Britain's Banks On the Dole
LONDON, England--The major British banks ended 1987 with vastly increased loan-loss provisions and the prospect of a substantial cushion--a billion pounds or some $1.75 billion at current rates--against the costs of their adventures into Third World lending, courtesy of the British taxpayer.
Following Citicorp's decision in May to boost loan loss provisions - or reserves - against its Third World loans, the British banks quickly followed suit. NatWest put aside an additional £496 million ($868 million), Midland £916 million ($1.6 billion), Barclays £570 million ($997 million) and Lloyds a huge £1.06 billion ($1.8 billion). Because this money can offset profits for tax purposes, the banks are expecting to receive up to a billion pounds in tax relief from the British Government--the equivalent to every man, woman and child in the United Kingdom giving the banks £18 ($31.50) each.
British company tax law, however, gives the final say on the billion pounds to the Inland Revenue. It is they who have to assess each specific provision and decide whether the banks are entitled to tax relief. While the Inland Revenue is officially conducting negotiations with each of the banks independently of the British government, the conservative government of Prime Minister Margaret Thatcher has made it clear that it wants the Inland Revenue to be as generous as possible. While Chancellor Nigel Lawson denies any direct interference and claimed in July to be opposed to "bailing out the banks" after their own commercial misjudgments, he said it is "wholly proper" that the banks' increased provisions will "mean a significant cost to the taxpayer."
Critics argue that this effectively subsidizes highly profitable institutions that, throughout the debt crisis, have pushed the burden of repayment onto the poor of debtor nations. War On Want Campaigns National Organizer, John Denham, accused the Thatcher government of "joining in the banks' attempts to have the burden of repayment pushed onto taxpayers."
Instead of simply granting tax relief, Denham says, the British government should use the billion pounds to buy debt from the banks, at a 50 percent discount, which reflects its value on the secondary market. This way the government would get £2 billion ($3.5 billion) of debt, which could then either be cancelled, generously rescheduled or used in debt-development swaps. The banks could dump their worst debt in exchange for a billion pounds of "real" money and then take a paper loss of a billion pounds on their asset sheets. Although this would not solve the crisis, "it would at last start to make the banks pay for their past 'mistakes' themselves," says Denham. "It would also mean that taxpayers would actually get something for their money, and [it would] allow the government to provide immediate debt relief in areas where it is desperately needed."
To date, however, the Thatcher government, although stressing the banks' legal entitlement to tax relief, has insisted that it will not get involved in the commercial affairs of the banks. But forcing taxpayers to pay out a billion pounds in tax relief is an involvement that has not been popular with the British public. Thousands of protest letters have been received by both the Chancellor and individual MPs, and members of the Shadow Cabinet have taken up the issue. The banks themselves have also been forced to respond publicly to the critics. Midland, for example, produced a 16-page document outlining its role in the debt crisis. The bank claimed that per capita incomes in Latin America have risen by 32 percent since 1980. Per capita incomes have actually fallen in all but four Latin American countries since 1980. Real incomes among industrial workers have fallen by around 50 percent.
Until this year, the big four British banks have done very well out of the debt crisis. In 1985, repayments from Latin America were equivalent to around 80 percent of Midland's pre-tax profits, 40 percent of Lloyds' and 20 percent of both NatWest's and Barclays'. It was also another year of record profits, reaching over £3 billion ($5.2 billion at current rates of exchange) between the four. Despite efforts in the last four years to build up their business elsewhere, repayments from Latin America remain essential to all four main High Street banks in the United Kingdom, especially in terms of cash flow.
Before Mexico's three month suspension of repayments in 1982, all four main British banks had been active lenders in the Third World. British banks are now the third largest source of commercial loans to developing countries, behind only their American and Japanese competitors. For years it was an easy source of profit and there was little concern as to how the loan money was spent. As they come under increasing fire for their role in the debt crisis, however, the banks are claiming that most of the lending actually was used constructively, helping to develop the industry and infrastructure of developing nations.
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