For the first time in nearly two years, I feel a bit more confident about the economic outlook. My bearish phase started in July 2007, when I wrote here of a storm blowing our way. But after listening to two business discussions recently, I suddenly thought: if these conversations are representative of a wider phenomenon, then we have reached an interesting stage.
Not a trace of optimism remained. In both cases, the people round the table had resolutely confronted the end of their dreams and their own worst fears. They were acting accordingly. One was a group contemplating the possibility that they would lose their equity in an investment they had made. The participants represented financial institutions from different countries that had formed a partnership specifically to undertake a venture that was bigger than any of them could prudently undertake on their own. Many investments are made in this way.
Also routine was the structure of the partnership, and here comes the problem. The partnership had borrowed a lot of money to complete the deal. Before the financial tempest had begun to whirl, these sensible, respectable people – each professionally advised – had thought they were doing the right thing. Now they find that income is below what they planned. Before long, they would have a problem paying the interest due on their borrowings. And were they now to sell their investment, what they would be likely to receive might not be enough pay off the debts. I don't know what the final result will be, but there is no question the problem will be sorted, one way or another, during 2009.
In the second example, the executives of a manufacturing business were examining for the umpteenth time the consequences of an unprecedented collapse in orders. To make sure they kept faith with their banks, they would have to sell attractive businesses they had bought in happier times. Only their core activities could be retained. Again, what needs to be done will be done, and it will be done this year.
Had you met the same people in September 2007 when the run on Northern Rock took place, they would have been unfazed. "What have problems with mortgages granted to borrowers with poor credits ratings got to do with us?" they would have asked. Even a few months later, when banks had become so frightened about bad debts coming their way that they stopped lending to each other, never mind to new corporate clients, they would not have been downcast. "We have our agreements with our banks," they would have said, "We shall be all right. True, trading conditions have deteriorated, but this is just a mild recession. Governments will do what is necessary."
By now, what I have previously called the doomsday machine was doing its work, forcing cohort after cohort of over-stretched borrowers to provide fresh security or let their bankers take their businesses and sell them for what they could get. As a result, asset prices were steadily declining. Then came the wake-up call that everybody heard. On 15 September 2008, the leading US American investment bank, Lehman Brothers, asked for bankruptcy protection. The biggest bank failure in US history sent shockwaves through the global credit system. No country, no institution was untouched. Consumer confidence was shattered. An unstoppable process had been engaged that would discover and bring to the table ever over-borrowed consumer and every over-borrowed business.
That is what is going on. What I had heard at first-hand made me open my eyes. I look through the financial pages of the newspapers. There is no hiding place. I see that almost every other story describes financial restructuring. The two examples I have described are being repeated many times over. In the next four weeks, for instance, shareholders in British property companies will be asked to put up more than £3bn in fresh capital to rebuild their balance sheets.
Here, then, is why I've suddenly become a little optimistic. One of the necessary conditions for ending the deep recession in the global economy is that creditors and debtors finally come to terms with each other. This essential workout is now taking place. It will, I believe, be completed in 2009. The damage has been immense; the worst, as we are often told, since the 1930s. It has been like a great storm passing overhead from which it will take years to recover. But I dare to hope that it is finally departing from our shores.Reuse content