Vanderlei Silva sits squarely in the middle of the global financial crisis. A Brazilian by birth, he immigrated to the United Kingdom eight years ago to work for a Dutch retailer. Now, aftershocks from a credit crunch that began in the United States are clouding his future.
In 2005, when the global boom looked set to run indefinitely, European retailer Mexx signed a 20-year lease on a prime Oxford Street location. Now that the company wants to retrench, it can't find anyone to take over its pricey storefront. "With the credit crunch, nobody's interested in investing in stores. That's why we're still here," says Silva, 33, a floor manager. "I'm worried a lot. … I will lose my job. I just don't know when."
Last fall, the British government's aggressive response to cleaning up its troubled banks was cited as a model by critics who accused U.S. Treasury Secretary Henry Paulson of giving American bankers overly generous bailout terms. But today, deep problems with the flow of credit are choking the British economy, enfeebling retail stores, darkened factories and the housing market alike.
The financial ailments — and their troubling implications for the overall economy — mirror the ills afflicting the United States' banking sector. But here, they may prove even more difficult to resolve. Britain's global banks, once a source of pride for this financial capital, now carry potential liabilities that dwarf the nation's total economic output. The loans and other assets on the balance sheet of a single bank — the Royal Bank of Scotland — are greater than the U.K.'s entire $2.1 trillion economy.
"The British are in a deeper hole. … They specialized in finance in a way that may prove unsustainable," says Simon Johnson, former chief economist of the International Monetary Fund.
The British government launched its second banking system rescue Monday, when it extended new aid to troubled institutions on the specific condition that they boost lending. Lenders in recent weeks had reduced the amount of credit for households and businesses by an unexpectedly large amount while planning further cuts in the months ahead, according to the Bank of England. To jump-start the collapsing economy, the bank on Jan. 8 cut interest rates to their lowest level since 1694. No one thinks that will be sufficient to thaw the credit freeze.
To date, the government has committed about $885 billion to save the banks — an amount equal to more than 40% of the country's gross domestic product. The United States' Troubled Asset Relief Program, for all its controversy, is about 5% of the nation's output. Yet, some prominent experts say credit channels are so impaired that only outright nationalization of the banks would guarantee new lending.
Given the outsize role of the financial industry in the U.K., the nation's economy seems certain to become a major casualty of the global crisis. This year, total output is likely to shrink by 3%, according to BNP Paribas. That would be a greater decline than is expected in the United States and would be the steepest one-year plunge since 1946.
"The U.K. has the worst of all worlds. … (It is) at the beginning of an adjustment that is going to weigh on growth for a protracted period," said Malcolm Barr, an economist at JPMorgan Chase.