Mon | Dec 5, 2016

Column: Borrower is servant to lender, usually

Published:Friday | April 17, 2015 | 12:00 AM

IN BANKING, we have an understanding that when a bank lends any borrower a very large amount of money, that bank has to make sure the borrower is treated with velvet gloves.

The banker must ensure that his borrower of a big pot of his bank's money gets regular medical check-ups, eats well, exercise regularly and is adequately and properly insured.

Once the large amount of loan funds are disbursed by the bank, the borrower controls the relationship - at least until a substantial amount of the loan is repaid.

Large amount has two sides. First, a large sum is relevant to the banker-lender when it is significant relative to the size of the institution's balance sheet, and especially to level of paid-up equity in the bank. Second, a large amount is of vital importance to the borrower, and lender, when it is of a dollar value which is near the edge of that borrower's financial capacity such that the least economic storm or a relatively unplanned minor shortfall in revenues jeopardises the borrower's ability to repay the lender.

Greece is clearly in the position of facing the kind of revenue drought that is making it extremely difficult to repay its lenders. The latter have been put on warning that a Greek repayment crisis is looming. According to NationalDebtClocks.Org, Greece's national debt is €355.85 billion and that figure represents more than 175 per cent of the gross domestic product (GDP) of Greece. The troika of lenders to Greece - the IMF, the European Commission and the European Central Bank - is learning that a fiscal-consolidation plan without a complementary economic growth-facilitation plan will work for only so long.

Some of us have carried that public message for more than two years about Jamaica's fiscal-consolidation efforts, which is divorced from any clear and widely accepted growth-facilitation plan. Greece's economy has contracted for more than five years. Jamaica's growth has had a start-and-stop record. One is being charitable to call what has happened 'growth' in light of the existing need for economic improvement.

IMPRUDENT LENDERS

When King Solomon of Israel, reputed to be the wisest man who ever lived and who reigned in the 10th century BC, said "the borrower is servant to the lender", he was referring to prudent lenders. We know this because it is recorded in another Bible passage in Proverbs that, "A good man shows favour and lends; he will guide his affairs with discretion."

What kind of exuberant optimism drove bankers and similar institutional lenders to keep lending to Greece and Jamaica when their debt-to-GDP ratios were climbing to the 175 per cent and 150 per cent vicinities, respectively? What measure of indiscretion propelled these banks to load unsuspecting, uninformed, often misinformed taxpayers and to so unfairly force poor people to shoulder, blindly, these unmanageable debt burdens?

Lenders to countries with very high albatross-like debt burdens of the size of the Greeces and Jamaicas of the world have a case to answer when impoverished and destitute taxpayers start saying as one: Enough is enough! We cannot manage the payment burden.

This is not a very polite or politically correct point to make, but, certainly, the imprudence of sitting down with politicians to load up taxpayers with debt that they cannot repay must now be a self-evident and major piece of indiscretion on the part of lenders.

So why must uninformed and uninvolved-in-the borrowing-decision taxpayers be the only ones who pay for the institutional slackness? How can institutions make amends in this time of extreme difficulties faced by taxpayers?

As a banker, I understand why the focus has been on the need to repay debts. As a taxpayer, the huge imbalance where only uninvolved taxpayers seem to carry all the responsibility and burden to repay bad loans needs to be addressed more openly. Equitable redress of the imbalance is needed.

BORROWERS' SERVITUDE?

Who led Jamaicans to borrowers' servitude? The answer is simple - politicians and bankers. Many are still in power today.

Politicians cosied up to bankers and offered them astronomical interest rates which suffocated and eventually killed economic growth. In return, bankers stuffed them and the country with unwise and unpayable loans. Indeed, the record shows in sad brilliance that those political leaders had no interest in fostering economic growth.

Many businesses were driven out of existence either by high interest rates or by direct government action, which ended in FINSAC. This experience and history is the reason many in power and business leadership today find it so difficult to understand why private investors are not flocking back to Jamaica as a favoured investment destination.

Our politicians used unaffordable borrowed money to finance consumption rather than investment, and allowed inefficiency and internationally recognised corruption to grow in government. That continuing inefficiency is another deterrent to investors.

Banks will have to deal with the query as to why they have such strict covenants to private borrowers, but kept on lending to a profligate government which was spending ever more than it was earning. Since a debt-to-GDP ratio of 60 per cent to 70 per cent has always been known to be the reasonable range for well-run countries, why were 80 per cent, 90 per cent and 100 per cent deteriorating debt-to-GDP ratios not used as stop signs to lenders? Why were perennial, anaemic growth rates not seen as the red flag it is?

Rebalancing, like a bad loan, is overdue.

Aubyn Hill is CEO of Corporate Strategies Ltd and chairman of the Opposition Leader's Economic Advisory Council.

Email: writerhill@gmail.com

Twitter: @hillaubyn

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