There is too much debt in our banking system, and not enough growth to service it. While a degree of forbearance by banks is desirable – to consumers and companies – it is toxic in the long term. If this continues, we run the risk of ending up like Japan, where low growth and spiralling public debt will be the norm. Banks are now trapped in a stasis: interest rates are low enough to stop them from realising their bad debts, but aren’t high enough to build a healthy balance sheet. Correcting this is necessary, but will be painful. With further socialisation of losses economically and socially untenable, it is likely that bondholders may have to take a hit. But to return to normality, we need banks to lend, employers to invest and hire, and consumers to spend; ultimately, high debt is preventing this from happening. Economically speaking, one Japan in the world is quite enough.
Michael Ingram is a market analyst at BGC Brokers.
We need to stop worrying about banks. Instead, the focus needs to be on the zombie companies and consumers themselves. Banks are in business to lend money profitably; by now, they should have had plenty of time to get their books in order. On the other hand, zombie debt is delaying an economic recovery, inhibiting investment and causing companies to fail. Personal debt further depresses retail spending. Zombies need a reality check. They need sensible business plans, appropriate capital structures, and experienced teams. Not all zombies will survive, and zombie debt will not magically disappear. While banks’ portfolio sales can help deal with the problems, they will only do so if sold to buyers that are committed to maximising the operational potential of the businesses they purchase, not just recovering assets. Zombie deniers should wake up and smell the coffee.
Christine Elliott is chief executive of the Institute for Turnaround.