UK financial regulators have rehearsed how a pandemic like the swine flu, now spreading from Mexico, will affect Britain. In the most detailed disaster planning exercise held anywhere in the world, more than 70 City firms, including HSBC and Norwich Union, secretly tested how the crisis would unfold over five months.
The exercise, which began in November 2006, was masterminded by the Bank of England, the Financial Services Authority and the Treasury – the three authorities that monitor financial stability. It was condensed into six weeks, with firms sent updates as the crisis developed.
Such was the detail that a hypothetical Robbie Williams concert in Stoke-on-Trent was cancelled for fear of fans spreading the virus, while London Underground suspended the Piccadilly and District lines indefinitely.
It is ironic that the three authorities worked on a financial disaster exercise that extended into 2007 just as markets were about to suffer a real crisis. While regulators worried about a hypothetical housing market collapse, stock-market fall, rising unemployment and banking liquidity crisis, evidence was emerging of the credit crunch that caused exactly that scenario.
Nevertheless, the authorities are adamant that this was not just a complex board game. It led to the official policy strategies now being used to deal with the Mexican flu and changes by companies and bodies such as the Association of British Insurers.
Sir John Gieve, a deputy governor of the Bank of England at the time, said: "The scenario was designed to test the impact on the financial sector. I think we demonstrated that it would put a severe strain on all the daily activities which we take for granted, from cash distribution to securities settlement."
The exercise started with bird flu from Thailand but the consequences could be the same as those for swine flu from Mexico. Almost immediately, absenteeism by UK workers soared to 15 per cent as people stayed at home rather than mix with potential carriers. City absenteeism increased as parents stayed away to care for children sent home from boarding schools, but within weeks, half Britain's workers refused to go to work and all schools closed. People working from home caused a boom in broadband demand.
The Chief Secretary to the Treasury appeared on the Today programme to say government spending budgets were adequate, but, before long, hospitals ran out of masks and hand gel, and the Department of Health warned it would take four to six months to produce a vaccine. Hospitals cancelled all except urgent operations.
But as the crisis deepened, Britain's economic structure collapsed. There were queues at garages as motorists filled cars and petrol cans. Panic buying at supermarkets was followed by stores stocking only basic food and clothing, while smaller shops and restaurants closed, creating ghost towns. Food piled up on docksides but could not be distributed. Sickness and absenteeism led to bank branches closing and empty cash machines after the public hoarded banknotes. Supermarkets' cashback replaced banks until they ended that service.
As the death toll reached 50,000, the prime minister called on people to show their famed bulldog spirit but the country was grinding to a halt. The three authorities warned: "The UK economy could face financial meltdown unless the situation improves soon." Rather than improve, businesses closed due to lack of staff, suppliers or customers.
Besides the Tube closures, London's commuter railways were suspended, and intercity trains, all packed, were reduced to one an hour, stopping only at major towns. Roads became jammed – but London refused to lift its congestion charge. Airlines cancelled hundreds of flights as demand plummeted.
Reduced manning caused power cuts and residential mail was delivered only every two or three days. Parliament was suspended and three MPs died. With so many people not working, credit card and mortgage defaults rose to record levels and the housing market fell. Opposition MPs called for tax breaks. The FA Cup was abandoned and West End shows closed because of poor audiences. More seriously, care in the community broke down and there were problems burying or cremating so many bodies.
Credit-card companies cancelled 0 per cent deals to restore profits, and insurance firms, criticised for slow payments and jammed helplines, looked for ways to conserve cash. The 2007 Budget was postponed until 18 April – though the real crisis delayed this year's until 22 April.
Financial markets remained open though the Stock Exchange delayed opening until 10.30am and there were few flotations. The FSA relaxed its rules, including reporting requirements, and company year-ends were extended.
Doubts were raised about the integrity of markets, however, with heavy trading in pharmaceutical stocks ahead of news on vaccine production. The FSA admitted: "The City is rife with insider-dealing rumours as unscrupulous employees of financial firms take advantage of diminished controls arising from high staff absenteeism."
But the pandemic would cause crime to rise everywhere. Vans carrying cash were robbed in Leeds and Manchester and by youths in Essex – stories carried by the exercise's newspapers, The Spun and the Daily Whail. Thieves who broke into an Eastbourne bank found it had no cash and they had to be released from the vault by police.
Meanwhile, rumours circulated of companies hoarding vaccine for their own executives and the discovery of fake vaccine imported from China.
By the time the exercise ended, the flu had affected 500 million people worldwide and killed nine million. Problems continued: insolvencies soared and firms' credit ratings were downgraded in the following months.
Firms suffered skills shortages and workers' moral was low as employers considered penalising people who refused to work. Criminal gangs were rumoured to have set up hundreds of bogus bank and credit-card accounts while identity fraudsters exploited relaxed checks by understaffed banks.
But participants claim the exercise prepared them for a crisis like today's pandemic. Phil Hine, the head of business continuity at Prudential, one of 10 major insurers that took part, says: "Lessons learnt included the need to identify the impact of suspension of core and non-core services and to identify opportunities for transferring operations to unaffected areas."
The British Bankers' Association has developed a policy for co-ordinating branch closures and, according to Andrew Wallace, a consultant to the Apacs bank payments system: "The exercise highlighted the extent to which the circulation of cash relies on adequate availability of skilled staff such as drivers and note-sorting machine operators. The severe levels of absence seen at the peak raised a number of challenges."
Peter Matheson, an economic adviser to the Treasury, warns: "A flu pandemic would lead to a temporary fall in demand as individuals tried to minimise the risks associated with face-to-face contact, and possibly some increased precautionary saving if disproportionate panic caused business and consumer confidence to take a knock.
"There could also be adverse economic consequences if a pandemic encouraged the Government to impose restrictions on international trade to stem the spread of infection."
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