Peter Jones: Banking crisis may have grim parallel with Darien disaster

Published on Tuesday 3 November 2009 20:38

AFTER all the humiliation that has been heaped on Scottish banks, could it have got any worse?

Yesterday, it did, with the once mighty, world-striding RBS, now hobbled and crippled further by huge debts to the government, ordered to dismember itself. And, inside Lloyds, the once equally proud HBOS is giving its owner near-terminal indigestion. Is this the greatest financial disaster Scotland has suffered since the catastrophe of Darien?

At first sight, there are an awful lot of ominous parallels. The attempt by the then independent Scotland in 1696 to establish a colony on the Central American isthmus in modern-day Panama was carried out in a time of huge optimism. The aim was simply to join the ranks of European imperial nations and grow rich from the profits of colonies.

Of course, it is well known that it was an awful disaster. The chosen site was disease-ridden, the natives became hostile, the English monarchy and establishment tried their best to stop and undermine the venture, and the Spanish empire put it to the sword. Far worse than the human tragedy was the economic disaster. Financing the expeditions consumed almost all the available capital Scotland had, causing acute distress to domestic commerce back home.

The popular version of this dismal history says it was English perfidy that was the main culprit. Actually, viewed dispassionately, why on earth should England, fully engaged on its own imperial acquisitions, have let its truculent neighbour engage on a competitive venture that, ultimately, given Scotland's history of allying with continental European powers, might have threatened the security of England?

Nevertheless, fast-forward 300 years and much the same sort of scenario has been played out around the Scottish banks. Out of the optimism of the last decade and a half was born a belief that the banks, RBS especially, could become global financial giants.

Indeed, measured by assets, RBS was the world's biggest bank. In earnings power, it was the world's fifth biggest bank, and HBOS was the 12th biggest. No small feat for a small nation on the periphery of Europe.

Then came the collapse. Here, too, there is a popular version which says political manoeuvrings played a part in the downfall of HBOS, that Gordon Brown engineered its takeover by Lloyds. Actually, Eric Daniels, the chief executive of Lloyds, is on record as saying that he and Andy Hornby looked at a merger long before the crisis blew up, concluded it would be a good idea but thought it would be too hard to get past the regulators.

When takeover became the only option, Lloyds was already there. Mr Brown eagerly embraced the Lloyds plan because it looked like the cheapest solution. It would require less taxpayer funds and allow shareholders to retain more than did the alternative of a stand-alone HBOS. That, there is no doubt now, would have been outright and expensive nationalisation, leaving shareholders with nothing and taxpayers with an even more massive bill.

The more acute, but ignored, common factor between the two events is financial incompetence. Douglas Watt, in his recent book The Price of Scotland, makes it abundantly clear that so woeful was the management of finances by the Darien promoters, it is doubtful whether it would have succeeded even without the other problems. Similarly, management incompetence is now also the main reason for the banks' downfall.

However, in financial and economic terms, although this is undoubtedly the biggest blow to hit Scotland since Darien, it is still pretty small in comparison. Yes, tens of the thousands of shareholders have lost money, but the country has not been stripped of capital in the way it was three centuries ago. Other companies are having to work hard to stay alive in the banking- induced recession, but they are not falling like ninepins. Yes, a lot of people have lost their jobs, and more will, but the economy is still operating at near record employment levels.

But Darien had other effects. The best known is that, such was the impoverishment of the Scottish establishment, their salvation was to abandon independence and seek union with England. This had the handy effect of getting a lot of capital back into the country, via the compensation – or bribe – paid to those who had sunk money into Darien, along with opening the way for Scottish trade with England and its growing empire.

It seems pretty clear that a similar process is now working, that the idea of independence is losing a lot of popularity. The idea the Scottish nation could follow the role model of RBS and HBOS and stand on its own feet as a European nation like all the others, a political goal that gained a remarkable amount of popular support in the years of optimism, is now severely wounded. The first manifestation of that trend came in the Glenrothes by-election, when SNP hubris was demolished by a surprisingly large Labour majority. We will know more from the result of the Glasgow North East by-election next week, but opinion polls suggest the SNP is fast losing the momentum it established in the first two years after its Holyrood victory.

The ups and downs of the SNP in response to the banking failure are probably less important than what it does to the confidence of the people as a whole. Here, there is an unexplored parallel with Darien. To me, the histories of the Darien disaster make a mistake in suggesting it all ended with the 1707 Union. It was a huge event, but memories of Darien cannot have died with its occurrence.

The oddity of the Union, as Nationalist historians are fond of pointing out, is that it took a good 50 years for the "boasted advantages" to turn up. That is probably due to Darien having dealt such a blow to national confidence that few would have been prepared to take even a modest risk in tackling the opportunities offered by the Union.

And if that is the effect of the banks' disaster, Scotland is in for some dismally dull business in the years ahead.