13 Jun 2013

The bankruptcy G8

David Cameron should will not need to take his guests at next week’s G8 Summit very far to see the very real challenges still facing the world economy.
The Lough Erne Hotel and Golf Complex was Northern Ireland’s first five star golf resort, with course designed by Nick Faldo.

It was funded by none other than Halifax Bank of Scotland.

 Bank of Scotland Ireland is still owed £25 million for the speculative commercial property development that will house the world’s political elite.

Today, just four days before the summit, was the last opportunity for you to lodge a bid to buy the business from adminstrators KPMG. The brochure is here: yours for £10m.
Lough Erne should in fact be the 345 acre poster boy for Britain’s banking excess. Turret clad lodges, a 14 metre infinity pool, a Thai spa, and Light Therapy sauna all on an island golf course, accessible by seaplane.

Bank of Scotland Ireland, a basketcase within the HBoS horror, became the second worst bank in Ireland, only beaten the calamitous AngloIrish. Of its 2008 loan book, 36 per cent was impaired by 2011.

That is £11.5 billion, or six per cent  of Irish GDP. The majority, £6.5bn of these impairments were on commercial property, such as Lough Erne.

BoS Ireland had £31 billion in customer loan in 2008, including £17.6bn corporate, but just £6.1 bn of deposits.

Money ‘conjured from the skies?’

BoS Ireland had a loan to deposit ratio of 498 per cent in 2008. The money that funded the loan to build Lough Erne was conjured from the skies  in wholesale funding, I’d imagine some sort of Corporate Mortgage Backed Security (CMBS), perhaps it is even a piece of collateral at the ECB right now.
The golf complex is an example of both the ongoing chronic economic crisis in the UK, and the impact of the eurozone crisis from the Republic of Ireland.

G8 leaders had decided that the relevant crisis in the world economy was the sovereign debt crisis in around 2010. Austerity was the answer.

The actual venue of this conference illustrates that the real drag on developing country growth comes from the still piercing hangover from the credit bubble.

Banks can not lend to fuel growth because of an overhang of debt. Markets have not cleared. Who would dare invest in a major leisure facility in Northern Ireland when Lough Erne is available for £10m?

Focus on tax transparency
The G8 has not achieved much, nor has the G20 in achieved anything in tackling the root causes of the crisis in global economic imbalances. Instead the prime minister has focused attention on tax transparency.

He hopes to arrive clutching an agreement with Britain’s own dependencies and territories which operate a hefty chunk of the world’s tax loopholes and corporate secrecy.

Perhaps he will be less keen on changing the presence of the London hedge fund history on most of these British islands? In any honest look at the financial system and the shadow banking system, these territories are huge conduits for hot money. As are jurisdiction within the G8 that few want to talk about.

If the Caymans are on the table, and Cyprus has been zapped, why not Delaware? The original crackdown on tax havens occurred at Gordon Brown’s famous 2009 Summit to Save the World in London.

Large nations facing deficits could bond over having a pop at small island tax havens. The same instinct remains.
Outside, Vladmir Putin would approve of the Potemkin-style repainting of boarded up shops in Enniskillen.

The people paying the price, for the adjustment are the middle classes of US and the UK, facing pronounced and prolonged falls in their real wages. The jobs numbers stay high, but people are not spending as the private debt problem remains.
Is there any point in the G8 “industrialised nations” meeting? It cannot solve the world’s problems.

“Deindustrialised” would be a better description. Few solutions are being found, and the greatest achievement is to stop the outbreak of a trade war. Perhaps Shinzo Abe will shake things up with Japan’s profoundly different approach to settling the crisis.
For now though they could do a lot worse than looking at the books of the place they are staying.

A geopolitically bankrupt G8, meeting in a bankrupt golf course, threatening to bankrupt tax havens.