§ 3.20 p.m.
The Minister of State, Privy Council Office, and Minister for the Arts (The Earl of Gowrie)
My Lords, I beg to move that this Bill be now read a second time. The Bill, together with the International Monetary Fund (Increases in Subscription) Order, implements the United Kingdom's share of international decisions to increase the resources available to the International Monetary Fund by the end of 1983. The United Kingdom subscription to the IMF was increased by order last week under the International Monetary Fund Act 1979. And Clause 1 of the Bill now amends Section 2 of that Act so that the limit of approximately £350 million on the power of the Treasury to lend to the IMF under the general arrangements to borrow is replaced by a limit of 1.7 billion special drawing rights—in money terms, approximately £1.2 billion.
The second clause of the Bill provides statutory authority for the Treasury to indemnify the Bank of 987 England in respect of its participation, together with other central banks or the Bank for International Settlements, in operations to provide bridging finance for countries. Such bridging finance can provide a breathing space for countries faced with a sudden deterioration in their external finances and allow time for an International Monetary Fund adjustment programme to be negotiated and implemented.
Before these international decisions to which I referred were taken, this House had an opportunity last December to discuss international deficit finance. It was a most stimulating and educational debate provoked by the noble Lord, Lord Lever of Manchester, with many notable contributions. The origins of the present difficulties were well covered and well understood in that debate. Throughout the 1970s and particularly following the fundamental shift in the world economy after the 1973 oil crisis, the newly industrialising countries financed development by borrowing. Increasingly, borrowing was from the private sector and from commercial banks in particular.
It is worth emphasising that the main borrowers were all economies with very considerable underlying strengths and development potential. That this borrowing came to be characterised as "the debt problem" reflected the interaction of broadly three factors. The first was a reduction in the level of global economic activity and the consequent fall in commodity prices, combined with a period of high interest rates which were the inevitable counterpart of high inflation, and the policies required to reduce it. The second factor was the extent of the borrowing by some developing countries that had to be serviced, as they sought to delay the inevitable adjustment of their own economies to new and changed international conditions. The third factor was a growing concern of commercial banks about the creditworthiness of these countries.
The noble Lord, Lord Benson, pointed out during the course of that notable debate last December:…when all is said and done there remains the burning question: should lending continue to those foreign borrowers whose credit is now in question? I believe that it is inevitable that it must, and that it should be aided 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,"—[Official Report,15/12/82; cols. 686–7.]Replying to that debate, at col. 705 my noble friend Lord Cockfield stressed:the need to fortify and improve the existing mechanisms… 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".Within two months, finance ministers and central bank governors agreed to increase the total amount of commitments under the IMF's general arrangements to borrow, broadly known as GAB, from SDR6.4 billion to SDR 17 billion—that is to say, approximately 18,000 million dollars, or £12,000 million. This was the first substantial increase in general arrangements to borrow since the year 1962, which helps to put it in some perspective. The IMF Interim Committee, meeting under the chairmanship of my right honourable friend the present Foreign Secretary, agreed that IMF quotas should be increased by 47.5 988 per cent. from around SDR 61 to SDR 90 billion, equivalent to 95 billion dollars. It was decided to implement these decisions by the end of 1983, a considerable acceleration of the previously envisaged timetable.
Since then events have moved on, but the analysis remains the same. The Treasury and Civil Service Select Committee endorsed these agreements and supported, in their words,the speedy passage of the legislation laid before Parliament to give effect to these agreements".The committee's report rightly stressed that three elements are necessary in dealing with debtor countries. I refer to paragraph 4.10 of their report. The first element is that commercial banks agree to reschedule their outstanding debt and to make a modest contribution of net new lending. The second is that their lending is supplemented by a loan from the IMF. The third is that the IMF's contribution is conditional on the borrower undertaking an adjustment programme.
The role of the private banks is of course vital. As my honourable friend the Economic Secretary said when introducing this Bill in another place:there is … nothing unusual in banks seeing corporate customers through temporary patches of difficulty, so long as they are taking steps to put their business in order. In the same way it is quite natural for commercial lenders to be prepared to continue to lend money to their major country customers—provided that they have the assurance that the borrower concerned is taking action, agreed with the IMF, to put its economy in better order".—[Official Report, Commons;11/7/83; cols. 612–3.]Of course the IMF and the world's central banks, operating through the Bank for International Settlements, have a key function to perform. The central banks and the BIS have acted quickly to provide bridging finance in cases where there was a general threat to banking confidence, until longer term adjustments can be agreed with the IMF. Dr. Leutwiler, the president of the board of directors of the Bank for International Settlements, has expressed his hope that there will be no further need for emergency credits of this kind, while recognising that the possibility cannot be ruled out. Nevertheless, the Government feel it right, as a matter of propriety, to seek specific authority to cover any future indemnities because of the contingent risk to public expenditure. That is the purpose of Clause 2 of the Bill.
But the central international financial institution is the IMF. The adjustment programmes agreed between borrowers and the IMF are absolutely central to the process now in train—the basis for setting the borrowers' economies in order and giving commercial banks the confidence to agree to reschedule existing loans and advance additional funds. There is widespread agreement that the fund's resources need to be increased.
I believe that the measures before the House today strengthen the practical role that this country can play in co-operative international operations to deal with the current debt problems. In debate after debate on general economic affairs in your Lordships' House it has been put to me that this form of international co-operation is desirable and essential. I believe it is right for us to support the existing international financial institutions and to join other nations in 989 helping responsible countries facing severe difficulties. I beg to move.
§ Moved, That the Bill be now read a second time.—(The Earl of Gowrie.)
§ 3.29 p.m.
Lord Bruce of Donington
My Lords, we on this side of the House have little dispute with the Government about the broad thrust of the Bill. As the noble Earl said in the course of his opening remarks, it was quite proper for IMF funds to be made available, within the constraints placed upon the debtor countries by the IMF, provided that the debtor countries put their economies in order. Within that broad general context, many of us feel that the policies of the IMF are to some extent over-influenced by the present Government, and indeed by the Government of the United States, insisting on the more rigorous applications of monetary policy which are applicable in some cases.
Nobody would dispute that the lender has the right, if he is to make large sums available to people already in debt, to require that they should take some steps to remove the causes of the imbalances within their economy. Nevertheless, the noble Earl rather skated over (although I am not suggesting he did so in any way deliberately) some of the matters that were raised in the debate in your Lordships' House on 15th December, which pointed to the unwisdom of many banking institutions throughout the world in making loans to countries at high rates of interest without any kind of prudent regard as to their ability to repay, even in times of normal trading circumstances.
I believe that most of the noble Lords who were present during that debate came to the conclusion—and some articulated it from all sides of the House—that the banking institutions themselves were very largely to blame; that there had been a tendency, particularly in the countries of South America, to spend rather large sums on armaments, and following close upon the heels of those salesmen came the representatives of the banks, assuring them that credits could be made available to them for this purpose.
I repeat that so far as the general thrust of this Bill is concerned we are in support of it. I myself had rather hoped that my noble friend Lord Lever would participate in today's debate, to give us the very constructive ideas appearing on pages 18 and 20 of The Economistfor 5th July about the formation of a centralised export credit agency. I will not touch upon that today, in the hope that other noble Lords may do so.
A point upon which I do wish to touch, and into which I shall go in some detail, is the position of ourselves and the Argentine. It is well known that the Argentine is still in a state of hostility at the present time so far as we are concerned. It is known today that the Argentine is still obtaining supplies of armaments from various countries in the world. The terms on which she is getting those armaments and the means she is using, or will ultimately use, to pay for them are unknown; but it is a fact that the Argentine is still continuing to re-arm.
This raises a question of considerable principle: the question as to whether it is proper, in these circum- 990 stances, for Britain and British banks to participate in a facility, some £100 million of which will be directed at the relief of Argentina's liquidity position. This is a straight question of principle. I do not propose to deal with this question in emotional terms, which would perhaps be inappropriate in your Lordships' House, but it is a matter to which we ought to direct attention since the people of our country generally are quite mystified as to how it is that this situation exists in respect of a country with which we are still technically in a state of hostility, with the Argentine representing, presumably, an ever-present threat against which we have to safeguard ourselves at considerable cost to the country and (if I may mention a term which I would mention with more emphasis were the noble Lord, Lord Cockfield, present this afternoon) to the taxpayer.
The Government themselves have been very uneasy about this from the commencement. Your Lordships will recall that on 14th February last this matter was raised by my noble friend Lord Molloy, who sought some assurances in the matter. The noble Lord, Lord Trefgarne, who was replying at the time, said this:The purpose of these facilities is to enable Argentina to meet her debts as they fall due, and the IMF support programme, of course, has a number of conditions atached to it. As the noble Lord will recall, it is not customary to reveal the details of those conditions. I can say, however, that the conditions are pretty stringent". [Official Report,14/2/1983; col. 2.]The noble Lord added, in the course of his reply to a further supplementary question put by the noble Earl, Lord Lauderdale:Those restrictions are quite severe and will no doubt at least curtail Argentinian ambitions, if they have any".This point was further reinforced the next day. The noble Lord, Lord Belstead, in reply to other questions on this matter and in referring to remarks made by his noble friend Lord Trefgarne in reply to questions, said:My noble friend said that he very much doubted whether the Argentinians will have much in the way of spare cash for the sort of military adventures which we may fear". [Official Report,15/2/1983; col. 99.]The view which the Government were putting forward at that time, and which this House quite clearly understood, was: first, that the Argentinians had little spare cash of their own, anyway, to devote to armaments; secondly, that in so far as the loans made to them by the IMF were concerned, the restrictions imposed by the IMF were quite severe. But that broke, because it was found out that the IMF had imposed no such restrictions at all affecting Argentina's right, if they so wished, to use their financial resources in order to buy armaments.
The next argument that was put forward was put forward also by the noble Lord, Lord Trefgarne, on the 14th February, as follows:I might add that if support had not been provided for Argentinian debt repayment purposes in these circumstances, presumably they would have defaulted on their obligations—not only on their obligations to us but on their wider obligations to the world banking community in general; and that would have released substantially more funds for the purposes which the noble Lord and I both deplore".—[Official Report,14/2/1983; col. 3.]In other words, if we did not, through the IMF, lend the Argentinians the money, then somehow that would make it easier for them to acquire armaments. The delicate reasoning that lay behind that argument 991 was never fully explained, but I have no doubt that the noble Earl, Lord Gowrie, when he replies, will probably elaborate on that point a little. But the converse of it would appear to be this: that the more money that is loaned to the Argentine the less money there will be to buy arms.
This really is a question of principle. We went to the rescue of the Falklands on a question of principle. Many of our men died for that principle and hundreds were wounded in the course of upholding that principle. Why should the practice, which I would have thought would be universally accepted, that you do not give financial aid to a person or to a country that is still in a self-avowed state of hostilities to this country, be exempt from the principle?
The Government themselves in another place expressed some distaste about this. The Economic Secretary to the Treasury, speaking in another place on 11th July, at col. 616, said:I cannot hide from the House my distaste, and the distaste of my right hon. and hon. Friends, that this should be necessary".Then he pointed out that we, the United Kingdom, through the IMF and through the United Kingdom banking sector, are involved in the international effort to facilitate the resolution of Argentine's debt problem.
I invite the noble Earl, who I am quite sure is very sensitive concerning matters of this kind, to address himself to this problem: is it to be the case that the loyalty of the ordinary man and woman is to be to his or her country, but that the bankers' loyalty is to be to the international banking system? This question has to be asked, and I am hopeful that the noble Earl will be able to say that in all circumstances the loyalties of British banks should be to the British people, who very largely sustain them, and to their own nation, and that this should take precedence over any wider and very clubbable loyalty to the international banking community with whom they are in daily contact.
I say, I trust without any degree of wishing to give offence, that bankers, particularly international bankers, live rather different lives from ordinary mortals. I make no particular complaint about that. They meet on these numerous occasions, they are in continuous touch on a daily basis by telephone and telex. There is an international camaraderie, which I take it is quite proper, among them. Quite clearly, therefore, they together have a desire that the international banking system, from which they profit considerably, should be preserved intact with the least possible ripples of trouble. This is something, I think, which ought to be challenged; this is something which we ought to think a little more deeply about.
It is said, of course, that if these facilities were not granted the international banking system might be imperilled. It was referred to in the course of the debate last week in the other place—the so-called domino effect: if there were a default by any particular nation, or perhaps a group of nations, particularly again in South America, the whole system would be in peril. I do not know whether the noble Earl, Lord Gowrie, has had the opportunity to consult his noble friend Lord Cockfield on the subject, because Lord Cockfield referred to this aspect of the matter in the 992 debate on 15th December. Some fears were raised from all sides of the House that the whole workings of the banking system, largely due to the follies of the bankers themselves, were in some danger.
The noble Lord, Lord Cockfield, was most reassuring. He said on 15th December, in col. 701:Let us start by looking as calmly as we can at the actual facts. The total external debt of the third world 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, particuarly 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".Those were very reassuring words from the noble Lord, Lord Cockfield. True enough, he made those remarks on 15th December, but the noble Lord, Lord Cockfield, who likes to update his remarks from time to time, stated again that that was his view as recently as 21st March. The noble Lord then said, at col. 1146:As I said in December—and I adhere to this view—the present situation is a cause for concern but not for alarm. This is the difference. Steps were necessary: it was essential to take them. Those steps have been taken. The funds available to the IMF have been substantially increased—an increase of 47½ per cent. is a very large one indeed. The funds of the World Bank have been replenished".So the argument that if we do not take this action, that if we in the United Kingdom suddenly decide to veto—which of course we are quite entitled to do—the lending of £100 million of our money to the Argentine, an international banking collapse would follow, is quite clearly wrong.
Therefore, the idea which was put forward in another place in the course of the debate last week, that somehow any hesitation in making funds available to the Argentine would lead to unemployment, is a lot of monstrous nonsense; it would do nothing of the kind.
Moreover, it has been suggested that if such a step were taken it would provoke some trade retaliation. The Argentine is in no position to retaliate trade-wise against the United Kingdom. The noble Lord will see from the records for 1981 and 1982 that our imports from the Argentine were £136.9 million and £58.7 million respectively, while our exports were much lower, at £161.2 million and £37.3 million respectively. So the Argentine would be in no position to embark on a trade war of that kind. Therefore, the excuses will not work.
I must go into this in very great detail, I am sorry to say, because I want an effective and informed answer to a question which the House is entitled to ask. The existing criteria have been laid down by the IMF and given by the Economic Secretary to the Treasury as follows. The countries concerned must take certain action in regard to,balance of payment deficits, public sector domestic and external borrowing, domestic credit expansion, the elimination of external arrears and the removal of exchange restrictions." [Official Report,Commons, 11/7/83; col. 616.]Is there any reason why those cannot be extended by the IMF in approved cases? Is it entirely out of the 993 question that the British representatives on the IMF should insist upon an additional criterion—that the funds cannot be used for the purchase of armaments for possible use against the countries that are advancing the money? Is that an unreasonable proposal to put forward? I should not have thought that it was an unreasonable criterion.
As I have said before, bankers are very friendly and clubbable people, internationally, one with the other. It might be argued that for the United Kingdom to make such an argument would disturb the broad and general harmony within which international banking takes place. It cannot be forgotten, and I trust the noble Lord and the Government will not forget either, that one of the difficulties may well be that the individual bankers who take part in the consortium also have board representation on most of the world's leading armament companies. Therefore, there may not be the same incentive to restrict the sale of arms.
I have tried to put these arguments as temperately as I am able, even though it gives me and many of my noble friends, and, indeed, noble Lords in other parts of the House, some cause for considerable indignation. If no action of this kind can be taken and if no pressure can be exercised to this end, what does it really prove? It will prove something that we have long suspected—that the Prime Minister, the Chancellor of the Exchequer and the Foreign Secretary are lap dogs when it comes to the City of London and financial interests.
Lord Bruce of Donington
My Lords, the noble Earl will have an opportunity to reply. It must be said that the Prime Minister herself has a very limited knowledge of these matters. The House will recall that when she was answering a question—
The Earl of Gowrie
My Lords, I must ask the noble Lord to give way. He has been astonishingly irrelevant and astonishingly offensive. There is every opportunity, as I shall shortly seek to show, to influence the way that the IMF programmes are budgeted.
Lord Bruce of Donington
My Lords, the noble Lord must not be so impatient. The function of the loyal Opposition in this House—
Lord Bruce of Donington
Yes, my Lords, because it is a very important subject. The function of this House and of the Opposition is to oppose and to bring forward exactly these considerations. That is why I point out in illustration of my last remark that, when the Prime Minister was answering a question on 6th March 1980 in another place, she said that,the tendency is for bank profits to be high when times are bad for others and a good deal lower when times are good for others." [Official Report,Commons, 6/3/80; col. 656.]She said that as though she were mystified by this phenomenon. The noble Earl may fulminate as much as he likes upon this, but he will have to satisfy himself in his own mind that he is correct, as distinct from 994 quite properly supporting his Government. I say on behalf of the Opposition, as I have a right to say and will go on saying, that the present Government have neither the intellect nor the will to stand up to the banking community. For that they should be indicted, and we on this side of the House have not the slightest hesitation in indicting them on those lines.
§ 3.58 p.m.
§ Lord Taylor of Gryfe
My Lords, this debate has gone on rather longer than expected, but in view of the fact that when this matter was discussed in the other place there was very sharp criticism of the SDP-Liberal Alliance for failing to make its position clear, and because this is a very important subject, I propose to say a few words this afternoon. We on these Benches are agreed on the need to support the international financial institutions in maintaining stability in the international financial system. Questions which we may ask are: Is it enough? Is it in time? The possibility of collapse of the international financial system is something that I do not look forward to and would not like to encourage.
The Minister has rightly identified the main causes of the present crisis: the oil price increase, the world economic depression with the consequent collapse in the prices for primary products, and the continuing high interest rates. The Bill we are discussing will make a contribution towards relieving the situation, but until the world economic depression takes a positive turn for the better the crisis will continue. I can well understand the chairmen of the central banks making reassuring statements from time to time because they must maintain confidence in the system, but in the light of the facts of the moment I doubt if that reassurance is justified.
It is easy to criticise the international bankers. That is always an emotive thing to do. It is easy, in retrospect, to criticise indiscriminate lending. But your Lordships will recall that when the lending was taking place two facts existed. The first was the need to recycle petro-dollars, and the international banking system was hailed because it had these large deposits of petro-dollars which were on-lent for further development. They were being on-lent for countries, many of which had double-digit growth rates. To that extent it looked a reasonable possibility that these monies would be repaid. Today, because of the factors which I have mentioned, the situation has changed. The world banking system has taken some steps to tighten its controls and its monitoring of that lending. The exchange of information now at Washington (the Ditchley 2 organisation) will help in a sensible exchange of information on countries which are large borrowers.
But more important, and relative to this debate, is the positive role of the IMF in the rescheduling of debts. The IMF has not simply lent additional monies to make the system reasonably stable; it has also encouraged the clearing and central banks to lend as a condition of further IMF lending. As a further condition, it has insisted on the rescheduling of existing debts, thereby avoiding the crisis which we all fear. To that extent we support fully what the IMF is doing in this positive way. But do not let us 995 overestimate the size of the IMF contribution, nor our size in relation to the total IMF resources.
§ Lord Molloy
My Lords, I am following the noble Lord's extraordinarily interesting argument, but would he tell the House who forms the IMP? Who are the individuals who sit there and have this massive control? Who appoints them, and who checks on them?
§ Lord Taylor of Gryfe
My Lords, the British Government, like those of other countries, have representatives on the IMF. Once the 47 per cent. increase is carried through, the total British contribution to the IMF quotas will be only 7 per cent. I think the total at the moment is 10 per cent. So do not let us overestimate our power and influence to make the IMF decide in favour of our political prejudices or particular wishes.
The nature of the crisis is such that only last week Brazil was within 24 hours of defaulting on the short-term borrowing (the bridging finance) she had secured from the Bank for International Settlements. The chairman of the Bank for International Settlements, Dr. Leutwiler, said that there would be no further credits for Brazil from the BIS; and within 24 hours of the closure date agreement was reached between the IMF and Brazil. The Brazilian situation is that they owe $94 billion, of which $11.5 billion is to British banks. But to give your Lordships some idea of the nature of the crisis, the total export earnings of Brazil this year will be $22 million. In order to service her debt and repayment requirement, $17 million of that $22 million will be taken up. Even with the assistance which has been given, and the rescheduling of the debts, there is still a critical situation so far as Brazil is concerned. The league table is: Brazil, $94 billion; Mexico, $91 billion; the Argentine, $41 billion; and the third world total debt, around $600 billion. The crisis has not disappeared.
So far as the third world debt is concerned, primary products fell in price last year by 14 per cent., and between 1977 and last year debt servicing of the third world countries went up from 15 per cent. to 30 per cent. The third world countries are caught in this awful squeeze of debts increasing, because debt is related to the London inter-bank rate, and at the same time commodity prices are collapsing.
I want to say a word or two about conditionality—about the questions raised by the noble Lord, Lord Bruce of Donington, who speaks from the Labour Front Bench. This is a very difficult matter, and it arises repeatedly in United Nations deliberations. The test which the IMF places on borrowers is their ability to repay. The regime which they set for the countries to make reasonable repayment is to ensure that their economies can carry the debt that they are now incurring. Once you introduced into that system some preference for a particular political regime, it would make the IMF's general activities extremely difficult.
I can recall that at the end of the war, when I was engaged in the reconstruction of Europe as an official of the United Nations, we sometimes had to make decisions to assist countries with whom we had been at war. I remember that in all our discussions in the United Nations the Russians used to take exception to this. They used to say that assistance and aid should be 996 given only to countries which they described as countries that had resisted the Fascist hordes. We had, however, to get the European system working again. That required giving credits, support and aid to countries with whom we had recently been at war. There is something of a parallel in all this. We took the criterion of need, and not of our particular political affiliations. To some extent the test must be applied to the Argentine. Does its increased armament commitment affect its ability to service its debt? If it does, the IMF is entitled to take a very strict line, as it would with any other country. In many countries it has cut back public sector expenditure because it believed it was excessive. By the same token, the IMF is right in insisting on rigid financial discipline. and must take into account the fact that the Argentine is spending large sums on armaments.
Similarly, with apartheid. I noticed that in the discussion in the other place the view was expressed from the Labour Benches that we should not lend to South Africa because we disagree with apartheid. In so far as apartheid restricts a country's economic growth, stability and ability to repay a debt, apartheid should be condemned by the IMF in those terms. But if you are running the IMF you cannot do so on the basis of particular political prejudices or on the inevitable emotional feelings one way or the other. Therefore I suggest that our representatives of the IMF should critically examine the large expenditure on armaments in the case of the Argentine, and should also critically examine whether the policies of apartheid restrict or undermine the ability of South Africa to meet its credit commitments.
I want to say a few words in relation to the interesting idea put forward by the noble Lord, Lord Lever of Manchester, in which he suggested (and this would be undiscriminating, I suspect, if I may say so to the noble Lord, Lord Bruce of Donington) that there should be a general extension of the Export Credit Guarantee Department arrangements which presently finance sales to foreign countries, and that this should also include an export credit guarantee arrangement on capital which we might lend on to other countries. This is worth looking at. It is an idea that was aired during our previous discussions in December and last March.
In the Brandt 2 Report, Common Crisis,there is very good comment in relation to IMF policies. I commend the Government to take note of these three points. The first point is:That countries be encouraged by the enlarged availability of low-conditionality credits to come to the IMF at an early stage of anticipated difficulties".Too many of them come at the last stage, the IMF gets a bad name because it has to impose rigid disciplines on these countries, and it then becomes classified as an agent of imperialism.
Secondly, the Brandt Report states:That the IMF use its expanded resources to give countries support for expansionary adjustment wherever possible".In the application of IMF policies there has been a tendency to be totally contracting and restrictive. The report goes on to state:That greater attention be paid to supply relative to demand conditions, so that payments deficits are corrected by an appropriate mix of policies with less exclusive concentration on demand 997 constraints, devaluation and credit ceilings as the main instruments of adjustment".I suggest that we should take a positive role in IMF discussions, and perhaps pay some heed to the proposals contained in the Brandt 2 Report, Common Crisis.
§ 4.11 p.m.
§ Lord Beswick
My Lords, I find it quite astonishing that the Government Ministers complain that some of us should want time to discuss the issues involved in this Bill. The noble Earl referred to what he rightly called a notable debate at the end of last year, in which the dangers inherent in modern moneylending were discussed. But I think he will agree that that can scarcely be considered the end of the matter. The basic problems remain. We are as far away as ever from a genuine solution to the difficulties that we talked about in the debate last December. I would have hoped that we could have had a full day's debate on some of these matters, and I hope that after the Summer Recess we shall get such a debate; I might even help fulfil that possibility by myself putting down a Motion.
It is not that the Bill now before us is itself of such profound importance, though I must say that the potential liabilities opened up by Clause 2 cannot be considered as unimportant. However, against the background of the problem, the Bill really is a pitiful piece of legislation. Some may say that it is an ambulance measure, a first-aid operation. But when I learned something of first-aid I was told that when there was loss of blood, the immediate action must be to stop that loss. This Bill does not stop the flow; it is designed to provide more blood, so that the flow can continue—to the continued profit of the donor, and the weakening of the patient.
Much has been said about the large sums that have been borrowed, but it is possible to say that it is not so much the actual volume of lending and borrowing that has bedevilled our economic systems, but rather the quite stupid rates of interest that have prevailed. I do not believe that we have even begun to understand the distortion to our economic and social systems brought about by this debauch of moneylending. Of course, we can see what could happen if there were a default by a major borrower. Of course some banks could seriously burn their fingers and areas of trading could be brought completely to a halt. But the point that I want to make is that we need also to understand the deep-seated threat to modern societies if there is no default, but the devices in this Bill make it possible for moneylending to continue at anything like the current rate of interest.
In my submission there is a flaw, a design fault, in the world banking system, and this Bill simply props up the system. Much greater effort should be directed at identifying the fundamental design fault and appropriate modifications made. There are others far more learned about banking than I who can give solutions; but in my unlearned way I should like to point to some of the evidence that persuades me that there is this design fault.
I have no doubt that in this House there will be quite a number of us who hold Government stock yielding 15 per cent. interest. That 15 per cent. did not reflect 998 a prosperous economy in 1979 or 1980 with business and profits booming and growth at an all-time high. Precisely the opposite was the case—it was because business was so bad that the rewards went up. This morning I read in an American newspaper that in the United States between August and December 1980 prime interest rates rocketed from 11.12 per cent. to 20.35 per cent. Again this did not reflect real economic growth of that order. It was simply a panic reaction to signs of trouble.
If I may for a moment be allowed to look back I would say that many years ago I helped to start a little airline. I recall that it did quite well and one year my dear friend the chairman said proudly that he was going to propose a 10 per cent. dividend. He was rightly proud because everyone had worked hard, they had earned success and everyone was going to share in the rewards. But in the case of that 15 per cent. Treasury stock there had been no success. There was no question of that yield coming from economic growth. It seems to me basically wrong that there should be increased rewards as the result of failure. I shall not pursue that line of argument any further this afternoon but I would call attention to another piece of evidence in the case against moneylending as now practised.
Some of my friends in the other place, and the noble Lord, Lord Bruce, powerfully this afternoon, have emphasised the point that the effect of this Bill will make it possible for the Argentine to continue to borrow money—some of it our money—to enable it conceivably to buy weapons; and equally conceivably some of which weapons might be used against us. The Government agree that this is a bad thing. The noble Lord, Lord Taylor of Gryfe, said that it was a bad thing. But we are told that the institution itself is unable to stop it. The noble Lord, Lord Taylor of Gryfe, spelled out the difficulties confronting the IMF if it tried to impose conditions relating to military preparations.
But the extraordinary thing is that though its powers of persuasion or compulsion cannot cover military expenditure, the IMF powers can cover social and industrial expenditure. It can require austerity from everyone in a particular country. Now I am certainly not myself going to argue that in certain cases a bank manager should not say to his customer that he cannot borrow more money unless his personal extravagances are cut. But what the international bank manager is saying is that whoever may go without, whatever may have been the cause of the difficulty, the moneylender must be certain of his extravagant return. It was Mr. Henry Kissinger who described the position as clearly as anyone. He put it this way:As a condition for its assistance the IMF invariably insists on measures that have the effect of contracting the economy, increasing unemployment and reducing consumption".Moreover, as I have tried to indicate on previous occasions, we have to bear in mind that those conditions are enforced because of many problems that have arisen, directly in part and indirectly in large part, by the high rate of interest charged on earlier loans. The lending of money can be a valuable part of our economy if it leads to increased production of real wealth and out of which interest and dividends can properly be paid. But surely there is something 999 basically wrong that rates are higher when growth is lower. If there is no growth, then, to maintain rewards to the moneylender, some innocent people invariably have to suffer in the way that Mr. Kissinger spelt out.
No doubt I can be reminded of the elementary principle that risk-taking in banking should be rewarded. But this Bill is designed to take out such risk as there was in lending to sovereign borrowers. The Bill will of course go through; but I repeat my hope that, in the near future, we shall have the opportunity of discussing the real issues involved. As certainly as anything is certain in this world, the problems involved behind this Bill will not go away as a result of simply finding some more money.
§ 4.21 p.m.
§ Lord Molloy
My Lords, I apologise for not having my name down to participate in this short debate. However, there has been reference to me. I was responsible in the very heat of the Falklands crisis for submitting to your Lordships the idea that the day would come when we have to sit down, negotiate and start trading again with the Argentine Government, and that perhaps by that time there would be a sane and sensible Argentine Government. It would be a difficult situation in which we were faced with taking action in the hope that this would lead ultimately towards achieving that democratic Government. Equally, I was somewhat shattered when the IMF made its decision to lend money to the Argentine Government, not on the grounds that people were going to be killed, that they were going to be bombed or that any Welsh Guards would suffer terrible things, but that the international financial scene would otherwise be placed in difficulty. The dollar, the pound, the franc and the mark were all put well ahead of any soldier, sailor, airman or anyone else. I found this particularly repugnant.
I have to be honest in saying that I cannot go all the way with my noble friend Lord Beswick on the fundamental objectives of the Bill. Like my noble friend Lord Bruce of Donington I find that the measure can and will make a contribution. I agree with the remarks of the noble Earl, Lord Gowrie, in the early part of his speech, that it can help a great deal. I believe, however, that there must be great control. It is no use we in this Chamber getting up and saying, "The IMF do this" or "The IMF do that" because ordinary people are beginning to ask what the IMF is I have heard the IMF in this Chamber confused with the General Agreement on Tariffs and Trade, with which it has no connection. It is known that as a result of the Bretton Woods conference there was supposed to be strict control. I do not expect that many of us would be able to identify the representatives of the British people saying at the IMF how much we should contribute and where the money should go. Despite what I consider a dastardly act, I support immediate talks with Argentina once it has removed its hostility to my country. That has not happened.
I object strongly when this Government—supported, I am surprised to say, by some parties on this side of the House—are prepared to take the risk and to inform the Argentine Government that we are willing to contribute through the IMF so that they can 1000 have a few more millions but asking them only to use it for economic purposes and not to harm British subjects. Is it not possible that the Government could go further and argue that they have such confidence in the Argentine Government never acting again to harm the Falkland Islands that they wish to encourage more British families to go to the Falklands to develop farms and to make the land more productive?
That is the Government's stand, is it not? It cannot be anything else. I find it wounding that we should behave in this way, especially as one of those who says that the time has to come when we must trade with Argentina. I can imagine the justifiable anger that would have been displayed by the noble Earl, Lord Gowrie, if during his period as Minister with responsibility for Northern Ireland there had been some contribution to American financiers from the IMF to make sure that the IRA had better arms and more guns with which to attack the British Army. Would there have been the same cool attitude that has been seen this afternoon along the lines of, "It's too bad chaps, but that's the way it goes"? Anyone taking that view has no right to sit on any Front Bench. However, that is what would have happened.
There would have been total condemnation in this House in which I would have joined if financiers operating public money had said, "We are very sorry about the rough things we have said about the Soviet Union invading Afghanistan and if a few more billions are needed to maintain your arms there you shall have them." That is what is being said in other countries. It is what ordinary people are saying. It is wrong for us to believe that folk outside do not understand these things. They do understand. I support the noble Earl, Lord Gowrie, 100 per cent. in what he says about showing a co-operative attitude in international affairs. As the noble Earl rightly says one important step is through endeavours created under the Bretton Woods agreement; and, indeed, the International Monetary Fund.
There comes a time however when we have to say that although we are prepared to be co-operative, to be helpful and to start trading again, we will only start trade when those who have slaughtered our men and some women in a recent war say that they are no longer hostile to us. If they want to make an agreement with us to trade, we can say that we are prepared to trade. Until that is forthcoming, I am not prepared to listen to all the pleadings that have been made. I was disappointed to hear the contribution of the noble Lord, Lord Taylor of Gryfe. I do not want anyone to say that I am becoming emotional because a few hundred British soldiers, sailors and airmen gave their lives. I do not want anyone to say that I should forget that. I have no intention of forgetting it. I do not know what we can do.
I listened carefully to the speech of the noble Earl, Lord Gowrie, and his submission that under the Bill we are trying to be more generous and give more aid and help and increase international co-operation. I support that aim 100 per cent. But my shoulder is right behind my noble friend Lord Bruce of Donington. Like my noble friend, I feel that we should have been stronger. It is not enough to stand still for two minutes and give 21-gun salutes to the Welsh Guards, the Scots infantrymen and the men of the RAF. We do not 1001 dismiss them in 12 months simply because there is a new International Monetary Fund that has to be co-operated with. We have to take the same attitude that would have been adopted if the money had gone to the IRA or the Soviet Union to mount an invasion of some other country. That would be rightly condemned. These are the issues that we must consider seriously. By doing so, when we ultimately want international co-operation we shall achieve it on the most honourable basis that the human mind can devise. In that way, everyone will gain without bitterness or sadness. There will be a genuine feeling that we are moving along a saner and better road towards international behaviour in the dark, miserable and dangerous world in which we live.
When we can achieve a situation where, for example, there is an increase in the IMF funds to attack poverty, ignorance and disease, it will be a wonderful thing. Indeed, that is the part of the Bill with which I agree. However, I feel very strongly indeed that we move too hastily and too far as regards a people who felt a form of violence and hatred for us and who are still not prepared to say, "Very well, it was a black, dark, period of our relationship; it is now all over, let us try to give some sunshine and light to a new situation". We are prepared to say that, but they are not, and until they do so we ought to stand firm and have nothing to do with any organisation that is prepared to lend money to a régime which is only about 200 miles from the Falkland Islands.
Indeed, are we not now sending people from our land to try to develop the Falkland Islands? Can we do that with the absolute surety that the hostility still being professed by the Argentine Government is not much to worry about, so much so that we are prepared to go out on a limb and lend them money in the safe assurance that they are not going to attack the people who are, perhaps, not yet in the Falkland Islands? It is that aspect that the Government ought to take on board and consider very seriously indeed.
§ 4.31 p.m.
The Earl of Gowrie
My Lords, I certainly agree with the noble Lord, Lord Beswick, that this is a subject of immense importance, so much so that only a few days ago, when wearing my hat as Minister for the Arts, I rather surprised an arts journalist by saying that some of the things one could or could not achieve in the world of the financing of artistic activities might be contingent on events in Latin America or central Europe in terms of international financial stability. Therefore, I certainly yield to nobody in thinking this subject important. I do not think that there is any single issue except perhaps the issue of world peace which is more important today than continuing international financial stability and the sort of terms for international stability with which this Bill seeks to deal.
The response to the Bill in your Lordships' House has fallen very squarely into two parts. There are those like the noble Lord, Lord Taylor of Gryfe, and the noble Lord, Lord Beswick, who are concerned with the economic consequences and the economic thinking behind these measures. There are those like the noble Lord, Lord Bruce of Donington, and the noble Lord, 1002 Lord Molloy, who express themselves in broad agreement with the economic purposes but have expressed, very trenchantly, anxieties about a system which might be lending money to a country still formally engaged in hostilities with us—a country which might use such money to proceed against us or to damage our interests.
Of course I agree with the motivation for such anxiety, but I think that the criticism misses a key point: that this issue of "conditionality"—and the noble Lord, Lord Taylor, gave us an admirable account of the problem of conditionality—can be imposed in ways other than those suggested by the noble Lord, Lord Bruce of Donington, or the noble Lord, Lord Molloy. If I am not misinterpreting them, they want loans to such countries as Argentina to be contingent upon a political response—in this case as regards foreign affairs—by that nation.
The noble Lord, Lord Taylor, showed us very clearly how very difficult it is for an international economic body like the IMF, as against the chancelleries of the soverign countries around the world that belong to the IMF, to engage itself in direct conditionality and to say, "We want you chaps to have this, that or the other political objectives or this, that or the other political system". But that is not to say that the IMF cannot be enormously influential on the ways in which people respond politically to the needs and demands of their creditors and of the rest of us—
The Earl of Gowrie
My Lords, let me just finish the point. Were the Argentines to divert money to buy more arms, or indeed anything else, the IMF programme being negotiated with the Argentines could be severely jeopardised. Let me just say to noble Lords before I give way that the IMF programme and any bank lendings contingent upon it do not give Argentina any surplus funds to spend on arms. Indeed, the programme puts very tight control on Argentina's finances, and, if the Argentines were to divert money to buy more arms, this could jeopardise the programme and Argentina's ability to negotiate further funding. Indeed, I can tell the House that the international commercial banks have not yet signed the 1.5 billion dollar loan which has been under negotiation for several months. In earlier reports, the 11th of this month was quoted as a possible signature date. My present advice is that this has slipped and the loan is unlikely to be signed just yet. It is, therefore, unlikely that any such loan would be effective unless and until Argentina has satisfied the performance criteria of the fund programme. So the funds the Argentines receive will be contingent upon how they behave.
Lord Paget of Northampton
My Lords, I am most grateful to the noble Earl for giving way. Why is it very complicated for the IMF, as a matter of policy, to say that they only accept clients who are at peace with their fellow members of the United Nations, that they will not lend money or recommend the lending of money to nations that are at war and that they must wait until they make peace?
The Earl of Gowrie
My Lords, if there were circumstances of global conflict, that would be a great deal easier. But there are, of course, conditions of partial war and peace, or of good relations or bad relations, that exist between member countries. If noble Lords look at the membership of the IMF, they will find that this suggestion really would be a little unrealistic. The membership of the IMF includes 146 countries. Six countries—the United States, the United Kingdom, France, Germany, Japan and Saudi Arabia—all of which are profoundly unlikely under any rational scenario to be in any state of formal hostilities with each other, appoint directors to the executive board. The remaining countries are grouped into 16 constituencies and they elect 16 executive directors to the board. The point I am trying to make is that the IMF is a particular type of body, and, as a financial body, it is highly influential and can influence its creditors in ways which are thoroughly conducive to peace. But, if it took the frontal approach suggested by the noble Lord and others, it would immensely diminish its chances of being able to influence countries in their pocket books—which is where, in fact, they are probably most easily and sensibly influenced for good.
I can assure the House that the 1.5 billion dollar commercial bank loan currently being negotiated with the Argentine is very closely linked to the IMF programme, and that drawings will only become available while the IMF conditions are being satisfactorily met. If I showed a little impatience during the perhaps rather contentious remarks—where personalities were concerned—of the noble Lord, Lord Bruce of Donington, it was not because I do not recognise this genuine anxiety about lending money to people who may be, or indeed are, engaged in hostile diplomatic relations with one; it is simply that I have often debated economic affairs with the noble Lord, Lord Bruce, over the last five years and have always been accused of turning my back on Lord Keynes. It seemed to me that the noble Lord was turning his back on what could he called the economic consequences of the peace. I should have thought that it was a principle dear to Keynesians and to neo-Keynesians, or even to modified Keynesians, that countries with which one can have interruptions of good relations, or poor relations, should not suffer economically for a reason which can only strengthen those elements which are seeking to promote violence or disorderly policies within the countries in question.
I also have to say that I am always rather impatient when I here the old socialist argument about the bankers' ramp as if the IMF were, so to speak, gnomes. That is not what the IMF are. The way they conduct their affairs is not simply designed to provide commercial profitability, and we value their work highly. Of course membership of the IMF board enables us to take part in periodic reviews of the IMF's progress and to ensure that the appropriate conditionalities are met. I think what I have said about the Argentine shows that we take that seriously.
Coming to the remarks made by the noble Lord, Lord Taylor of Gryfe, I can only really commend them to the House as an admirable tutorial on the situation we have got ourselves into in the international world. I do not think it is fruitful to apportion blame, and I do not think it is particularly fruitful to criticise commer- 1004 cial banks for lending to countries which enjoyed high and indeed enviable rates of growth until growth was pulled up by the international energy crisis, and perhaps even more by the international liquidity crisis, if I may put it that way, which followed 1973 and which has cast such a blight over all our lives since.
The task of the 1980s is now to get more stable growth. It is therefore essential—and perhaps I may say this to the noble Lord, Lord Beswick—that all countries engage in these rather grim and gloomy policies (admittedly jeopardising growth in the short term) which enable us to get to non-inflationary and sustainable growth in the longer term, admittedly at perhaps a lower level than we enjoyed in that astonishing post-war flowering.
The measures in the Bill before the House strengthen rather than weaken the role that this country can play in needed international efforts to deal with international difficulties, and they strengthen the existing international financial institutions in carrying out their vital role of promoting and facilitating adjustment. I hope I have dealt with the central fear expressed in relation to the Argentine. Otherwise I very much welcome the wide support that the measures have commanded throughout this House and another place, and I commend the Bill to your Lordships.
§ On Question, Bill read a second time; Committee negatived.