It is easy to sound alarmist at times of financial turmoil, but the sentiment in Malta is of a surreal denial. It looks like we are busy rearranging the deckchairs and fine-tuning the violins while the Titanic sinks. The Times reported last week that it could not elicit information on the amount of damage which hit a local bank following the collapse of Lehman Brothers. The regulator was also non-committal. Certainly the newly appointed finance minister needs nerves of steel to calm the waters while preparing his first budget. We all wish him well and do not envy his ministry a bit - he cannot perform miracles.
Another finance man in the UK, Alistair Darling, has admitted that the country is buffeted with a maelstrom of epic proportions which had not hit the country since the war. More woes are piled up on the international financial scene such that Gordon Brown has decided to act as the liberator of the world: he darted to meet President George W. Bush on last minute unscheduled talks on a $700 billion rescue plan. As can be expected in these dire times, Mr Brown has called for international regulation, greater transparency and responsibility. He defended his decade-long style of risk-based regulation, but the scale of the new financial instruments outwitted the regulators.
Realistically, shall we stop and reflect what started this so-called crunch? It is a year old, although Malta seems to have been relatively unscathed. On its anniversary, we remind ourselves how it all started with the development of new and sophisticated ways for the financial markets to make and lose money. As the old adage goes, taxpayers on both sides of the Atlantic were living beyond their means, borrowing money to buy houses or mortgaging excess equity to fund their spending habits. Does this sound familiar? Yes - summer bonanza was chosen as a slogan by a bank who regaled us with colour adverts in most tabloids exhorting us to borrow as if there is no tomorrow. Similarly the hard sell practices of other domestic banks offered 48 hour loans and free credit under the guise of plastic money where interest can scale up to 14 per cent. Regulators went soft on banks who are the milking cows generating a welcome tax stream. A nondescript notion is the risk averseness from bankers.
The worrying thing about the crunch is that there are still people who insist on clinging to the view that it will never hit us much. More will be revealed this winter as banks disclose their annual results. Pundits contend that our closeted economy is resilient, mainly because it relies strongly on domestic factors such as the strong multiplier effect of its property and construction sector. Some economists contend that the price of land will spiral up, acting as a natural shelter for the millions of undeclared lira currency during the euro changeover.
Sheltering blindly behind our smallness will not wash because the openness of our economy is directly influenced by outside factors beyond our shores. Back to the global dimension and one meets with a lot of theories postulated as to how the crunch started. One may recall how a year ago long queues of depositors snaked the high street branches of Northern Rock in the UK, claiming back their deposits. Everyone appreciates that the European Central Bank reacted positively to buttress the distress of banks by injecting billions into the money markets, but it was too little too late. Hence the recent troubles faced by HBOS, the UK's largest mortgage bank which was rescued by Lloyds TSB at a mere £12 billion after its shares plummeted. If the proposed deal goes ahead, there will be massive redundancies due to the significant overlap between staff.
Lehman Brothers sealed its fate on September 15 when it filed for Chapter 11 bankruptcy protection and Washington Mutual followed suit. UBS, the biggest casualty in Europe, admitted in early July that it faced further write-offs estimated by analysts at $7.5 billion. Of unbelievable proportions was the bale-out of $85 billion of AIG as a major American insurance company.
The economic crisis of 2007-2008 came as a complete surprise. Economists did not think such things could happen. On a local front, with evidence that the crisis is spreading from the financial markets into the economy at large, party apologists who claimed "it will be all over by Christmas" have fallen silent.
Are we veering towards the vortex? Only time will tell if we can ride the storm. But the aftermath of the credit crunch will not metamorphose into a nonentity as if waking up from a bad dream.
Mr Mangion in a partner in PKF, an audit and business advisory firm.
gmm@pkfmalta.com
Another finance man in the UK, Alistair Darling, has admitted that the country is buffeted with a maelstrom of epic proportions which had not hit the country since the war. More woes are piled up on the international financial scene such that Gordon Brown has decided to act as the liberator of the world: he darted to meet President George W. Bush on last minute unscheduled talks on a $700 billion rescue plan. As can be expected in these dire times, Mr Brown has called for international regulation, greater transparency and responsibility. He defended his decade-long style of risk-based regulation, but the scale of the new financial instruments outwitted the regulators.
Realistically, shall we stop and reflect what started this so-called crunch? It is a year old, although Malta seems to have been relatively unscathed. On its anniversary, we remind ourselves how it all started with the development of new and sophisticated ways for the financial markets to make and lose money. As the old adage goes, taxpayers on both sides of the Atlantic were living beyond their means, borrowing money to buy houses or mortgaging excess equity to fund their spending habits. Does this sound familiar? Yes - summer bonanza was chosen as a slogan by a bank who regaled us with colour adverts in most tabloids exhorting us to borrow as if there is no tomorrow. Similarly the hard sell practices of other domestic banks offered 48 hour loans and free credit under the guise of plastic money where interest can scale up to 14 per cent. Regulators went soft on banks who are the milking cows generating a welcome tax stream. A nondescript notion is the risk averseness from bankers.
The worrying thing about the crunch is that there are still people who insist on clinging to the view that it will never hit us much. More will be revealed this winter as banks disclose their annual results. Pundits contend that our closeted economy is resilient, mainly because it relies strongly on domestic factors such as the strong multiplier effect of its property and construction sector. Some economists contend that the price of land will spiral up, acting as a natural shelter for the millions of undeclared lira currency during the euro changeover.
Sheltering blindly behind our smallness will not wash because the openness of our economy is directly influenced by outside factors beyond our shores. Back to the global dimension and one meets with a lot of theories postulated as to how the crunch started. One may recall how a year ago long queues of depositors snaked the high street branches of Northern Rock in the UK, claiming back their deposits. Everyone appreciates that the European Central Bank reacted positively to buttress the distress of banks by injecting billions into the money markets, but it was too little too late. Hence the recent troubles faced by HBOS, the UK's largest mortgage bank which was rescued by Lloyds TSB at a mere £12 billion after its shares plummeted. If the proposed deal goes ahead, there will be massive redundancies due to the significant overlap between staff.
Lehman Brothers sealed its fate on September 15 when it filed for Chapter 11 bankruptcy protection and Washington Mutual followed suit. UBS, the biggest casualty in Europe, admitted in early July that it faced further write-offs estimated by analysts at $7.5 billion. Of unbelievable proportions was the bale-out of $85 billion of AIG as a major American insurance company.
The economic crisis of 2007-2008 came as a complete surprise. Economists did not think such things could happen. On a local front, with evidence that the crisis is spreading from the financial markets into the economy at large, party apologists who claimed "it will be all over by Christmas" have fallen silent.
Are we veering towards the vortex? Only time will tell if we can ride the storm. But the aftermath of the credit crunch will not metamorphose into a nonentity as if waking up from a bad dream.
Mr Mangion in a partner in PKF, an audit and business advisory firm.
gmm@pkfmalta.com