Ross Clark

So, things really are different this time. The US Federal Reserve has decided to raise its Federal Funds Rate (its main interest rate) by a quarter-point, to 4.75 per cent – 5 per cent, in spite of a banking crisis that has seen two large banks fail in the past fortnight. For the past two decades, this sort of thing didn’t happen. Under the unwritten laws of the ‘Greenspan put’, the Fed could be relied upon to provide some form of stimulus at the first sign of financial trouble. It began with the collapse of the hedge fund Long Term Capital Management in 1998, when the Fed put together a $3.6 billion bailout funded by a consortium of banks, and it carried on long after former Fed chair Alan Greenspan himself had departed the scene.

Another Sunday, another banking takeover swiftly arranged before markets open on Monday morning. This time Credit Suisse has agreed to be bought by fellow Swiss bank UBS for 0.5 Swiss Francs a share – less than a third of its closing price on Friday and less than a tenth of what the bank was worth a year ago. A banking collapse which was beginning to look inevitable in spite of a 50 billion Swiss Franc bailout by the Swiss central bank on Friday has been averted, market turmoil has been avoided, or postponed, jobs have been saved (although many are expected to be lost in London as Credit Suisse’s investment banking operations are shrunk). Shareholders have not been left empty-handed. But at what cost?

First the good news. Unlike the IMF, which predicted in January that the UK economy would have a worse 2023 than even Russia, the OECD’s latest forecast has Britain outperforming Russia. Now the bad news: the OECD still predicts the UK to perform worse than any European country other than Russia.  Forecasts aside, the actual data for the UK economy is a slightly improving story Its latest bulletin, published this morning, sees Britain shrinking by 0.2 per cent in 2023, compared with growth of 0.3 per cent for Germany, 0.7 per cent for France and 0.8 per cent for the Euro area as a whole. The Russian economy, by the way, is expected to shrink by 2.5 per cent.  Why the negative outlook for the UK?

When your largest single shareholder decides that enough is enough, that it is no longer prepared to throw good money after bad to prop up your finances, you really do have a problem. And that is exactly what has happened to Credit Suisse this morning. The Saudi National Bank, which owns a 10 per cent share in the Swiss bank, announced that it is no longer prepared to put up any more capital to prop the bank up. Credit Suisse shares promptly fell by 20 per cent before trading was suspended. Yes, Saudi National Bank has trashed the value of its own holding – but evidently reckoned that that is a better course of action than continuing to throw money at the problem. For a bank, that is the smell of death.

On the face of it, the takeover of the UK arm of Silicon Valley Bank by HSBC is a triumph for the government. Today, we could have been seeing the collapse of dozens of UK tech start-ups. We could have seen staff going unpaid and shares in tech companies plunging to greater depths than they have yet explored during the correction of the past year.  Instead, things are fairly calm in the tech sector. Well before markets opened this morning, the government had brokered a deal which will allow the Silicon Valley Bank’s facilities to continue without a hitch, thanks to a wholesale takeover by one of the largest banking institutions in the world, with all the security that would seem to offer. Even better, not a penny of public money seems to be involved.

Tech start-ups tend to involve taking big risks on ideas which are untested both in terms of technology and the market place. Yet it isn’t blind faith in new ideas that is threatening to bring down scores of British tech start-ups over the next few days: it is boring old bonds. Many start-ups have relied for financing on Silicon Valley Bank UK, an offshoot of its larger US parent. Over the last few years, the institution has in turn relied on taking bets on government bonds whose value had been inflated by near-zero interest rates. As interest rates have risen, those bets have gone sour. On Friday, the Bank of England announced that the bank is to enter insolvency.

There have been celebrations this morning about a government surplus of £5.4 billion last month, and people are even talking about a ‘windfall’ for Chancellor Jeremy Hunt in next month’s Budget. But all this shows is how conditioned we have become to appalling economic news – and that we will grab at anything which seems to indicate a shaft of light. Nevertheless, any talk of a government ‘surplus’ masks the very real problem the government still has While any surplus is to be welcomed – and last month’s borrowing figures are far better than the Office for Budget Responsibility predicted – we would be in serious trouble if the government had not succeeded in running a surplus last month.