When Brian Sloane was asked to reapply for his job for the eighth time he knew
the game was up. He’d worked for Bank of Scotland for 25 years, rising to
head of telephone services in its corporate division but morale among his
colleagues had never been so low.
The bank, whose headquarters sit atop the Mound in the centre of Edinburgh,
had come close to collapse and all the safe assumptions he’d held about the
strength of the Scottish financial sector vanished overnight. If a
300-year-old monolith such as the Bank of Scotland could go down, nothing
was safe. Last January he accepted a voluntary redundancy package and now
runs a cafe in the city’s Stockbridge area.
“Suddenly there was a feeling of regulation and bureaucracy. There was
constant change and restructuring. The biggest challenge was managing morale
— at management level, we were worried about our own positions but had to
keep a corporate face on in front of staff,” he said. “I’d had enough and
thought, if I was ever going to go and do something else, now was my chance.”
The winds of financial change were being felt throughout the city’s financial
district. At fund manager Martin Currie, email inboxes were groaning with
messages as clients rushed to withdraw their cash. The value of funds under
management had almost halved to £9 billion as investors sought to move their
money from relatively risky equities into safer, fixed-income funds.
Rory Stone, who ran a specialist cheesemaking business near Inverness,
realised the recession had hit when he was refused funding from the banks to
expand.
The 50-year-old firm, whose clients include Sainsbury’s and Waitrose, had
grown by more than 10% in the previous two years and had a turnover
approaching £1m. He needed a loan of £100,000 to boost capacity at his site
but was turned down.
“I prostituted myself to the whole range of banks. They listened to me, said
all of the right things, then they made me feel like I must have had a very
bad case of halitosis,” he said. “I never heard from them again. Previously,
they used to ring up and say, ‘Rory, do you want some more money?’.”
Now in discussion with private investors and European grant funds to raise the
cash, Stone’s business remains in good health, but he is frustrated.
“That situation [of easy lending] had to stop and it is inherently sensible
that it does, but when you are a successful business and you actually want
to expand and create jobs, it seems ridiculous that it is a closed door.”
What had started as a few mild eddies in the current of the Scottish financial
industry became a gathering storm until, this time last year, a tsunami hit.
Halifax Bank of Scotland (HBOS) and Royal Bank of Scotland (RBS), the
bulwarks of the financial industry, came close to collapse within weeks of
one another and it changed the landscape for ever. In the past 18 months,
since the downturn began, Scotland has experienced a 6% drop in economic
activity.
This week the Fraser of Allander Institute warned the country is facing a
deeper recession than the rest of the UK and will take longer to recover.
There will also be significantly higher unemployment than previously
forecast. Looking ahead, the think tank predicts the Scottish economy will
grow by just 0.1% next year.
Thousands of financial services jobs have already been cut and it is
anticipated there are more to come. While America and the Eurozone countries
are now officially out of recession, the UK as a whole remains in negative
growth, with Scotland trailing behind.
Brian Ashcroft, professor of economics at the institute, said: “Scotland is
more reliant on its public sector — 22% of the country’s output is generated
by the public sector, as opposed to 18% in the UK as a whole. The problem
with that is it means the private sector is smaller here — and that sector
needs to drive the recovery.”
This month the European Commission ordered RBS and Lloyds Banking Group, owner
of Bank of Scotland, to sell off several of its divisions, including the
Direct Line and Green Flag insurance brands and the Lloyds TSB Scotland
retail banking brand. Many observers believe the ruling will lead to further
job losses as Scottish operations are centralised in London.
Douglas Adams, a senior economist at the economic consultancy Ernst &
Young, warns that Scotland is facing a prolonged recession. Previous,
relatively sharp downturns have been characterised as being V-shaped, where
the economy dips then recovers. Longer-term declines have been characterised
as W-shaped, where recovery is short-lived and followed by another downturn.
Adams believes Scotland could be facing a VW-shaped recession, with a series
of three or more dips and false-dawn recoveries, at least until 2011.
“My view is that we are likely to bump along the bottom and that will go on
for quite an extended period,” he said.
In Edinburgh’s Exchange district, once a hub for finance and legal workers,
previously bustling bars and restaurants are now eerily quiet. Even taxi
drivers working for large city firms, who previously generated a large
proportion of their business from company accounts, admit they are having to
work longer hours.
Scotland’s reputation for financial competence has also taken a hit. First
minister Alex Salmond had boasted that an independent Scotland would join a
northern European “arc of prosperity” along with Iceland and Ireland, both
of which suffered heavy losses in the downturn, with Iceland’s banks leading
the way to state ownership.
Iain McMillan, Scotland director of the Confederation of British Industry
(CBI) says there are concerns companies that might have considered doing
work in Scotland have been put off by the country’s damaged brand, combined
with the political furore surrounding the Diageo job cuts in Kilmarnock and
Glasgow.
“What happened to HBOS and RBS certainly did Scotland’s financial reputation
no good and what happened with Diageo was disastrous,” he said. “The risk is
that if a company thinks that moving its operations to Scotland will be
difficult, they may decide not to come here at all.”
The credit crunch and resulting recession highlighted Scotland’s
over-dependence on the public sector and the fragility of the financial
services industry. The big questions now facing businesses and policy-makers
are: what must we do to ensure recovery; how much pain must we endure; and
what will the landscape look like in the future?
At the height of the Scottish property boom Matthew Benson didn’t know whether
he was running an estate agency or a cafe. Business was thriving so much
that part of his job was to supply coffee and sandwiches to buyers who
camped outside his firm’s office overnight to make sure they were first in
line for particular properties the next morning.
A flat in Stockbridge, Edinburgh, sold for £130,000 — despite having a living
room the size of two snooker tables and a smaller bedroom.
“One development of 25 flats sold out within two days,” says Benson, a
director with Edinburgh-based Rettie & Co. “We would sell the first
flats in the morning then demand would be such that we would raise the price
in the afternoon.”
After the boom came the inevitable bust with a 7.5% drop in property prices
across Scotland in the past 12 months. In Edinburgh sales are down by 60%
and Rettie & Co has lost 15% of its staff.
“The shock to the system has been severe,” says Benson. “The difference
between now and the property slump of the 1990s, when we saw negative
equity, is that then the markets slowed down and a number of property
developers got into trouble with the banks. Now, it is the banks themselves
which have gone bust.” Other sectors have been hit just as hard. Retailers
have battled to survive as customers, afraid of unemployment, have tightened
their belts. Purchasing is likely to be further affected by the return to a
17.5% VAT rate in January. Combined with rising fuel prices, retailers are
determined to make as much as they can from the Christmas period.
The recession has also affected the number of new businesses being launched in
Scotland, with a 20% fall in the second quarter of this year. The only good
news is that the number of businesses going bust is lower in Scotland than
the rest of the UK, although experts warn more companies could fall into
insolvency as the country starts to come out of recession following a
sustained period of tough trading.
The number of new personal insolvencies fell by 4%, compared with a UK rise of
more than a quarter, but remained at 5,767, as more people lost jobs and
struggled to keep up with repayments. Scotland’s bloated public sector is
expected to bear the brunt of job losses over the next two years, with
funding levels predicted to fall by up to 13%. At present one in four Scots
is employed in the public sector, compared with one in five in the UK.
The inefficiency of the public sector is one of a number of complaints
business leaders have brought against the government. Last month they
criticised ministers for allegedly pursuing “anti-business” policies, citing
the scrapping of the Glasgow Airport Rail Link and the decision to exclude
private sector involvement in the building of new prisons and hospitals.
Nicola Sturgeon, the deputy first minister, raised eyebrows in the business
community when she told the SNP’s annual conference she would “never put
private profit before public services”.
“Public projects which create private jobs in construction should be the last
thing to be cut,” said McMillan.
It is unclear what the attitude to Scotland’s financial services sector is
abroad but many believe recent events can only have damaged its reputation,
and they blame the banks. “Twenty years ago, Scotland wasn’t known for its
banking,” said one leading London-based financier. “Bank of Scotland and RBS
were well thought of but relatively small banks. To me, the Scottish
financial services brand has always been about insurance and investment
management, not banking — and that part is still thriving.”
Finance secretary John Swinney has defended the government’s position,
insisting it is committed to sustainable economic growth and helping
businesses. “Our draft budget for 2010-11 prioritises support for our
economic recovery plan, despite Scotland’s budget being cut in real terms
for the first time since devolution,” he said.That recovery plan is
supporting 15,000 jobs, he added.
“Ministers have regular meetings and discussions with representatives of the
six main business organisations in Scotland, both collectively and
individually, and with the STUC.”
The Conservatives, predicted to win the general election, want a more
business-friendly approach, including a reduction in corporation tax and
National Insurance for small businesses. Gavin Brown, the shadow enterprise
minister, claimed a Tory victory south of the border would help Scottish
firms. “We would engage deeper and wider with the business community,” he
said.
Scotland’s share of UK public debt is estimated at 9%. With the UK figure
rising to £1.4 trillion by 2013-14, this would suggest a liability of £126
billion, well over 100% of Scottish GDP. This is concerns business leaders.
“Whoever wins the next general election is going to have to deal with a
serious deficit in public finances,” says McMillan. “The new chancellor will
have to give a very comprehensive account of how the UK will tackle that
deficit. It is critical that the UK keeps its AAA rating, or the borrowed
money will end up costing us even more.”
Renewable energy, the oil and gas industry, life sciences and even the
thriving Dundee-based computer games sector have all been touted as ways to
drive the Scottish economy out of recession. But Brian Ashcroft believes
Scotland needs to reignite its manufacturing industry to recover well.
“Scottish manufacturing is focused on a very narrow set of exports. We feel
that that business may not be diverse enough to generate the growth in
exports required to create a rapid recovery,” he said. “The fear is that the
manufacturing industry isn’t good enough — but that is where the growth
needs to come from.”
Ashcroft is also adamant that Scotland needs to attract inward investment from
emerging markets such as China, Russia, Brazil and India to emerge strongly
from the recession.
“Those countries are going to go back to fast growth quickly, while the
western countries are not,” he said.
Colin Borland, of the Federation of Small Businesses Scotland, believes more
needs to be done to help small companies access the finance essential for
growth, while Peter Shakeshaft, chairman of business angel body Linc
Scotland, says funding solutions could be found through “constructive
discussions” between the private sector and government.
Shakeshaft, whose organisation represents private investors who provide
capital to fund start-up companies, explained: “If you look at the Scottish
economy, it has a large public sector and if that catches a cold — as it has
done — it will have an effect on the whole economy and the private sector
needs to be strong to survive that.
“We are worried that the small- and medium-size enterprise (SME) sector is
suffering from starvation of funding from the banks. Unless we can find some
kind of answer to that, we will have a nursebed of SMEs which will either
not be able to grow quickly enough or will not survive. Potentially, we need
a new kind of initiative, where the public sector and the private sector
work together to put something in place.”
Borland added: “The real white-knuckle panic is not there as it was at this
time last year, but there are still many people being charged far too much
for loans or banks attaching stringent conditions onto lending. Small
businesses need financing to grow.”
Although their agendas differ slightly, the message from all members of the
Scottish business community is clear: support for small businesses is
essential and, while the country needs financial services, the previously
blinkered focus has to move away from those and onto other industries.
Serving the locals in his Stockbridge cafe, Brian Sloane is committed to his
new career, revealing long-term plans for a string of Sloane’s cafes and
even potentially franchising the chain.
“There is a lot of anxiety, especially when you first start up the business,
but you are in control of your own destiny,” he explained. “I’d never say I
would never make a return to banking, but definitely not in the current
market.”
He is now being contacted by former colleagues also looking for a new life
outside of banking. Some former colleagues have also started up their own
businesses, in IT, debt-collection and retail.
“Some of them have even suggested going into partnership in a new cafe
venture. We could start a chain of cafes run entirely by former Bank of
Scotland employees.”
Additional reporting: Julia Belgutay
Your Comments
Order By: