of the third of humanity who live in the third world and the people of this country. It is estimated—and it is feared—that there will be no increase in new lending to the third world this year. If that is so, then output in the third world this year will be cut by 3 per cent. because the capital input will be down by 50 billion dollars. What does that mean to us? It means that our growth next year will be reduced by 1 per cent. That is the link. Do the Government recognise that? If they recognise that, what are they doing about it in their own policy and in their influence towards the international institutions that are designed to deal with these very issues?
What I am suggesting is that any sensible British Government today would be investing in the purchasing power of those potential customers that consist of about one-third of the population of the world; that they would be using all their influence, along with our friends, in reforming the international economic and financial system; and that these are the measures which alone can restore our position, which so much depends on our operations as a trading nation.
§ 9.16 p.m.
§ Lord Benson
My Lords, I feel like Ruth gleaning in the cornfields after seven noble combine harvesters have been over the ground. Ever since the beginning of time the economies of the world have moved in cycles; periods of expansion and growth have been followed by periods of recession and stagnation. When the recession comes we all see, with that brilliant gift of hindsight, how over-trading should not have taken place, and we look for remedies for present discomforts. That is just the situation we are in now, but it has been exaggerated by the fact that it is not just one or 686 two economies but it is practically all the economies of the world at the same time. In consequence, some sovereign borrowers and some commercial debtors are in hardship. There is of course a danger of default in some cases, but I think we can all take comfort from the fact that none of the debtors will want to default because it will not be in their interests to do so.
Various remedies have been suggested. One that I have seen is that there should be, so to speak, an international consortium of central banks and Governments which would assess the total resources and ration credit. I do not think that that is practicable. In this context we can remember, however, that the IMF is there and that it does stand in to support in appropriate cases. The central banks, supported by their Governments as necessary, will take quick and decisive action when the need arises. In the summer of this year a credit of 510 million dollars was made available for Hungary; in August a credit of 1.85 billion dollars was made available for Mexico. I have not any doubt that similar negotiations are taking place even now.
Another solution I have seen is that central banks should support their private banks within their own territories in the event of default by sovereign borrowers. I believe this to be a most dangerous policy. It would merely discourage and not encourage responsible banking. A third suggestion has been that there should be a move towards greater protectionism. Of course, protectionism can help in individual cases for short periods and in the short term, but in the long term it is a disastrous policy and, by common consensus, is self-defeating.
I believe the remedies, the solutions, are much more commonplace and practical. Lenders must suffer the penalties which every lender suffers if he incurs bad and doubtful debts. Provisions must be set up, and in so far as they make inroads into profits, dividends must be cut. The revenue authorities must realise that these provisions are necessary. I do not share the anxiety of the noble Viscount, Lord Chandos, because the revenue authorities in this country at least have always been realistic when the facts are put before them.
In the present recession there has often been a noticeable lack of information about the position and prospects of sovereign debtors and commercial debtors. The information that must have been available when the loans were made must have been even less satisfactory. The conclusion to be drawn from that is inescapable, and needs no emphasis. It is enshrined in the old tag: easy come, easy go. For their part the borrowers also have to suffer the same miseries that occur to everybody who borrows beyond his means. Profligate and extravagant schemes will have to be replaced by stringent economic and financial policies. The banking supervision that has taken place in recent years has greatly improved, but in some places it is still lax, and that laxity has been exacerbated in some territories because consolidated accounts of international banking companies have not been available. This is inexcusable.
But, when all is said and done, there remains the burning question: should lending continue to those sovereign borrowers whose credit is now in question? 687 I believe that it is inevitable that it must, and that it should, aided of course by an enlarged IMF. There are, too, cases where it would be appropriate for the central banks and the commercial banks also to lend to sovereign borrowers in this state, but they should do so under the umbrella of an IMF programme. I suggest that all these borrowings should be undertaken only with varying degrees of stringency, on the understanding that the countries will follow sound economic and financial policies in the future.
Two factors would make a considerable difference to the restoration of confidence and breed recovery. We know them all of course, but the two factors are lower interest rates, and stable exchange rates. In the short term Governments can influence both by artificial means, but in the longer term water must find its own level, and interest rates can be kept down and exchange rates can be kept stable only provided that the countries follow sound economic and financial policies. It must surely be there that the hope for the future lies.
§ Lord Lever of Manchester
My Lords, before the noble Lord concludes. I should like to ask whether we are to infer that the erratic movements of sterling in the past two years are a measure of the unsatisfactory character of the Government at present in office? For my own part I would repudiate that argument, but it seems to follow logically from what the noble Lord said a moment ago.
§ Lord Benson
No, my Lords. The erratic movements have arisen from the bad economic and financial policies which have been followed by a great many Governments all over the world, and from a failure to understand the deep international problems that face us.
§ 9.24 p.m.
§ Lord Camoys
My Lords, I, too, should like to thank the noble Lord, Lord Lever of Manchester, for bringing to your Lordships' House the opportunity to debate the very important question of how the Government should help solve the current very serious deficit financing problems. Before setting out my own personal views, I should declare a personal interest in the subject as a director of an international bank. Therefore, I suppose that I should have to admit that I am one of those stupid chaps to whom the noble Lord referred earlier, but I shall try to prove otherwise. The opinions that I set out will be my own.
Although the noble Lord's Question is tightly drawn, I shall, with your Lordships' leave, review the causes of the problem, not least because the noble Lord, Lord Lever, in his articles, inter alia, in the New York Times, and in his recent Churchill Lecture (which was previously referred to), has given his own detailed and interesting analysis of the problem that the international system now. without doubt, faces. While I agree very much with the noble Lord's analysis of this sensitive problem, I do not agree with the cataclysmic approach. While I totally agree with the need for much greater involvement by the International Monetary Fund and its government proprietors, I do not agree—and I share this view with 688 others—that totally new mechanisms should be created. Nor do I share the noble Lord's apparent unawareness (if I may say so) of the banking systems' resilience in coping with the urgent problems to date.
As I will explain, I believe that the noble Lord's opinion of rescheduling has been disproved many times and is being disproved, and his opinion of the health of the world's great commercial banks is, if I may say so, a dangerous and unnecessary oversimplification. I would agree with the noble Lord about the failure of the governments of industrialised nations to get involved in a proper solution of deficit financing and about the need to do so now, both directly and indirectly. However, if one were that proverbial visitor from Mars, I sincerely believe that one would be surprised, if one knew the facts, that the international financial problems that we now face are not even worse than they are.
In order to place this sensitive subject in perspective, we have to look at the causes. First, we have the mammoth rises in the price of oil, not only in 1973 and 1974 but also in 1979—all of which had such an inflationary as well as deflating effect on world purchasing power. We had the related rise and then the collapse of non-fuel commodity prices, followed, almost inevitably (although we did not all foresee it) by the collapse of oil prices. So, in turn, energy-deficient economies and energy-surplus economies have been sharply affected. Simultaneously, we had the huge shift in monetary resources from oil-deficit countries to oil-surplus countries', and sadly—and this is very important—the latter were prepared to invest their reserves only on a very short-term basis.
In the absence of any concerted action by its principal proprietors, the IMF failed to solve the huge and, as is now very clear, long-term financing requirements that then occurred. The IMF resources remained too small and its lending conditions too rigid to render it politically acceptable to those nations in need. Part of the problem—and I know this from direct personal experience in the late 1960s and 1970s—was that the IMF in those years heartily disliked both talking to and co-operating with commercial bankers. In fact, they refused to do that. So there was no chance, at what might be called the beginning of this problem, of harnessing together the IMF's undoubted knowledge but limited resources with the much greater, as one might call them, unconditional resources of the commercial banking system. That must be a matter of very serious regret.
In the absence of any positive action by governments and their role as the proprietors of the IMF. commercial bankers stepped into the breach, flooded as they were with Euro-dollars, and often suffering (if that is the right word) from domestic credit controls and under-utilised balance sheets. At the time, they were praised for doing so and, no doubt, governments and the IMF were greatly relieved; for, if the commercial banks had not recycled petrodollars, there and then we should have had an immediate international financial collapse, with all the inevitable economic, financial and political repercussions. In stepping into the breach, the commercial banking system was. as it turns out. was able to transform the very short-term liabilities incurred from the oil-surplus nations into sufficiently long-term loans. Further, the loans that 689 were made were seen as a bridge until the time when the world economy recovered. That recovery has not occurred. The commercial banks' ability to lengthen their loans has not increased, and Government-owned institutions have not yet filled that gap.
One of the important areas in which I differ from the noble Lord, Lord Lever, is the state of what he terms "the great banks in the western world". In his recent Churchill Lecture to the English-Speaking Union the noble Lord said:If these assets (that is. loans to deficit countries) were realistically appraised for their strict commercial value, there is hardly a great bank in the western world whose balance sheets would not cause the profoundest anxiety".I suppose that there are some about which that may apparently be true, but I think I have some reason to believe that the noble Lord's statement is not totally accurate, thank goodness!—and I have to say that I think that statement was unnecessarily dangerous. At the very least, he seems to ignore general provisions, some of which are a matter of public record and some of which, sadly, are not.
§ Lord Lever of Manchester
My Lords, let me say at once that the soundest banks in the world are the British banks under the leadership of the Governor of the Bank of England. What I was saying concerned the world banking system. I wonder whether the noble Lord has studied the facts of the leading American banks and the relationship of Mexican, Brazilian and Argentine loans to their total capital. If even a 20 per cent. discount were taken, it would cause, shall we say, profound embarrassment. As he accuses me of overstating, perhaps he will comment on that.
§ Lord Camoys
My Lords, of course one has studied the position of the American banks, and one has also studied the position of many other banks. There are some American banks which are more extended in this matter than others. I should like to come on to the question of how a bank defends itself, which is through its profits. I am glad that the noble Lord is more happy about the British banks. I shall come on to the point now.
As any serious student of banking knows, a commercial bank's first line of defence against doubtful debts is the bank's profits, since to the extent that provisions can be taken in the profit and loss account the balance sheet remains unimpaired. On that matter, I have two suggestions. First, the banking industry simply has to improve its lending margins to its larger borrowers. Obviously, mistakes have been made there. Therefore, it will improve its first line of defence. Secondly, Governments, and perhaps this one in particular, have to develop a much more educated view of apparent banking profits and leave them where they are, subject to tax—that is, in the banks. The tax on banks could hardly have been at a worst time. It was quite extraordinary.
The second area in which I differ from the noble Lord, Lord Lever, in his well-publicised written and oral work is on his approach to rescheduling. This is an even more important point. In his Churchill Lecture on 6th December last year he described this as amounting to: 690Little more than exchanging an incredible and defaulted promise to pay. for another incredible promise to pay at a later date".Since 1956, some 80 rescheduling or refinances by countries have taken place, often with countries such as Indonesia, Pakistan, India or even Gabon, which are now regarded as healthy. Commercial banks have always been prepared to assist in a variety of ways. Their corporate customers and sovereign customers are now being given similar treatment. One well-known example of successful rescheduling or refinancing, whatever one calls it, in the private sector, was the combined Bank of England and clearing bank co-operation to solve the secondary banking crisis in the 1970s. Initially, the risks of that operation appeared huge, as of course do these other problems today. By dint of calm and firm action, the losses incurred were in fact relatively modest if one looks back to what was feared at that time. Rescheduling or refinancing has always been a regular feature of banking, and, after all, successive Governments of this country are forever refinancing. Sovereign borrowers are not very different, in my humble opinion, from private sector borrowers. All of them are anxious not to default on their debts, since the last thing they wish to do is to cut themselves off from the world centre of finances, whether they be official or commercial.
I am not only unhappy about the attitude of the noble Lord, Lord Lever, to so-called rescheduling but I am also—and I think I share this with many others—equally unhappy about his lack of awareness, as it seems, of the extent of recent co-operation among the commercial banks themselves and the Government-owned institutions. In the not-too-recent past, that concern might well have been fully justified, but recent events are still rather encouraging. First, following what might be called the Polish watershed, the difficulties of getting together over 500 banks have been analysed and discussed at very senior levels among what the noble Lord refers to as the world's great banks. Secondly, national guidance steering committees of such banks have been formed, and they are designed not only to deal with problems as they arise but also to suggest ways of identifying problems before they occur.
Additionally and equally important, in this calendar year there is gratifying evidence that both governments and monetary authorities have at last demonstrated a far greater capacity to intervene, to give a lead and, equally important, to harness their power and that of an enlarged and more enlightened IMF together with that of the commercial banks in dealing with the problems we face. Mexico, Hungary and, hopefully, Brazil are very good examples.
This harnessing of the different capabilities may be being achieved only at the eleventh hour. That achievement might better have been achieved earlier but, seeing where we have reached, I would be loath to support the noble Lord's suggestion in the New York Times of 24th September that:Governments should now set up a committee to decide in broad terms the overall amount of future lending necessary in the general economic and political interest…It must then decide where the money is to go and outline conditions that will reduce the waste and misdirection of the past in the interest of both the borrowers and the lenders".
§ Lord Lever of Manchester
My Lords, there is the export credit guarantee system in every civilised country in the world.
§ Lord Camoys
My Lords, well intentioned as I believe that suggestion is, I can only speak personally. There is hardly anything that would frighten one more, as a banker, than the prospect of trying to obtain timely decisions from such a body. Rather I believe that the Government should be encouraged to use the existing institutions already established. The IMF has, as last, been dragged to the centre of the stage, and at the Summit Conference held at Versailles in June, it was allotted the task of helping the major powers coordinate their policies to the best advantage of the world economy. In my humble opinion, Governments should follow that resolve through urgently and with more resources. That is where I agree with the noble Lord so much.
I therefore look forward to the responses of my noble friend the Minister, hoping that he will explain the Government's position on increasing both the IMF's quotas and the general arrangements to borrow. I also hope that he will give the Government's view on the Group of 30 proposal that the IMF should be empowered to borrow immediately in the commercial markets.
§ Lord Harmar-Nicholls
My Lords, before my noble friend sits down, did I understand him to say that, as 692 a banker, he saw no fundamental difference between a sovereign borrower, who cannot go bankrupt in the accepted meaning of the word, and others who can and have to do so?
§ Lord Camoys
My Lords, I am not sure that I am sufficiently experienced to give a totally educated view on that point. I think that a sovereign borrower could go bankrupt and this is the great fear in the present situation. The present situation is one that requires very careful handling, if only to encourage sovereign borrowers who are already in difficulties not to default. Anybody can, in a sense, go bankrupt. People might be very unwise to take that course. They have to be encouraged by further help not to do so.
Lord Bruce of Donington
My Lords, would the noble Lord agree, in discussing the position of default by a sovereign state or by an ordinary bankrupt, that, so far as a creditor is concerned, a bankrupt position is a little more favourable, because there is a chance of getting a dividend? If a sovereign state defaults, there is no way in which a creditor can get anything at all, so is not the sovereign default worse?
§ Lord Camoys
Yes, my Lords. I have to agree with that. In fact, one of the problems of commercial banks who have been lending is that they have been unable effectively to impose conditions, which the IMF might have done. That makes the whole situation more serious.
§ 9.42 p.m.
§ Lord Taylor of Gryfe
My Lords, like other noble Lords who have spoken in this debate. I should like to congratulate and thank the noble Lord, Lord Lever, for introducing this subject, albeit in the inappropriate form of an Unstarred Question. I hope that at some time, in the business arrangements of the House, we might be able at an earlier hour to spend a little more time on the very fundamental issues which have been raised by the noble Lord. I should like to say, too, that not only the House, but the country is indebted to the noble Lord, Lord Lever, for consistently drawing our attention, in speeches, in articles and in private conversations, to the growing seriousness of the issues which he raises.
Tonight, since we all have our eye on the clock, I should like to deal with one aspect of the problem, and it is an issue on which the noble Lord, Lord Hatch, dwelt at some length. It is the problem of the LDCs, and I believe that dealing with them requires not only the sharp analysis of the banker, but also a recognition of a moral dimension. At the heart of the crisis in relation to the LDCs, is their lack of liquidity and their inability to service the loans from the banking institutions of the industrialised countries.
This arises from several causes. First, the decline in world trade has brought about a dramatic reduction in the price of primary products and raw materials. In the last year the price of primary products has fallen by 14 per cent. and this is the currency by which they will have to service the borrowings that they have incurred. In order to modernise and create a viable economy, these countries have been forced to borrow at very high interest rates. In the last two or three years, the interest rates at which they have borrowed have frequently been related to the London inter-bank rate—the LIBOR rate—and the debt service ratios were 15 per cent. in 1977 while last year they were nearer 30 per cent. So here you have a critical squeeze on the LDCs. First, the resources by which they service a debt have diminished in price and in value; and, secondly, the interest rates at which they are now borrowing have risen against them. This has also been accentuated by the lack of responsiveness of the major aid-providing countries.
While the United Nations proposes 0.7 per cent. of GNP as a reasonable objective for countries giving aid to developing countries, the figure for the OECD and OPEC countries is now less than half that target. This has some implications for the LDCs and the financial problem. The scope of the debt problem of the LDCs estimated now at about £500 billion to £600 billion, is of such a character that the existing international agencies are unable to cope. The IMF, the World Bank and the IDA are inadequately funded, the commercial banks have become increasingly nervous and their auditors are beginning to question the quality of some of the loans which appear in their balance sheets.
Another pressure which forced the commercial banks initially into perhaps excessive lending was the accumulated availability of dollars from the OPEC countries which were placed on deposit in commercial banks. This compelled them in turn to make these dollars work by lending. There was a period of fairly aggressive lending, but that is now at an end. The 694 nervousness on the part of the commercial banks has resulted in a growing amount of short-term lending. When one considers the structural problems of the LDCs, short-term lending is irrelevant to the reconstruction of their economies. The proportion of short-term debt is now approaching 20 per cent. This provides no basis for the economic restructuring which is necessary to bring these countries to economic well-being.
The nervousness of the commercial banks and their withdrawal from the scene throws the responsibility back on to the international institutions. But the World Bank, the IMF and so on are not equipped, either financially or structurally, to deal with this kind of situation. The IMF operates on a strict country quota basis, more or less, which means that Mexico, for example, with its massive debt can receive from that source only a somewhat limited amount of money. What they are able to spread on a country quota basis bears no relation to the current size of the debts of many of these countries.
The BIS, to which the noble Lord, Lord O'Brien of Lothbury, referred and of which I believe he is a member (or, as he calls it, a bystander in their activities) has helped with a bridging loan in the case of Mexico and in other situations. However, the BIS. by its very character, cannot make medium-term finance available, since its resources are made up of short-term deposits from the central banks. There is no possibility, therefore, of the BIS fulfilling the role we want it to fulfil, although it is making a useful contribution to relieving immediate pressures. The IDA has completely inadequate resources. The World Bank, if it is to fulfil a useful or relevant role in this situation, will require to expand its capital base.
I agree with many noble Lords who have said this evening that we do not require any new financial institutions. This is the only matter upon which I disagree with the noble Lord, Lord Lever of Manchester. I do not think that we require new financial institutions. I believe that we require new-attitudes and new moods in relation to the nature of the problem. I believe it is right that the IMF should lay down certain conditions for its lending. I am not opposed entirely to the conditionally concept of IMF lending. However, I think that it should be less rigid and that the strict application of the policies of sorting out the balance of payments by cutting back Government spending within a country can lead to all kinds of social tensions within that country and defeat its initial purpose. There have been cases of lending which have resulted in some rather foolish projects. I am familiar with an island which has a population of 1 million and with no steel consumption in sight, but which has just completed the building of a modern steel plant. It is that kind of irrational use of resourses which must be taken into account by any of the international lending institutions.
I should certainly support the creation of some special emergency facility which could make these institutions much more responsive to the demands which have to be met. I support the view that there should be more flexibility in the application of IMF lending policies and would also like to look at the whole question of the additional facilities which might be created being used to some extent to support 695 medium-term commercial lending on an insurance basis. I know that the noble Lord, Lord Benson, does not support the idea of the Government underwriting in any way commercial lending—but the nature of the problem is such that we must get this cycle going again. We must get trade moving again. We must get the LDCs in a position of financing reasonable projects which can have long-term impact on their economic viability. We will not do this if we are too strict or if the commercial banks contract out of medium-term lending.
I certainly support the ideas which are now being discussed and which originated at Ditchley for an international exchange of information, so that countries which are large lenders in various parts of the world will have at their disposal a fair picture of the economic situation and of the viability of individual borrowers. I wonder too whether the Western world should not look occasionally at the activities of arms salesmen, who go around the LDCs creating nervousness and tension in order to sell their products. To me that is a rather wasteful use of resources. I looked at the statistics for Uganda the other day and found that Uganda is spending 60 per cent. of her GNP on armaments and only 11 per cent. of her GNP on agriculture. It occurs to me that that is an imbalance and that we ought to restrict this form of salesmanship, which eats up useful resources in the LDCs.
I wonder whether in our search for some control of currency fluctuations, the Government may care to comment on the EMS and its operations, and the Government's attitude to the EMS in making at least some contribution to keeping currencies within manageble bands. I wonder if the Government will tell us tonight how they view the question of increasing substantially the quotas to the IMF and the other international institutions. Reference has been made to the Export Credits Guarantee Department by the noble Lords, Lord Hatch of Lusby and Lord Camoys. In my dealings with the ECGD I have been full of admiration for the sensible way in which they apply their resources as an insurance organisation supporting the export of British goods and encouraging world trade. I do not regard the ECGD as being in any way as an international lending institution.
Can I say this finally: that I have read over the last two or three years the warnings of Lord Lever. I know that since he is not engaged daily in banking he can be less inhibited about warnings of the dangers in the crisis situation. I know that most bankers who are involved in the day-to-day practice of banking have to be careful not to create too much nervousness or too much uncertainty. But I do believe there is a great deal in what Lord Lever says, and that we have reached a stage when we cannot depend, as Lord Benson seemed to predict, on the cyclical recovery of the economy. And I cannot accept fully the assurance of my noble friend and good friend Lord O'Brien that we are managing all right and that it is going to come all right.
I believe there is a real crisis and I believe that this real crisis depends on some international action not dissimilar to Marshall Aid, when we faced the problems of post-war Europe and had to support 696 countries that were defeated in the war and had very limited resources. It is that kind of massive international effort that has to be applied to the present situation if we are going to survive. You know, my Lords, we spend millions, as was announced yesterday, to create a defence system against the Soviets, because we believe that our Western society, with all the values which we treasure, is endangered from that source. But that is not the only source from which they are in danger. Unless we can sort out the problems of the Western world, unless we can cope with these kinds of problems and uncertainties, unless we can arrest the decline in world trade, these values, and our system and our society will be equally threatened. So I commend to the Government to take immediate and drastic action to face the very critical situation which the noble Lord, Lord Lever, has drawn to our attention.
§ 9.58 p.m.
Lord Bruce of Donington
My Lord, I should like to add my thanks to those of your Lordships to my noble friend Lord Lever for having given us the opportunity to debate this very important subject. It is, of course, possible to overestimate its importance, and perhaps there is a danger, too, of underestimating it, but, listening to your Lordships tonight, particularly those of your Lordships who have banking experience and City experience, I am persuaded that the international banking system is in very grave crisis indeed. I am fortified in that belief by an analysis that appeared in the Economist for this week, though it analyses only the Latin American position. However, the financial press since the weekend has highlighted other countries in addition to the ones I am going to cite.
One of the most disturbing features about the present position of the borrowers is the very large percentage of the total loans outstanding that consists wholly of interest. In the case of the Argentine, it is about 20 per cent. of the total external debt which comprises interest: in Mexico it is 44 per cent., in Brazil 60 per cent., in Chile 53 per cent., in Venezuela a mere 18 per cent., in Colombia 35 per cent. and in Peru some 28 per cent. These are enormous sums of interest on top of principal. If one looks at the same time at the total export income of many of these countries to which I have referred, it will be found that the interest outstanding on their loans is in excess of their annual income from exports.
No wonder, therefore, that the bankers of the world are worried. No wonder there is so much soul-searching. The position is very grave indeed. There is a fear that if there is an international banking collapse—by that. I mean default, not bankruptcy, by a sovereign state against whom there is no physical sanction to put the bailiffs in and take away the assets—the world banking system will be in a very serious condition indeed.
I was a little surprised by the whole tone of the debate, because of course it is fundamentally a debate on economics, a part of the integral whole, albeit a very specialised part. One thing that did occur to me is that for once the ordinary people of the world are not being blamed for it. Nor are the ordinary people in Britain being blamed. Those of us on this side of the House are well accustomed to lectures from the other 697 side of the House on the need for British industry to become competitive and on the country's high and uncompetitive labour unit costs. We are accustomed to the reproaches to the ordinary working people in this country that daily pour from the press that supports the noble Lord opposite. These do not always come from the noble Lord himself, who is a gentle character, but possibly in more strident terms from his right honourable friend the Secretary of State for Employment in another place.
For once, it would appear that the ordinary people of the world are not at fault. This is indeed remarkable. Instead something has gone wrong with the wonderful folk. Something has gone wrong with those who have universal acclaim as being the leaders of world economics, leaders of world finance. Indeed, it is said that, in effect, the banks are being too competitive. This is getting a little odd. We are told that in commerce and in industry we must be competitive. Yet here we have observations from noble Lords opposite about the need for discipline, about the need for international action and about the undesirability of competitive devaluation. If it is competitive, what is wrong with it? If competition is all right for everybody else, what has suddenly happened now there is competition in the banking industry?
We all know what has happened. The noble Lord's Government started it. In the autumn of 1979 they shoved interest rates up by 4 per cent. As the noble Lord, Lord O'Brien of Lothbury, adequately pointed out, what then immediately happened was that funds came flowing in to London for which a high rate of interest had to be paid and then, as he also quite correctly pointed out, that money has to be re-lent, and re-lent at a profit. So, despite the King Canute posture of the noble Lord, Lord Cockfield, the money supply went up and they did not even know how to stop it going up. So there was competitive lending.
§ Lord Camoys
My Lords, I think the general tone of what has been said before is that the problem is that the international monetary institutions have not become involved. It is not a question of competition among the commercial banks, it is a question of the lack of the right type of finance becoming available.
Lord Bruce of Donington
My Lords, I do not want to press the noble Lord too far, but when The Times talks in these terms it behoves us to take notice. We all pay attention to "The Thunderer" from time to time, and it has no doubt about it. The issue for 14th December says:A default can only occur if a country had overborrowed. It can only have overborrowed because its sums were wrong, either in the estimate of its own likely performance, or of its capacity to adjust to overestimates of the world's general economic performance. Whichever way you look at it the borrowing countries have made mistakes, which should not, on the face of it, be used to hold the industrialised world to ransom. So surely did the lenders. If it is a banker's business to lend money to clients, it must be bad business to lend so much to any particular client that the borrower acquires a stranglehold over the bank because the bank can no more afford to stop lending than the borrower cn afford to stop borrowing".That is precisely what has been happening. There has been a rush to lend all over the world and, more particularly, not merely to lend for useful purposes but to lend for the sake of lending—to lend because of the compulsions to lend.
698 Look at the process. Very large numbers of countries in the world have been pursued—and I do not joke about this—by arms dealers, arms manufacturers and Governments pressing arms upon them which they could not possibly afford and which they did not need. Close on their heels have come the bankers offering to provide funds in order to buy these particular items. And so there comes the position described so graphically in the Economist—the scramble to lend, to lend almost at any price; competitive lending. Competition has gone on and has produced precisely the situation that we have today.
§ Lord Harmar-Nicholls
My Lords, I am looking at the clock but I just wondered why the noble Lord was so frightened of telling what he called the "ordinary people" that they have a contribution to make. Was it not their appetite that helped the borrowing which brought about these terrific interest payments which he says are the basis of all the problems?
Lord Bruce of Donington
My Lords, I am most grateful for the noble Lord's intervention. I do not really believe that the population of San Salvador, for example, wanted its Government to have large loans in order to buy arms in order to oppress them, and for murders to take place in the streets. This is not merely a caricature; it is exactly what happened.
The noble Lord, Lord Soames, in pursuing his desire for competition, made an extraordinary observation and I looked at the noble Lord, Lord Cockfield, while he was making that observation to see whether there was a little more in it than appeared on its face. He said that we had been taken in by our own rhetoric. Immediately following that observation he said that we had learned that reducing inflation and interest rates is not enough to encourage recovery. If that be so, then the noble Lord, Lord Cockfield, has some penance to do.
§ Lord Soames
My Lords, will the noble Lord give way? I am sure that I have known him long enough to know that he would not wilfully put the wrong interpretation on my words. What I said was that it was very right and very necessary to get interest rates down and to get inflation down, but that it was not enough because there also has to be a deal of action in the international sphere—because we are so interdependent one with another—if we are to get the world out of recession. That is all I said. It does not in any way cast aspersions upon the policies of Her Majesty's Government.
Lord Bruce of Donington
My Lords, I accept the position of the noble Lord within the context that he has now set, but it of course makes nonsense of the initial rise in interest rates by the Government of up to 4 per cent.—one of the most disastrous steps which has ever been taken since this Government came to office, the repercussions of which we are still, in fact, feeling. but in due course, perhaps, he may denounce that.
We have got ourselves into a position by following free enterprise banking—as, indeed, my noble friend Lord Lever reminded us—whereby the whole thing is as near as may be a complete shambles. The noble Lord, Lord Benson, gave as one solution to the situation, as a guideline, that the accounts of banks should show an accurate position. He, as a very 699 eminent accountant, would know and would tell us what that means. It means a true and fair view.
If there are banks in the world and in this country that have large sums outstanding to countries likely to default, and if they adopted the prudence concept, as laid down in standard accounting practice, their balance sheets at the present time would be in a very sorry state indeed.
§ Lord Camoys
My Lords, with great respect, I think that ignores the very considerable general provisions which have been built up over many years to deal with just this fairly (thank God!) unusual situation. For the noble Lord to make that statement without taking that into account is, I think, rather irresponsible.
Lord Bruce of Donington
No, my Lords, not a bit. The noble Lord will be well aware of the observations of the noble Lord, Lord Benson, on inner reserves and matters of that kind. He will know perfectly well that under the revised code, in order to comply with EEC regulations which are now enshrined in the Companies Acts, we have to show a true and fair view.
§ Lord Camoys
But, my Lords, the principal banks involved in this in this country are the clearing banks, and they declare their general provisions totally without any secrecy whatever. So I am not sure what the noble Lord is saying.
Lord Bruce of Donington
My Lords, I am not endeavouring to cast any aspersions on British banks. I entirely share the views of my noble friend Lord Lever on this subject. But I am aware of a new vogue in the United States, of which the noble Lord himself must be aware, called "creative accounting", whereby computed losses, which ought on a prudence concept to be written off in one year, are permitted now, by creative accounting, to be written off over a period of 10 or 20 years. Perhaps the noble Lord will familiarise himself with that.
To return to the international banking situation, of course there must be an international co-ordinated effort by all concerned, including Governments, to get over this particular state in which the world now finds itself. I, too, am a little puzzled sometimes by what is meant by "rescheduling". It is a term that is used in the financial press quite considerably. It can, of course, mean an extension of time over a longer period, reducing the instalments; it can possibly involve reductions of interest. But I do not like to contemplate the addition of further sums with more interest at the same rates as part of the rescheduling process, because I think that the world will be far worse off for it; there will be no improvement whatever.
In particular, I think that our Government have to give a lead in this matter. We are one of the four financial centres of the world. The main four are ourselves, New York, Frankfurt and Tokyo. I believe that the Government have to take a lead in this. The Government have to take an imaginative look over the international scene as a whole. Just as their original policies were very largely responsible for precipitating the rise in interest rates, which itself precipitated a good part of the depression in which we now are—and 700 the Government were themselves responsible for activating a good deal of the world depression on which they now rely—so they should now take a leading part in helping the world to extricate itself.
This cannot be done by these ridiculous and idiotic monetary policies which have been proved so wrong. If the noble Lord reads his own speeches and the forecasts he has made this last three years and is honest with himself, he will know they have failed. He will now know they are wrong. It is no good the noble Lord, or the Government, mouthing the same old slogans. The problem will not be killed by slogans at all. It will be done by the banking resources of the leading countries and their Governments getting together to make a realistic appraisal of what world financial requirements really are in order to be able to release the factors of production so that people who want to work can live while they are working. This is what is required: a balanced look at the whole picture and constructive action on those lines.
As my noble friend Lord Hatch said, it is not merely for the sake of the developing countries but for the sake of our own country, because, unless we take action both nationally and internationally to reverse the disastrous deflationary policies that have been operated over the last three years, there will be no recovery for us, there will be no recovery for Europe, and we shall be doing the world a poor service. I hope that at this late hour and as a result of the debate initiated by my noble friend Lord Lever. Her Majesty's Government will think again. The people are already thinking: it is high time the Government caught up with them.
§ The Secretary of State for Trade (Lord Cockfield)
My Lords, the noble Lord Lever, is a great authority on these matters and we listen to him with great interest and indeed with respect. But it does not follow from that we agree either with his analysis and his conclusions or with the remedies that he proposes. Still less do we agree with his noble friend Lord Bruce of Donington, who said, "the international banking system is in a state of very grave crisis". He then went on to say that the situation was, "as near as maybe a complete shambles". I realise that statements of that kind make good theatre, and the noble Lord, Lord Lever, at one time got involved in his speech with King Lear. I realise they make good theatre, but they do no good service.
§ Lord Lever of Manchester
My Lords, I made no reference to that distinguished person. I think it was a noble friend.
§ Lord Cockfield
My Lords, I apologise to the noble Lord for attributing the reference to King Lear to him and not to his noble friend Lord Ardwick.
§ Lord Ardwick
My Lords, I was merely referring to the noise upstairs—the noise of the thunder outside.
§ Lord Cockfield
My Lords, whether the noble Lord was referring to the noise upstairs or the noise on the Bench immediately in front of him, I do not know. All I would say is that the comments of the noble Lord, Lord Bruce of Donington, do no good service either to the international banking system or to the international community as a whole.
Let us start by looking as calmly as we can at the actual facts. The total external debt of the third world 701 countries now just exceeds 500 billion dollars. In real terms, that is somewhat less than 2½ times what it was 10 years ago. In relation to GNP, the growth is relatively modest but individual countries, particularly in Latin America, have very heavy debts—Mexico, Brazil and the Argentine are prime examples. These are all countries with great economic potential. The problems arise not so much from the magnitude of the debts as from the impact of the recession, which has stunted growth everywhere, and sometimes from economic mismanagement as well. But, having regard to the potential of these countries, and the improvements in management that are feasible, given proper control over the economy, it is quite wrong to suggest—as has been suggested by several noble Lords this evening—that this is massive bank lending which sooner or later will have to be written off.
I do indeed understand the anxieties which have been expressed, but at the same time we need to remind ourselves that the international institutions, and in particular the IMF, have faced serious problems before and found the solutions to them. The picture therefore is one that causes concern, but it is certainly not one which ought to cause alarm. On this crucial point of analysis, I part company with the noble Lord, Lord Lever.
Let us look therefore at the part that the IMF has been able to play. Mexico, one of the major debtors, has now reached agreement with the IMF on a 3½ billion dollar support programme. Brazil and the Argentine have both indicated willingness to agree to IMF adjustment programmes. Other major borrowers are also in discussion with the fund. In all these cases, the fund is playing something of a new role in helping to co-ordinate discussions between the countries concerned and the commercial banks.
It is, of course, clear that in present circumstances the resources at the command of the IMF need to be strengthened to sustain the increasingly important role that the fund is playing. Currently the quota-based resources of the fund total about 65 billion dollars and the supplementary lines of credit—both bilateral and under the General Agreement to Borrow—amount in round figures to a further 25 billion dollars. These are the monies that the fund has available to support its members. Under its articles, the fund must review quotas at intervals not exceeding five years. The present quota review has to be completed by the end of 1983. In the past, it has normally taken up to two years for the quota increase to be implemented. On the present occasion, we should like to see a substantial increase, and early implementation.
In his speech to the IMF's annual meeting in Toronto in September, my right honourable friend the Chancellor of the Exchequer advocated an increase in quotas of at least 50 per cent. Events since then have suggested a need to put an increase in quotas in place as quickly as possible. There have also been proposals from the Americans to institute among the Group of Ten a substantial line of credit which would be available to the fund in times of major strains upon the international financial system.
These measures will help to underpin confidence in the international financial system. But it is equally essential that all countries, and particularly those with 702 heavy liabilities, should pursue prudent financial and fiscal policies. It is the pursuit of imprudent policies which has resulted in high inflation, high interest rates and high unemployment. In the developing world, falling commodity prices have led to increased indebtedness and increased difficulties in meeting debt servicing costs. In developed and undeveloped countries alike, the strains have often shown themselves most acutely in the case of countries with a record of mismanagement, who have delayed adjustment too long. Unless countries are prepared to help themselves, there is nothing anyone else can do to bail them out of their difficulties. Indeed, it is a condition of assistance by the IMF—as we know to our own profit—that prudent adjustment policies are followed.
Sometimes, too, there is an important role to be played by the monetary authorities who can take action to calm the markets and, where necessary, to provide direct assistance to borrowing countries to tide them over during the period they are putting programmes of adjustment in place with the help of the IMF. Mexico illustrates this point. Mexico was able to get prompt assistance to the tune of some 1.9 billion dollars from the United States authorities and from the BIS with the support of a number of central banks. Her Majesty's Government gave their backing to the Bank of England's participation in that group of central banks. The fall in inflation and the fall in interest rates have been a significant help. As inflation comes down, so do interests rates, too. The response is not necessarily immediate or automatic but it is undeniable there. My noble friend Lord Soames referred to recent reductions in American interest rates. I doubt whether the American authorities would entirely accept my noble friend's analysis. We welcome the recent moves by the Fed and these moves recognise as we indeed have always done ourselves, that money supply statistics can be distorted by institutional changes in financial markets and that it is sensible to take account of a range of factors in interpreting them. We therefore welcome the recent reduction in United States interest rates.
The noble Lord, Lord Lever, and indeed other noble Lords, commented on the role played by the international banks and those responsible for their supervision and regulation. There would indeed have been room for justifiable criticism if banking supervisors had ignored the potential problems to which so much attention has been paid, both in public discussion and in the debate today. But that is not the case. As long ago as 1974 the central bank governors from the major industrialised countries made it clear that they were satisfied that means were available to provide temporary liquidity to the Euromarkets, and that they would be used if and when necessary. In 1975 the banking supervisors of the major countries agreed to a set of guidelines on prudential supervision which have become known as the Basle concordat. So it is wrong to say that banks' off-shore business is not supervised or regulated from a prudential point of view. It is. Regulation of the international banking market, like the regulation by individual countries of their domestic banking markets, may not be perfect. But the framework of regulation is well established and it is both wrong and unhelpful to suggest that it does not exist at all. The contrary is the truth.
703 In today's markets, there are very strong reasons for both lenders and borrowers to avoid outright default; and in recent years all major problem countries have made considerable efforts, usually successful, to keep paying interest on outstanding loans. Rescheduling is something we all try hard to avoid. But if it does happen it is not a disaster. The effect on the lending banks is not to make them insolvent but to reduce their liquidity, and to some extent the quality of their assets. Banks are right to worry about their exposure in some cases and to be reluctant to increase it. Nevertheless, there is both justification and need for lending to continue in cases where countries have adopted appropriate adjustment policies but may still require time and accommodation to carry them out.
Perhaps at this point I may touch upon one or two specific suggestions which have been made in the course of the debate. May I start with what I hope the noble Lord will forgive me if I describe as the Lever Plan for the establishment of a committee of central banks and Governments to determine the level of international bank lending and apportion it to borrowers. This plan was supported by the noble Viscount, Lord Chandos, but opposed by the noble Lord, Lord Benson, and my noble friend Lord Camoys. Whatever view is taken about how the Euromarkets have operated, the idea of substituting allocation by committee for allocation by the markets has few attractions.
§ Lord Lever of Manchester
My Lords, the noble Lord would not want to put up skittles to knock down. The last thing in the world that I want to do is to have a committee of central bankers telling individual banks where to lend. The proposal is rather on the lines adopted by every export credit guarantee system, that this would be internationally arranged for limits of credit borrowing to particular areas so that we at least know broadly where the money is going and whether we want it to go there.
§ Lord Cockfield
My Lords, I do of course entirely accept what the noble Lord says. But I entirely disagree with him on his interpretation of the role of the Export Credits Guarantee Department. There is a fundamental difference between the insurance of credit and the granting of credit itself. I do not think for a moment the kind of position that the noble Lord has put forward, either in the form in which I had deduced it from various writings which appeared in various places or in the form in which he now explains it more fully, would be effective.
May I come now also to the proposals made by Secretary Regan which were quoted by the noble Lord, Lord Lever, and by my noble friend Lord Soames. The noble Lord, Lord Ardwick, also referred to Secretary Regan's statement. What Secretary Regan proposed was this: first of all, a new mechanism for co-cordinating rescue operations to countries in difficulty; and, secondly, a new Bretton Woods conference. Secretary Regan has stressed that these were personal ideas and he has since said that anything like a new Bretton Woods conference is a long way off. The developed countries are already co-operating closely in helping problem countries such as Mexico, Brazil and 704 Yugoslavia through the IMF, through the Group of Ten and other groupings of finance Ministers, through the central bank governors in Basle and through the Bank of International Settlement.
Several noble Lords, particularly my noble friend Lord Soames, mentioned their wish that we should have more stable exchange rates. I think that all the world's major countries would like to see a return to more stable exchange rates and indeed greater stability elsewhere as well in interest rates and in return also to stable growth. The free world's leaders said as much at this year's Versailles Summit. At the same time, they recognised that the way to such stability lies through lower inflation and greater convergence, particularly among the major economies. They also recognise the key role the IMF has to play in promoting such convergence. That is the only way to the stability we should all like to see.
A number of noble Lords, among them the noble Lords, Lord Ardwick and Lord Hatch of Lusby, pleaded the case of the third world countries.
§ Lord Soames
My Lords, before my noble friend leaves this matter, would he allow me to intervene? Am I wrong in interpreting the statements made in the United States before the meeting of the Group of Five, referring to the possibility of a conference of the type of Bretton Woods, as inferring that what Secretary Regan was hoping for was to give some form of lead to the developed world and to the Group of Ten, with the objective of building some greater stability into the international money markets?
§ Lord Cockfield
My Lords, there has of course been a great deal of discussion and speculation on these matters, and Secretary Regan was contributing to this discussion. But he has made it clear that he regards the emergence of anything like a new Bretton Woods as a development that lies quite a long way off. This does not in any way diminish the value of discussing these projects, but anybody who thinks this is going to provide the answer in the near future is unlikely to have his hopes realised. These are much longer term developments.
Perhaps I might at this stage return to the point I was going to make about developing countries. There is, of course, an important and continuing role for official aid to many developing countries, but no service is done to developing countries by continuing to lend, regardless, to those who have mismanaged their economies, who are reluctant to help themselves or who have delayed adjustment to their external circumstances for too long. The noble Lord, Lord Hatch, himself admitted the gravamen of many of these charges. The approach adopted by the IMF is the right one. Countries that reach agreement on sensible adjustment programmes with the IMF have usually found further commercial lending from the banks forthcoming.
Suggestions were made—the noble Lord, Lord Benson, referred to them, not with approval but with disapproval, and it is a disapproval which I share—for the refinancing or guaranteeing of existing bank loans to developing countries by Governments or by a body such as the IMF. The difficulty with proposals of this sort is that they delay adjustment on the part of the 705 economies concerned, they give an incentive to lending on uncommercial terms and they mean that if, for example, the Government charged a fee or a premium for the lending then it is unlikely that the commercial banks would be greatly attracted by the proposition.
The noble Lord, Lord Chandos, raised the question of the Inland Revenue's approach to rescheduled sovereign loans and the tax treatment of provisions banks make against them. The point to which the noble Lord drew attention has been, and is being, considered by the relevant authorities. I am afraid that at this stage I can go no further than that.
§ Lord Harmar-Nicholls
My Lords, before my noble friend leaves that point, may I say that I have sat through the whole of the debate, I have enjoyed it and I have learned a lot from it. I have listened particularly because I wanted to hear what my Government intended to do. We have had the explanation of what the Americans think is meant by getting back to the concept of Bretton Woods. They think it is a long way away. What is our Government's attitude going to be towards bringing it a little nearer, if possible, and what influence do we have to try and shorten the distance? That is really what I wanted to hear.
§ Lord Cockfield
; My Lords, had my noble friend possessed himself in patience, he would have had the answer very shortly. The world financial system is passing through a difficult period. About this there is no doubt. Many schemes of various kinds have been suggested, both in your Lordships' House and outside, to deal with these problems. I have commented on a number of these schemes. But, in general, I think we would do best to beware of schemes that involve tackling today's problems with institutional reforms that would, inevitably, take many years to implement, and beware also of proposals that substitute Government decisions for those better made in the market place.
The message that I would leave with your Lordships is the need to fortify and improve the existing mechanisms. In this, I include Governments of both developed and developing countries, the central banks, commercial banks and their supervisors and, in particular, the IMF, which has a key role to play now, as it has had in the past. These mechanisms have withstood great strains and stresses over a long period of time, and have coped with novel and unexpected developments with remarkable success. We need to build upon that success, and I see no reason why these well-tried institutions should not continue to cope with the situation successfully.
§ Lord Taylor of Gryfe
My Lords, before the noble Lord sits down, there were specific suggestions made and specific answers called for, such as by the noble Lord, Lord Harmar-Nicholls, who has just raised a question. Are the Government now committed fully to a substantial increase in the IMF quotas, are the Government committed to a much more generous aid programme and are the Government committed to the kind of conference which Mr. Regan of the United States has suggested, to discuss the basis of a new Bretton Woods? If the Government answered on these points, it might be helpful to us.
§ Lord Cockfield
My Lords, I have, in fact, answered every one of those points, and I suggest that the noble Lord reads what I said with care tomorrow.
§ Lord Taylor of Gryfe
My Lords, with due respect, the noble Lord said—and I listened very attentively——
§ The Earl of Swinton
My Lords, I think we are getting into great troubles if we start raising questions on an Unstarred Question when the Minister has sat down.
§ The Earl of Swinton
Because, my Lords, I think it is against the best traditions of this House. I stand to be corrected if I am wrong, but I am sure that I am right. On an Unstarred Question, when the Minister sits down, that is the end of the debate.
§ House adjourned at seventeen minutes before eleven o'clock.