BANK BAILOUTS
Programme : NEWSWEEK SCOTLAND
Station : BBC RADIO SCOTLAND
Date : 02/07/2011
Time : 08:13
Duration : 8 MINUTES 24 SECONDS
DEREK BATEMAN: Presenter
Well, let’s stay with Westminster for a moment and recall this exchange from the last session of Scottish Questions.
JOHN BERCOW: Speaker, House of Commons
Philip Hollobone.
PHILIP HOLLOBONE: Conservative, Kettering
Isn’t it the case that a separate Scotland simply wouldn’t have been able to survive the global banking crisis on its own and, had it been separate, would now be heading the way of Ireland and Greece?
MICHAEL MOORE: Secretary of State for Scotland
A very important point, because the scale of the financial disaster that befell both Royal Bank of Scotland and Halifax Bank of Scotland would have placed a crippling burden upon Scotland. By being part of the United Kingdom we shared the risks, we’re sharing the recovery and that is the right way forward.
DEREK BATEMAN:
Michael Moore, the Scottish Secretary, answering Philip Hollobone, the Tory MP for Kettering, and indicating that an independent Scotland would have been in deep economic trouble with the cost of the RBS and Bank of Scotland bailout. And that’s virtually identical to an exchange between another Tory backbencher and a previous secretary of state, Jim Murphy. So it’s a consistent theme that the bailout would have effectively bankrupted Scotland without the Union, a modern Darién Scheme. Is it true, or does the responsibility not lie with the country in which the bank is trading, as is normal in international transactions? I turned to Professor Andrew Hughes-Hallett, professor of economics at St Andrews University. He was tracked down to western Australia.
PROFESSOR ANDREW HUGHES-HALLETT: Professor of Economics, University of St Andrew’s
No, in my estimation that is not right, for various reasons. One is that the number he’s taking is, of course, the gross liabilities of the RBS – and, of course, HBOS was in a similar position at the time. But of course any bank at any time has loans out which exceed the assets in the bank, so on his argument every bank would be technically bankrupt all the time, always. So it’s a nonsense statement. That’s easy enough for me to say. The real point here, and this is the real point, is by international convention, when banks which operate in more than one country get into these sorts of conditions, the bailout is shared in proportion to the area of activities of those banks, and therefore it’s shared between several countries. In the case of the RBS, I’m not sure of the exact numbers, but roughly speaking 90% of its operations are in England and 10% are in Scotland, the result being, by that convention, therefore, that the rest of the UK would have to carry 90% of the liabilities of the RBS and Scotland 10%. And the precedent for this, if you want to go into the details, are the Fortis Bank and the Dexia Bank, which are two banks which were shared between France, Belgium and the Netherlands, at the same time were bailed out in proportion by France, Belgium and the Netherlands. And furthermore the Government itself – of which Michael Moore, naturally, is a member – has already made its calculations of what Scotland’s own contribution to the bailout would have been. And that comes to… because I looked the numbers up and I used the latest GERS, that comes to about £0.9 billion, and not that [word unclear] £470 billion, or whatever you said to start with. So that’s on the basis of the sharing, so his own Government is already admitting that the sharing was going on. The last point I would make is by calculations from the Treasury and elsewhere, the cost of the bailout is actually largely in terms of interest charges in … and so on of loans that were made. The rest was actually guarantees, and therefore no money has actually changed hands in that sense. Of course, that makes it, of course, altogether cheaper, but as I said at the beginning, the real point is that it’s always the case here with bailouts of this kind – it’s shared across the countries. I might point out that it’s also… it’s not just the UK Government, but the US government, in the form of the Federal Reserve, bailed out on liquidity basis both RBS and HBOS. I think it was about $200 billon for HBOS and about $400 billion for RBS. That’s another example of international sharing.
DEREK BATEMAN:
So just to be clear, then, I mean, if we assume that Scotland had been independent in 2007, just before this whole catastrophe began, Scotland would have only been responsible for bailing out that percentage of the bank activity taking place inside Scotland. The rest of the UK, as the… you know, Britain would then have become, would have been responsible for all of the bailout for their activities in the City of London where they would have been regulated by the English authorities.
PROFESSOR ANDREW HUGHES-HALLETT:
Yes, right – that’s the convention on this kind of activity. Yes, correct.
DEREK BATEMAN:
But the point about that is really that would make – if you’re correct – that quite flatly makes Michael Moore and a previous secretary of state, Jim Murphy, absolutely wrong on this point.
PROFESSOR ANDREW HUGHES-HALLETT:
Absolutely. There’s no other way of putting it. That’s how it’s done, and, I mean, it’s not just within the UK – as I was pointing out, it’s within the eurozone exactly the same thing’s been happening, and that’s the way these bank arrangements work. And, of course, an independent Scotland would have been perfectly entitled to say, “We’ll pay whatever that 10% figure would be, or we’ll guarantee that much, and if you don't want to guarantee the rest of it, then, of course, one of the bigger banks in the rest of the UK – 90% of the RBS – will go down and hurt the rest of the UK far more than it would hurt Scotland”. So I think there’s no difficulty in persuading people to keep to that convention.
DEREK BATEMAN:
When you say they’re international conventions, presumably the UK has signed up to those?
PROFESSOR ANDREW HUGHES-HALLETT:
No, I say it’s convention. I don’t know whether there’s a treaty saying you do this, but this is a convention, and obviously if the UK has signed it up, then you can see that in, you know – and signed up in inverted commas – you can see that’s the case, first of all because of the American interventions already had happened for both RBS and HBOS, and secondly because the Government’s own calculations of what the Scottish contribution imputed to the Scottish budget – just short of £1 billion – also following a similar convention. So it’s something which they do already.
DEREK BATEMAN:
So he was actually saying this in the House of Commons that Scotland would be liable for £27 billion at the same time as his own Government had already billed Scotland for less than £1 billion.
PROFESSOR ANDREW HUGHES-HALLETT:
Right. Actually, in effect, that’s what he’s saying. Now, I mean, it’s possible he didn’t know because he hadn’t gone through the accounts at that point, or it’s possible he was imagining a view [unclear – as heard] – and in some sense, and again in inverted commas – fine Scotland. You know, they’d make some other arrangements. But not being party to what his thinking was I can’t tell you why he said that, but the, you know, standard conventions and, indeed, the arrangements which his Government has gone through, implies a much smaller number.
DEREK BATEMAN:
You’re an academic, obviously, but, I mean, what do you make of a situation where, you know, the… Scotland’s representative in the Cabinet can stand up in the House and make a statement of that kind? I mean, is that informing the debate?
PROFESSOR ANDREW HUGHES-HALLETT:
I think it’s somewhat misleading, to put it mildly. I’ve no idea what his motivations in saying that would be, other than his political position is buttressed by making a statement of that kind, but I’ve no idea what his motivation really is. It’s entirely possible that he doesn’t actually know what the arrangements typically are, but, you know, when the Council of Economic Advisers existed in a previous administration in Scotland, George Mathewson from the RBS was making the same points to the Scottish Parliament’s select committee on the economy. So, you know, this is not… what I’m saying is not unusual; it may not be widely known by everybody else, but it’s not unusual.
DEREK BATEMAN:
Andrew Hughes-Hallett on a somewhat rough phone line from Australia.
Well, we asked to speak to the Scottish Secretary, but he wasn't available this morning. Instead, his office issued a statement. It says:
“In part, the scale of the crisis was so great that it could be only effectively dealt with by the resources of the UK as a whole. The idea that the Royal Bank of Scotland is primarily an English institution as far as the allocation of debt is concerned is simply wrong. The UK as a whole shares and spreads economic risk and reward. The GERS figures simply assign a population share of the bailout to Scotland. That does not address the issue of whether an independent Scotland would have been able to save the banks.”
Well, you can make up your own mind, and if you go to the Newsweek Scotland blog you can tell us what you think.
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