Two trains are heading through the tunnel towards a potential global meltdown in the next month. Combine these global strategic events with worrying signs in regard to debt and solvency issues for business and the global – and, by extension, national and local – economy starts to look shaky.
The first train in the tunnel is the Pentagon reports of an Iranian cyber-attack on US installations. The second is the Obama commitment at the UN this week to support an all-out attack on Iran if it continues to develop a military nuclear threat to the existence of Israel.
What would be the impact of a huge surge in the cost of energy at the same time as the gold price goes over $2,000? The volatility index in the next month could make the oil shock of the 1970s and the stock market crash a decade ago look becalmed.
Believe it or not, thousands of small and medium enterprises could well be chased into a crisis, with banks calling in their loan books in the face of a predictable storm that will build upon the global reaction to that anti-Muslim film.
The cyber crisis for banking
Hundreds of business heads will need to avoid trading as insolvent, if they have set aside enough funds to pay out redundancies and meet demands for early repayment of their loan books like Gunns in Tasmania. In this context, we can surely ask how the big end fund managers managed to pour millions of shareholder dollars into Gunns’ insatiable capacity to bury its head in the face of a global collapse in wood chip prices.
The consumer banking website of Bank of America was unavailable to some customers last Tuesday, and JPMorgan Chase on Wednesday had the same problems; which multiple sources linked to a denial-of-service attack, in which a website is bogged down by a large number of requests.
A Chase spokesman said last Wednesday that the consumer site was intermittently unavailable to some customers, but did not acknowledge then that there was an attack.
On Thursday, Chase said slowness continued but was resolved by late afternoon Eastern Time. Bank of America acknowledged on Tuesday that its site had experienced slowness, but would not say what caused it.
Senior US officials acknowledge that Iranian attacks have been the subject of intense interest by US intelligence for several weeks. Last week, the Joint Chiefs of Staff’s Intelligence Directorate, known as J-2, confirmed continuing Iranian cyber-attacks against US financial institutions, in a report described as “highly classified”. The report was posted on internal classified US government sites last Friday, September 14.
A financial services industry group, the Financial Services Information Sharing and Analysis Center (FS-ISAC), warned US banks, brokerages and insurers late Wednesday to be on heightened alert for cyber-attacks. FS-ISAC also raised its raised the cyber threat level to “high” from “elevated” in an advisory to members, citing “recent credible intelligence regarding the potential” for cyber-attacks as its reason for the move.
The former head of cyber security for the White House testified Thursday that “we were waiting for something like this from Iran”. Frank Cilluffo, who served as Special Assistant to the President for Homeland Security under President George W. Bush, is currently an associate vice president at George Washington University and heads the Homeland Security Policy Institute.
Cilluffo testified in a previously scheduled appearance before the US House of Representatives’ Committee on Homeland Security, saying:
“The government of Iran and its terrorist proxies are serious concerns in the cyber context. What Iran may lack in capability, it makes up for in intent. They do not need highly sophisticated capabilities – just intent and cash – as there exists an arms bazaar of cyber weapons, allowing Iran to buy or rent the tools they need or seek.”
Industries that historically are likely to be dramatically hit by this volatility are construction, retail trade, accommodation and food services, manufacturing, and transportation and warehousing.
Our multi-speed patchwork economy is likely to see massive cutbacks in many of these sectors if Israel feels the need to test the will of the American president. And all of this takes place as Wayne Swan may have to launch the mother of a credit squeeze if the government is to maintain its drive to achieve a surplus.
The debt and solvency crisis for banking
Roger Mendelson, chief executive of Prushka Fast Debt Recovery, which acts for more than 45,000 clients in Australia, has already noted a 40% year-on-year rise in statutory demands – the first step in the process of declaring a debtor insolvent – in order to force some payment of an outstanding debt.
Prushka warns the data is the ”canary in the coal mine” for the economy, as it demonstrates that cautious businesses and households are keeping their hands in their pockets for longer than usual before paying debts. ‘We’re definitely finding that there’s a lot of insolvent companies that should be dead and wound up, but they’re still trading.”
A briefing paper released by Prushka Fast Debt Recovery, which acts for small businesses, shows its debt collection levels have fallen 15% year-on-year, despite increased client numbers. Falling profits across the small business sector have resulted in companies struggling to pay their bills and many to keep trading while insolvent, according to a major debt collection agency.
Mendelson says the majority of clients are unwilling to follow through with liquidation procedures after issuing a statutory demand, as it costs between $4,000 and $5,000 and their feeling is the creditor is insolvent anyhow. Businesses are putting a lot more pressure on suppliers to cut margins to come up with good prices.
Mr Andrew Needham, director of business recovery at HLB Mann Judd Sydney, says that businesses are not going into liquidation because of trading difficulties, but rather because they haven’t managed their debt and cashflow appropriately.
“If an owner of a business is having problems meeting debt repayments, the worst thing they can do is bury their head in the sand and hope that everything will somehow turn out OK. It’s vital to put your hand up and ask for help.”
Even worse for the global recovery would be to fail to at least consider the existential threat of a breakdown in diplomacy in the lead up to the US elections on the first Tuesday in November. The canary is shrilling out a warning.
Dr Colin Benjamin is an entrepreneurship and strategic thinking consultant at Marshall Place Associates, which offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship. Colin is also a member of the global Association of Professional Futurists.