Scottish Labourites at their conference in Manchester last week were practically punching the air at the collapse of HBoS. They think the crisis vindicates their unionism and reveals Alex Salmond as a tartan fantasists living in an economic Brigadoon. Mind you, some Scots might prefer Brigadoon to Labour land.
The collapse of HBoS and the coming economic recession represent the first serious test of Scotland’s minority nationalist government. How Alex Salmond conducts himself in the coming months could determined whether Scotland continues down the nationalist road or reverts to a default unionism. So, who has come out best in the battle of the banks, and what does it mean for the forthcoming Glenrothes by-election.?
Labour are confident Alex Salmond’s suggestion that an independent Scotland could have organised a £100bn liquidity bail out of Scotland’s second largest private company looks naive and unrealistic. And that the First Minister’s claim that the fall of HBoS was all down to “spivs and speculators” betrayed a misunderstanding of the actual stress facing Britain’s biggest mortgage lender as house prices collapse. A rejuvenated Wendy Alexander ridiculed the idea of an independent Scotland being able to handle bank rescues when it doesn’t know if it intends to have a Scottish central bank or not.
But what Labour are really banking on here - if you’ll excuse the pun - is not the inadequacy of nationalist economic policy, but fear. They believe that the international economic turbulence will drive Scots back to the union for fear of being left out in the cold. Since the Darien disaster, one historically-minded Labour figure suggested to me, the Scots have repeatedly been shown that they can’t stand on their own. It’s all very well harbouring dreams of self government when everyone is in work and house prices are making people feel rich, but in a recession, as in wartime, the security of the United Kingdom starts to look more attractive.
Scottish Labour hope to sit out this crisis calling for jobs to be defended in Scotland against SNP cuts in social provision. The local income tax will be held up as a Nat Tax job killer which might even derail the HBoS rescue. Labour think nationalism can now be marginalised in Scotland as a kind of Tartan Thatcherism led by an irresponsible demagogue who will help the Tories back into office.
Will this work? Fear is always a strong card to play in times of economic uncertainty. This is going to be a difficult period for the SNP, and they know it. But my impression is that Scotland has changed a great deal over the last couple of years and may not be ready to leap back into fearful dependency quite yet. Telling people they are naive for believing in themselves is a negative and dispiriting political message as Labour discovered in May 2007.
Labour glee at HBoS’s plight may also backfire. I don’t particularly care whether a bank happens to be Scottish or English. They are there to make money out of money and should be kept tightly regulated to save themselves from the consequences of their own folly. Increasingly that regulation is required at an international level, though this doesn’t mean that national identities become irrelevant. But there are a welter of questions raised by the manner of the HBoS takeover, and the cry of “we wuz robbed” isn’t coming from Alex Salmond but from the Edinburgh banking community.
We were all led to believe, falsely, that the merger with Lloyds had been a rushed through by Gordon Brown at the height of the crash two weeks ago. But in Friday’s Guardian the LLoyds chairman, Sir Victor Blank, boasted about how he had entered negotiations with the HBoS boss Andy Hornby two years ago. Blank says he later lobbied Gordon Brown on a plane returning from Palestine and secured the Prime Minister’s agreement for a suspension of the competition regulations which would have made a merger between those two giants unlawful.
What did Blank tell Gordon Brown about HBoS that made the PM so willing to waive the competition laws in this way? The presumption must be that Brown was persuaded that HBoS was heading for insolvency some time before its shares finally crashed. In which case why weren’t shares in HBoS suspended under stock exchange rules on merger talks? Why did the Financial Services Authority announce the very morning of HBoS’s demise that it was “well capitalised and solvent’. And why was the ban on short selling, and the extra Bank of England’s extended liquidity scheme delayed until after the deal had been struck?
You don’t have to be a nationalist conspiracy theorist to see all this as highly questionable. A raft of blue chip figures from Scottish banking like Sir Donald McKay of the Scottish Mortgage Trust and Gavin McCrone, 22 years a government adviser, have been calling for a rethink of this merger and are urging shareholders to reject it. This is not a done deal.
The consequences are likely to include significant job losses, higher mortgage rates, a reduction in competition among banks, serious damage to the financial sector in Scotland and a blow to Scotland’s self respect. Labour might see this as something to crow about, then I’m not so sure many Scots will agree. Labour have been over eager to give up on HBoS the better to claim it as confirmation that Scotland is “too wee “ to have its own banks. Granted, a small country with five million people would have difficulty raising the hundreds of billions necessary for bank bail outs. Finance has become a global industry, which is why we have a global catastrophe. But I’m not sure that the UK government is in all that great a position to do deal with this crisis. It is baulking at rescuing Bradford and Bingley, the next bank to fail.
A lot of small countries have had very successful banking systems, including Ireland, Iceland and Sweden. Yes - Ireland is in trouble with its housing crash and Iceland recently increased interest rates to 15% . But that doesn’t mean they are eager to become a part of the UK and Denmark again. Sweden had a banking collapse in 1992, after its property bubble burst, which led to bankruptcies and a run on the krona. The authorities acted swiftly to recapitalise the banks by seizing equity stakes, getting rid of the bad assets, and reorganising the remainder along more competitive lines. The Swedish system recovered quickly.
Far from Scotland being too small, the Lloyds-HBoS merger will actually be too big, with 30% of the UK mortgage market. It is highly likely that regulators will insist that it is broken up in future to restore competition. But in the meantime, most decision making functions will probably have gravitated to London and the HBoS will largely cease to have commercial identity.
This isn't over. It's likely to dominate the forthcoming by-election in Glenrothes - one of the most important by-elections in Scottish history. And in my book the SNP are still favourites.