Change is inevitable on road to recovery

ON 9 August 2007, the European Central Bank shocked the world by posting a notice saying it would provide as much financial support as banks wanted.

Jaws dropped in dealing rooms across the globe. Nothing ever happens in August in Europe, when the ruling class is on les grandes vacances. The bulletin came out of nowhere. Few, outside a tiny banking elite, were aware of the crisis developing in that dullest of instruments, asset-backed commercial paper.

Two hours later, the ECB revealed that 49 banks had demanded an eye-watering 94 billion to keep them afloat. With that the credit crunch began.

The price of gold took off, along with the cost of borrowing, while shares and bonds tanked. With Eurocrats locked in their country retreats, no-one, including UK regulators, could establish what was happening. Panic set in.

And the rest is history. The events of 9 August will be remembered, along with 28 October 1929, the date of the Wall Street Crash, as the day the dream ended and the bubble burst.

Tomorrow is the third anniversary of the start of the credit crunch. We will celebrate many more before its legacy has run its course. Banks, pension funds and house prices crashed. There were runs on savings institutions as consumers panicked, fearing they would lose their life savings. Trusted household names fell like rain, among them Halifax Bank of Scotland, Royal Bank of Scotland, Lloyds, Bradford & Bingley, Northern Rock and the Dunfermline Building Society. Others rushed to shore themselves up via mergers, such as the Britannia and Co-op.

In Iceland, a whole country went down, taking the savings of hundreds of thousands of UK depositors, who had put their faith in the ice cap for that extra quarter of a percentage point. By some miracle we survived the crisis, and predictions of a 1930s-style slump proved empty. Stock markets and house prices bounced remarkably quickly, thanks to near-zero borrowing rates. Unemployment failed to reach the dreaded three million.

But the post-credit crunch world which is now emerging will look very different from the heady days of the bubble. Taxes will be higher, even as safety nets provided by the state are withdrawn. Home ownership will be restricted to certain occupations, and retirement plans have disintegrated for millions now forced to work until they drop.

So the pain was real enough and widely spread, as workforces accepted pay freezes, cuts in wages, part-time working and the tearing up of pension agreements.

We are not out of the woods. As industry emerges with growing order books, the public sector recession is just beginning. Overall, the economy remains on a life-support machine. Many consumers' personal finances are a shambles. Long-standing accounts and relationships have been swept away by the musical chairs of mergers and acquisitions.

The latest involves two million RBS and NatWest customers whose accounts were last week sold to Santander along with their branches, many after a lifetime's banking with the institutions.

The days of easy credit and a wallet full of plastic are over, almost certainly for good. Shoppers have been asked to hand back excess cards.

The housing landscape will be radically restructured if watchdogs press ahead with new rules to restrict loans to all but the safest borrowers.

Sue Anderson, of the Council of Mortgage Lenders, asks: "If home ownership is restricted to certain professions and income groups, where are other people to live and who will provide those homes?"

Taxes will rise and stay high for some time. John Whiting, of the Institute of Taxation, says: "Our world has got a lot tougher. We have fallen down a deep ravine, and are about to begin the slow climb up. It will be very hard work. Taxes are going up, tax credits will be squeezed and benefits reduced."

Those who rely on their savings for an income to live will continue to be disappointed, as interest rates remain low. Brewin Dolphin director Bryan Johnston reports: "Many people have been hit hard by the fall in the return on cash. They are very worried and do not know where to put their savings in the hope of a decent return."

Employees of banks who poured all their savings into Sharesave schemes stood by and watched as the value was wiped out. Demutualisation shares turned out to be more fool's gold, with many of the privatised mortgage banks the earliest victims of the credit crunch.

And finally pension plans have been torn to shreds. The state pension age is rising, final salary schemes have closed and pension fund values at one point nearly halved.

But there are always winners as well as losers, Some have actually been better off since the credit crunch began, as the recession sidestepped some sectors.

Low interest rates have been the major silver lining. If you kept your job, and were able to enjoy falling mortgage repayments, you were quids in. Another source of celebration is the expectation that rates will stay low for some time.

Silver-lining two is the new regime for safeguarding investors' deposits over 50,000.

There has been schadenfreude for those sceptical about joining the euro, as they watched the crisis across the Channel.

Public sector cutbacks will help focus on priorities. Do we want to fix the holes in the road or fund films?

In our personal lives the pressure is off to have the latest fashion, gadget or expensive holiday. Property bores have been silenced. But these are mere swallows that don't yet amount to a spring. Unemployment is set to rise further when the public sector cuts hit.

SVM managing director Colin McLean believes the problems of the banks, despite last week's recovery in profits, are not yet solved, and until they are the economy cannot be restored to good health.

He argues: "A great deal has been achieved in getting banks back on the right path, by refinancing them and putting in new management. But it has been like papering over the cracks and hasn't gone anywhere near far enough.

"There is also the issue of public finance, and that doesn't just mean sovereign debt crisis like Greece. If you look across the globe, local authorities from California to municipalities in China are struggling with debt problems."

What Scotland will look like in the new post-credit crunch world remains to be seen, but step change is coming. Control of the three global banks headquartered in Edinburgh, RBS, HBOS, and Lloyds, has moved to London. The dismantling of public services will hit hardest those regions relying heavily on the state for jobs.