Ex-UK Chancellor Darling Warns that QE and Low Interest Rates Must End
“I spent 1,000 days at number 11 Downing Street as the UK chancellor of the exchequer and am often asked what was my worst day,” said Alistair Darling MP in his opening address to the FIX EMEA trading conference in London on 6 March. The day marked the fifth anniversary of the Bank of England (BoE) cutting UK base rate to a historically low figure of 0.5% – an unsustainable position in his opinion.
“I’m spoilt for choice,” Darling joked, recalling his turbulent period in office during the global financial crisis, “but 7 October, going into the 8 October 2008 is probably my choice of my worst day. Royal Bank of Scotland (RBS) was haemorrhaging money at the time, its shares had been suspended twice on the London Stock Exchange (LSE), and the-then head was asking me what I was going to do about it. ‘How long can you last’? I asked, and he replied: ‘Maybe two to three hours’.”
“An RBS crash then would’ve made the run on Northern Rock a year earlier look tame in comparison so that’s why we decided to rescue it on 8 October,” explained Darling (Northern Rock, forced to approach the BoE for a liquidity support facility in September 2007, was nationalised by the UK government five months later after two commercial bids faltered).
Darling also shared his recollections of dealing with the-then US treasury secretary, Hank Paulson, and his fears that the mooted Barclays Bank rescue of Lehman Brothers prior to its collapse on 15 September 2008, perhaps wasn’t such a good deal for UK taxpayers if the Americans were offering it up on the other side of the Atlantic. It was also a ‘big mistake’ not to have rescued Lehman as the US had done with Bear Stearns in March that year, he added, as it led to the “blind panic on 7-8 October that the entire banking system [and world economy] might collapse”.
Alongside the start of the low interest rate environment, the UK is also marking five years of quantitative easing (QE), continued Darling. This raised the question of when the UK will follow the US lead in a ‘tapering’ programme designed to switch off the electronic money printing presses and start nudging up interest rates. Both these anticipated moves will have an immediate impact on the nascent UK recovery, which to date has largely been consumer and property-led with rather less export-led growth.
“Interest rates will have to go up and it will be a shock to the system when they do,” warned Darling, adding that while QE had done its job of preventing a downturn becoming a recession this policy too would have to end. Corporate treasurers in Europe should therefore emulate their US peers and start preparing for such an eventuality – assuming they hadn’t already begun.
European Economy Still Shaky
“The UK’s main trading partners in the European Union (EU) are still struggling, which makes achieving an export-led UK recovery harder. The big problem is not enough growth: austerity is not the answer,” said Darling.
He next turned to critiquing the European economy and the recent trials of the eurozone economies. “Currency union doesn’t work unless you have the political and monetary union to support it,” he suggested, while citing Mario Draghi, president of the European Central Bank (ECB), as the saviour of the single currency.
Draghi promised to do “whatever it takes”
to support the currency at the height of the eurozone crisis in 2012.
Darling also heads the ‘Better Together’ campaign aimed at keeping Scotland part of the UK. His speech touched on the potential business implications if the nation votes for independence during its planned referendum this September 2014 and the outcome results in Scotland’s expulsion from the British pound (GBP). As a keen supporter of unity in all its forms, he wants Scotland to remain within the UK and also supports the UK remaining inside the EU. In the event of an outright Conservative victory in the 2015 UK election and an end to the current Conservative-Liberal Democrat coalition, a referendum on the UK’s continued membership is promised.
Darling admitted that while he was basically an EU enthusiast, membership did have its problems. “I think the EU is constitutionally incapable of doing anything fast,” he said. “I’m not a Eurosceptic but this is a problem,” he said, recalling EU members’ slow response to the 2008 financial crisis. “We [in the UK] moved fast to save RBS, introduce QE and cut rates. We did it quickly and we did more than expected [to calm the markets] – that didn’t happen with Greece later on, and it should have. Indeed, I’m pretty sure Greece will need yet another rescue package.”
The key lesson is that you should go hard and you should go fast in any such crisis situation, advised Darling. However, he acknowledged that the fallout from 2008-09 is still being felt today by businesses up and down the land. The ‘new normal’ is something that treasurers around the world have had to get used to, alongside the raft of new post-crash regulations.
Scottish Independence: Potential Currency and Economic Impacts
“I’m fiercely proud of being Scottish,” said the Edinburgh-based MP as he concluded his speech, “but I believe it is in our own best interests to remain part of something bigger like the UK.”
There is a real possibility that Scotland may vote to leave the UK by the time of the referendum this September. Recent polls indicated around 40% of voters in favour of an exit and the numbers are growing. Darling, as head of the Better Together campaign, is all too aware of the treasury and business implications if Scotland breaks away. His own Edinburgh constituency is home to the major financial services group Standard Life, which recently threatened to move its base to England if it were to face the prospect of new tax or currency barriers to its main customer base south of the border.
“If Scotland breaks away we could end up with a currency union like the euro where you have to negotiate budgets every year anyway [as Greece does with the EU]. It’d be an extremely unequal situation and I don’t see the benefit of a split for Scotland or the UK.”
Darling went on to ask what would happen to Scottish government revenues if the oil price collapsed – North Sea oil being still a key component of both the Scottish and UK economies. He also listed other threats to the nascent UK economic recovery, such as a lack of investment in infrastructure and energy production capacity, not to mention still-low productivity growth. “Things are getting better though and confidence is returning,” but the UK, European and indeed world economy is by no means out of the words yet, he warned. “We’re only just emerging from the first post-crisis phrase of the recovery,” he concluded.