3rd April 2011

7IM: Ban the Usurers!

For reasons best not discussed here, I have seen far too many television adverts over the past couple of months. Most are banal wallpaper that make no impression, but I suspect I am not the typical target market for most advertisers on daytime television (which by the way has to be the best incentive to get back to work). There are some however, which have riled me to levels varying from annoyance to outright anger.

At a time of economic austerity and consumer nervousness, adverts proffering instant cash are of course going to attract attention, and especially from those most financially vulnerable. From the annoying ‘cash for your mobile phones’ through to ‘cash for your gold’, these seem no more than licences for untrustworthy types to set about stealing phones and anything else that glitters and effectively ‘fencing’ them through these virtually unknown outfits.  

Perhaps it would be worthy of some of the channels to also promote the recycling of phones through more worthy causes and charities and even to have their use extended in third world nations. The same was often the case with old spectacle frames. One of the gold adverts especially irks as they promote that they will take ‘even broken gold jewellery’. I am not sure quite how you can break gold as even in little pieces it is still – gold?

However, from the annoying area, let me move on to outright anger.

‘Pay Day Loans’ are being promoted by smiling people happily holding a small wad of notes, having seemingly found a way of resolving their particular financial issue. These loans are designed as short term cash facilities to cover you until quite literally your next pay day, but that bland and seemingly comforting offer only covers a far more dangerous problem. The rates being charged for such loans are astonishing with levels of up to 4120% per annum being quoted. This by any measure is usury. Whilst they may be intended for very short periods of time, just how many people are going to find themselves further financially distraught by late and delayed repayment at eye watering interest rates.

Usury was illegal in the UK until the 19^th century and in many religions the act of paying interest is against the tenets of the faith. In medieval England money lending was illegal under Christian doctrine, and was it thus such unsavoury acts were pushed to the Jewish community - who of course were banned from any other of the usual trades and professions because of their faith. English Kings would have to borrow money from the Italian bankers as none were to be found closer to home capable of such financing - and especially after the Jews were expelled by Edward I in 1290.

Now such loans are being offered to many of the weakest and more vulnerable in our society and those who often have had no financial education, let alone understanding the effect of interest rates or the Byzantine methodology behind working out an APR.

I do not accept that these people are responding to a much needed demand from society; they are nothing if not dressed up loan sharks. We all know how much pain has been caused by the easy availability of credit and especially with the instant access to store and credit cards. We may rile at these card operators with their rates of double digit APRs, but these are nothing compared to the usurers. To casually enable vulnerable people to run up debt with huge interest rates of thousands of percent is appalling and a disgrace to our society.

Stop Wallpapering

Papering over cracks, as we all know, never solves a problem but rather just delays the action and frequently means that the end result is far worse. So it seems with the continuing crisis around the debts of the weaker sovereign nations within the Eurozone. The recent agreement for the establishment of another set of Euro initials, the European Stability Mechanism (ESM) as a supranational mechanism, may be one of the key ways of addressing the problem. By 2017 it could have a capital base of €80bn with a lending ceiling of up to €500bn, and surely enough to create enough confidence and avoid any further crisis?

Maybe, but that is still some way away and does not resolve the current issues of the weakest such as Ireland, Greece and Portugal, that at current rates they are barely capable of sustaining the interest on their debts let alone afford any meaningful repayment schedule. They have been more graphically titled ‘zombie nations’ staggering around, half dead, unable to manage their future.

Despite all the hyperbole the Euro itself has not been a failure, especially when you look at the amount of trade in the currency, the percentage of global reserves in Euros and the amount saved of removing the cost of operating multiple European (often minor, petty) currencies serving little purpose other than to cover the pride of princes and politicians. So it has not necessarily been the Euro that has caused the problems, but rather the politicians themselves allowing the disciplines to be ignored and certain of their economies to run out of control.

Time then for some more certain if painful actions to be considered.

In the early 1980’s the world went through another banking crisis that brought down some and damaged (sometimes terminally) others. The Latin American debt crisis was brought about by irresponsible lending to incompetent politicians. Some of this was by dumb banking, other parts were at the behest of politicians (including some of our own). The result was disastrous and seemingly intractable.

Reality was faced in the end and the debt renegotiation had to take place if only to allow those indebted nations to get their economies starting to move again. Part of the answer

came with the innovation 1989 of the Brady Bonds – named after the US Treasury Secretary Nicholas Brady.

The introduction of Brady Bonds was to allow the commercial banks exchange their claims on developing countries into tradable instruments, allowing them to get the debt off their balance sheets. This reduced the concentration risk to these banks.

Countries that participated in the initial round of Brady Bond issuance were Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Ecuador, Mexico, Morocco, Nigeria, Philippines, Poland, Uruguay and Venezuela.

There were two main types of Brady Bonds:

• Par bonds were issued to the same value as the original loan, but the coupon on the bonds was below market rate; principal and interest payments were usually guaranteed.
• Discount bonds were issued at a discount to the original value of the loan, but the coupon was at market rate, principal and interest payments were usually guaranteed.

Brady Bond negotiations generally involved some form of haircut, meaning that the value of the bonds resulting from the restructurings was less than the face value of the claims before the restructurings. For Par Bonds, creditors kept the same face value, but received a below-market interest rate, while for Discount bonds, investors received a market interest rate on a lower bond face value.

Now for the Eurozone such talk of default, haircuts and rescheduling is seemingly heresy and will only result in the financial attentions of a latter day Torquemada. But for the likes of Ireland and the others this surely will give those economies a chance to breathe again above the water line rather than to continue to sink down into the Grimpen Mire of debt. 

Of course this will make for further pressure on those banks holding such debt (including French, German and UK banks), and especially on weakened balance sheets. The result must therefore be a more co-ordinated approach to manage down those that will not survive, and manage through those that will survive and be rejuvenated.

And finally..........an American website reports that in a recent poll that of some 200 participating Anglican priests only 60 could name all Ten Commandments. However, to balance out this theological uncertainty, half did say that they believed in space aliens.

Presumably these same religious folk must only regard communion as an opportunity for a between-meal snack?

Have a good week.

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