THE FRIDAY INTERVIEW/Alistair Darling, UK Chancellor of Exchequer:THE SUBJECT of stag party destinations is hardly the expected jumping-off point for a 35-minute interview with the UK chancellor of the exchequer, Alistair Darling.
In Darling’s office overlooking St James’s Park in the Treasury Building at Westminster last Monday, a little small talk gives some insight into the fallout from one of his most controversial decisions of the financial crisis.
He asks about my time in London. I mention how I had attended a friend’s stag party in London two days earlier, prompting Darling to ask whether Dublin was still a popular spot for such parties.
It is, I reply, but Reykjavik may become fashionable again given that Iceland has devalued, making drink cheaper.
“I can’t see myself being there any time soon,” he said, smiling.
The UK government’s use of anti-terror laws against Iceland to freeze British deposits in one of the country’s failed banks generated great anger in Reykjavik towards the UK.
This wasn’t the only diplomatic tension involving the UK during the crisis. Early on September 30th, 2008, the Irish Government’s unprecedented decision to guarantee the Irish banks drew an angry response from the UK. The move had the potential to draw deposits out of the equally precarious British banks in Ireland.
Darling said he first heard about the guarantee that morning from one of his officials “who had picked it up at about half-past six”. The chancellor was reported to be furious and wanted the guarantee dropped or at least the UK banks in Ireland covered. Now he is “totally relaxed about that”, he said.
“I fully understand why the Irish Government felt it had to take that decision. People forget even 18 months ago the world’s financial system was teetering on the brink and governments were doing things all over the place which you would never do in ordinary times.
“I spoke to Brian obviously the next morning. It was difficult for us and for other European countries, but we were able to deal with the situation fairly quickly.”
The guarantee could have created problems, he said. “In those febrile days, we were concerned, the French government was concerned and so on, but we managed to deal with it and it didn’t cause the problems that people worried about on that particular morning.”
Darling said he understood why the Government had no alternative but to announce the measure – the first blanket guarantee in the world – very early that morning without consulting its EU partners before its introduction.
The Irish shared the same fears as other governments, he said – the loss of bank deposits.
“The whole thing is so mobile and savings don’t respect borders anymore because you can do so much by internet,” he said.
“It confirms what I have said countless times – you have got to do these things together; you cannot pull up the drawbridge these days.”
Darling said the two governments thereafter agreed to consult one another in advance.
“The only repercussion it has had is that we agreed among ourselves that whilst we had to reserve the right to do things unilaterally if we needed to, it would be far better if we could possibly do so to discuss these things in advance.
“We might do things, or the Irish Government might do things, which can cause the odd ruffled feather. Frankly, it didn’t make a blind bit of difference between what is basically a good relationship between our governments.”
A joint UK treasury-Irish Department of Finance group meets regularly “to keep abreast of what we are doing”.
“It’s a close relationship but that is not to say there won’t be times when we won’t always see eye to eye,” he said.
The interaction is important, he says, given the Irish banks’ presence in the UK and because of Ulster Bank and Bank of Scotland (Ireland), the Irish subsidiaries of Royal Bank of Scotland (RBS) and Lloyds Banking Group, of which her majesty’s treasury owns 84 per cent and 43 per cent respectively.
The two UK banks have 17 per cent of the €530 billion total loans within the Irish banking system, while the Irish banks have almost €50 billion in property investment and development loans in the UK market.
One area where there has been much dialogue is on the different way the governments are dealing with the toxic bank assets. The UK asset protection scheme (APS) insures against losses on £282 billion (€320 billion) worth of loans on the books of RBS. The Irish plan, the National Asset Management Agency (Nama), will see the State take €80 billion in loans from the banks, including an estimated €16 billion covering UK property assets, with many in London.
The British market is rightly seen as offering much better prospects for Nama. Commercial property prices rose 8 per cent in the UK in the final quarter of last year, while Irish prices fell 4.9 per cent. About 23 per cent of office space in Dublin is vacant; the figure is 7 per cent in central London. Is Darling concerned at how the treatment of UK assets by the Irish State agency might affect the British market?
“I would have thought from the Irish Government’s point of view though that they would be quite keen to ensure that these assets are sold as and when they will want to get their money back too for the Irish taxpayer. I don’t see the argument for a hasty sale at the moment given that a lot of the stuff is commercial property.”
Have you sought reassurances from the Government about how Nama will treat the assets?
“What I have agreed is that we will keep in touch so we know roughly what they are doing. I am quite sure that it wouldn’t be in their interest to do something that would actually depress prices which would end up in them getting less money for the assets.”
Nama also has the potential to create an uneven playing field for UK banks in Ireland as the Government bonds issued to buy the toxic loans will strengthen the domestic banks.
As for the future of RBS and Lloyds in Ireland, Darling says this is a matter for the banks.
The treasury’s interest in the banks and the taxpayers’ £70 billion exposure to the two lenders, is managed by a separate entity, UK Financial Investments (UKFI), to prevent any government interference.
Both RBS and Lloyds have said they plan to remain in Ireland, despite the decision of Lloyds’ Irish division to shut down its retail 44-branch business, Halifax.
Will the banks now show a “home bias” by conserving the capital to benefit the taxpayers in the UK who have bailed them out?
“First, you ask about the future. It remains our intention to sell our shareholdings when the time is right but our objective is to get as much value for the taxpayer as possible and certainly get our money back so we are no hurry to sell. Our objective is – we don’t want to hold on to these banks long term. When the time is right, we will sell,” said Darling.
“We need to be equally clear – we are the shareholder. We set up the UKFI, which holds these shareholdings, and its job is to make sure that we get the maximum value for these shareholdings. As part of that, it talks to RBS and Lloyds about what commercial strategies they are pursuing. Essentially, it is a commercial decision for banks as to what they do and where they do it,” he said.
“I was very clear right from the start that I didn’t want to be running a bank from this office – you just can’t do it. RBS is – if not the – one of the biggest banks in the world and Lloyds is a pretty significant bank. The treasury couldn’t possibly run it. Whatever it does and where it does it, it has got to be a commercial decision taken in their boardrooms.”
The aggressive cheap-and-easy mortgage lending followed by the UK banks in Ireland – RBS and HBOS (now part of Lloyds) – helped to inflate the credit bubble with disastrous consequences. Darling said they offered the same products in Ireland as they did in Britain.
“There are probably lessons to be learned about how they were pricing credit across the piste. But equally the Irish banks were lending especially in commercial property in Ireland and other countries as well and that has been pretty badly hit. All banks in every part of the world were guilty of the same problem.”
This week’s decision by RBS chief executive Stephen Hester to decline a £1.6 million bonus was “entirely sensible”, said Darling, who is trying to reform the bonus culture in banking.
“One of the things we are trying to do is to try to bring some common sense to the banking industry. There have been some signs since the turn of the year that they are beginning to realise that they live on the same planet as the rest of us,” he said.
Another area requiring change is the UK’s spiralling deficit which stands at 12.5 per cent of gross domestic product, not far off that of Greece whose debt crisis is threatening the stability of the euro.
The UK government posted its worst January borrowing figures on record in a blow to Britain’s attempts to reassure other countries that it can address its deficit.
Darling says he is in no doubt that he has to reduce borrowing and plans to more than halve it in four years, cutting the structural deficit by almost two-thirds in that period. The Conservatives have rounded on Darling, saying he must set out a credible plan to bring the deficit under control, starting this year. Tory leader David Cameron has vowed to cut spending after this spring’s election.
Last week, more than 60 leading economists, including two Nobel laureates, supported Darling’s decision to delay spending cuts until 2011 in a letter to the Financial Times. It was a riposte to a call by 20 economists in the Sunday Times the previous weekend supporting the Tories’ push for fiscal tightening to begin this year.
“Until you have got recovery established – in the absence of private sector investment coming back – if you start to reduce your spending too soon, then the risk is you derail the recovery and tip us back into recession,” he said. “The Tories take a different view to that – at least I think that is their view at the moment; last week it was something different. I think my judgment on this is right and it is a judgment as you can see at least 60-odd outsiders share.”
Darling said there “can’t be anyone in any doubt” that public spending will be much tighter but that the issue is “when and how fast”. The Conservatives’ view is inconsistent and based on incorrect judgment, he said.
“I make no bones about it. There are going to be some difficult decisions taken – public spending is going to be tighter. That is on the back of public spending having more or less doubled over the last 10 years. There will be things that will be cut, things that will be postponed. It is said that in the public sector wage increases will be held to a lot lower than they have been in the past,” he said.
“If we don’t back down on our borrowing, then you will simply end up spending money on servicing debt instead of spending on things that people would probably like to have monies spent on.”
Ireland took pretty radical action in its budget last December, said Darling, and the international debt markets have recognised that, distinguishing Ireland from Greece.
“What Greece needs to do is to show people that it is actually committed to delivering everything it has promised,” he said.
He doesn’t believe greater political union is needed to fix the euro area’s fiscal problems; there just needs to be greater co-operation.
“The euro group will stand behind Greece, which is good. I have said that I thought whatever happens in Greece was the responsibility for all of us whether we are inside the euro or not. The first responsibility is for the euro group. We have set up international institutions precisely to deal with problems like that,” he said.
Moving into election mode, Labour has narrowed the Tories’ lead in the polls, despite the potentially damaging claims this week about the prime minister’s personal conduct towards Downing Street staff.
Darling does not believe that the public will punish Labour for the near-collapse of the financial system during their watch or indeed that they will thank him for his efforts.
“Well, if you are in politics, you shouldn’t rely on gratitude. People will, of course, judge you on what you have done. There are just as many things that we have done that we will campaign on,” he said.
“The main thing that decides it for people is what they think will happen in the future. They will chose a government that will shape this country for the next 10 or 20 years.
“They will chose a government that could well decide what chances there are for their children and grandchildren getting jobs, the sort of country we live in. Elections are always about the future.”
He cites the example of Churchill at the end of the second World War when the people “thanked him” for his leadership during the war years by voting in a different government “because they were looking ahead”.
“This is our election year – in the next few weeks, it will be about the future. As Gordon was saying in his speech on Saturday, we are making a central plank of what we are about is what the country could be like and should be like over the next few years, not backward-looking,” he said.
Darling described the Conservatives’ plan for a “people’s bank bonus” – announced last Sunday – as “a gimmick”. His opposite number on the Tory benches, George Osborne, said the Conservatives would, if elected, offer the public the chance to buy into the part-nationalised banks at a discounted price given that they had bailed out the banks.
“This obviously didn’t last the day,” said Darling. “It got a bad reaction so he said that it is something for the medium term.
“I don’t understand how you can say that you have got to get debt down and then say: ‘By the way, we are not going to apply the sale proceeds to doing that.’ When we sell the banks, that money is there to reduce the debt. That was, at least until Saturday night, the Tories’ policy.”
Darling said the picture painted by Observer journalist Andrew Rawnsley in his book of Gordon Brown – as revealed in last Sunday’s newspapers – as a bully didn’t ring true for him. “Everybody, whether you are in government or running a football team or whatever, the person in charge does get impatient. They do want things done. If they were totally laid-back, maybe that would be worse,” said Darling. “The picture painted in the papers . . . was a bit bleak. I think most of us are grown up enough to get on with it. I have known Gordon longer than most and we are still working together so that tells you something.”
Darling said this week that “the forces of hell were unleased” against him by Downing Street after he warned in August 2008 that the world was facing “arguably the worst” recession in 60 years, in sharp contrast with Brown’s view that it would last six months. Brown responded, saying he had no part in negative briefings about the chancellor.
“All finance ministers and all prime ministers I suspect the world over will have robust arguments and, if they didn’t, you should be worried about it,” said Darling.
“It is the instinct of all chancellors to avoid spending money if you can and the instinct of all prime ministers to want to be able to do things. It is a perfectly healthy tension. There is nothing surprising about it. At the end of the day, what matters is that both of you – prime minister and finance minister – are pointing in the same direction. We are.”
The interview draws to a close and Darling leaves for a 3pm meeting with Brown around the corner on Downing Street. Two floors below in the reception of the Treasury Building, the claims about Brown’s alleged bullying play out on the television screens.
ON THE RECORD
Name: Alistair Darling
Position: UK Chancellor of the Exchequer; MP for Edinburgh South West
Age: 56
Family: Married to Maggie Vaughan, he has two children
Political career: He was first elected an MP in 1987. After the Tony Blair-led Labour Party took power in 1997, Darling was appointed Chief Secretary to the Treasury until 1998. He held various Secretary of State roles, including the Transport portfolio, before being appointed Chancellor on June 28th, 2007.
Darling took over at the Treasury two months before the credit crunch hit and oversaw the UK response to the financial crisis which peaked in the autumn of 2008.
