AlexSTANDARD & Poors (S&P) appear to have a very dim view of the economy and the forecast programme Finance Minister Dr. Omar Davies gave to the International Monetary Fund.
The thing that continues to strike me is the difference between S&P and that other venerable rival, Moody's Investor Service.
While Moody's is much more relaxed about the Government's stats, S&P continues to doubt almost everything that comes from official quarters. It will be interesting to see how this plays out but I can't help thinking some serious image building needs to be done with S&P.
Both Dr. Davies' response and S&P's vital statistics are on our website, so you can decide, which version of the real deal you prefer.
FINSAC sale
Last Friday Finance Minister Dr. Omar Davies paid me a compliment I will remember for several years to come. He said that I was the one person he could recall that had, from the very start, publicly warned that the wholesale bail-out of the financial sector was wrong.
For once I was lost for words but it got me thinking. Now that we can put some sort of figure on the cost of the Financial Sector Adjustment Company (FINSAC) bail-out, close to $130 billion, how bad a crisis have we actually had?
As the genesis of our own bail-out company was the collapse of the savings and loan operations in the US and the emergence of its Resolution Trust Corporation (RTC), I thought I'd have a look at what that led to.
A paper called: "Managing the Crisis: The FDIC and RTC Experience" gives some interesting insights to the scale of the US problem. On the face of it, it was huge.
"The U.S. banking and thrift industry in the early 1980s was facing a financial crisis of a magnitude not seen since the Great Depression years of 1929 through 1933, when depositors lost US$1.4 billion with the closing of 9,755 banks. The banking and thrift (quasi-building societies) crisis of the 1980s and early 1990s bore certain similarities to banking conditions leading up to the Great Depression", it says.
With a few notable exceptions the early 1980s bank and thrift failures were generally small institutions, many with roots in the agricultural or energy sectors. "Continued problems in the energy sector and a collapse in several major real estate markets greatly increased the number and cost of failures.
"As a result, in 1988, the Federal Savings and Loan Insurance Corporation (FSLIC) insurance fund was reported to be at minus US$75 billion, and the ratio of losses to all insured deposits rose to 1.48 per cent, a level that had only been exceeded in 1933.
"The insolvency of the FSLIC fund and the continued weakness in the thrift industry led to creation of the Resolution Trust Corporation in August 1989. Before that year ended, 318 failed thrifts had been taken over by the RTC.
But just how large was the problem? "Between 1980 and 1994, 1,617 federally insured banks with US$302.6 billion in assets were closed or received FDIC financial assistance. During this same time, 1,295 savings and loan institutions with US$621 billion in assets also were either closed by the FSLIC or the RTC, or received FSLIC financial assistance.
Failure
The failure of 2,912 federally insured depository institutions is in fact the equivalent to "one failure every other day over the 15-year period".
The fascinating study estimates that the combined total of US$924 billion in assets from the failed institutions is equivalent to US$168 million in failed bank or savings and loan assets that had to be liquidated or otherwise resolved each day for the 15-year period.
The timing of the bank and savings and loan failures between 1980 and 1994, however, was not evenly distributed. At the height of the crisis, which was the five-year period between 1988 and 1992, a bank or savings and loan failed on an average of once a day, bringing with it a daily influx of US$385 million in assets.
Our collapse here, can't compare can it? Perhaps not in cash terms but in the scale of the magnitude of the crises, the cost of ours has been far worse.
FDIC records show that in 1994 there were still some 2,152 savings operations and another 10,451 commercial banks. Ten years earlier, in 1984, there were 3,418 savings and 14,482 commercial banks.
And in asset terms the US$924 billion in failed assets over the 15-year period to 1995 was equal to just 20 per cent of the total assets of the commercial banks and savings institutions' US$5.5 trillion in assets.
In comparison Dr. Davies has estimated that 1.5 million depositors here had bank accounts with failed institutions, more than half the population. Not to mention the 569,000 pension policies with an insured value of $174 billion.
The bank account holders alone had some $69 billion (US$1.6b) in deposits in the institutions that failed between 1996 and the end of 1998. That is equivalent to about 80 per cent of all the deposits in the local commercial banks.
As to the $130 billion cost that is more than the $101 billion of deposit liabilities at commercial banks at the end of April. With a maximum of $30 billion of saleable assets, in my view the $100 billion real cost is enough to make even Bill Gates check his change.
I am sure it is the scale of the collapse that Dr. Davies would argue made the intervention a necessary evil. But that is exactly the reason why we should have attacked the problem in a different way.
One of the primary problems was the unwillingness to ask the multilaterals for cash. Now we are asking, have a programme and are looking at how to deal with the enormous cost.
With about $74 billion to remain on the Budget, any hope of Government-led growth is gone not just in the short term but the long term.
This is not entirely a bad thing, but it means that every extra penny of revenue we get for the next 10 years will go towards paying the interest on the bail-out.
For the full FDIC document see e.fg online.
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