GUARDIAN 9.5.09
Bank of England braced for third wave of financial crisis
Surprise £50bn cash injection is attempt to avert new phase of credit
crunch
. Ashley Seager
The Bank of England is concerned that the UK's banking system is
heading for a third wave of crisis that could snuff out fragile signs
of recovery in the economy.
On Thursday the Bank surprised the City by announcing that it would
pump an extra £50bn of new money into the economy despite recent
stockmarket rallies.
Now the Guardian has learned that this increase in quantitative
easing was driven by fears in Threadneedle Street that the credit
crunch is still sucking the life out of the British economy and the
banking sector remains in deep trouble.
The new mood of caution chimes with comments from business leaders
yesterday, who warned that apparent green shoots in the economy had
shallow roots.
Richard Lambert, director general of the CBI, said: "The fact is that
for all the injections of taxpayers' money, the credit markets are
still not working properly."
Bank of England officials are concerned that big banks now supported
by the taxpayer, such as Royal Bank of Scotland and Lloyds Banking
Group, are struggling to increase lending volumes, as they had
promised in return for help from the government.
The governor, Mervyn King, and several other members of the Bank of
England's monetary policy committee are said to be unconvinced by
talk of green shoots that has helped propel the FTSE 100 share index
up by more than 20% over the last month.
Fears of a false dawn echo the mood at the beginning of the year,
when apparent recovery in financial markets was wiped out by a second
wave of crisis led by RBS and Lloyds.
This week both banks again warned of sharp increases in bad loans to
British business customers. RBS said yesterday it was seeing little
sign of green shoots.
Continued weakness at these banks may prevent the increase in lending
that ministers are desperate to see, and dash hopes of a pre-election
recovery for Labour.
The Bank of England is also worried that continued stresses in the
global financial system will suck money out of the UK as cash-starved
international banks bring money back home. Foreign banks are thought
to be withdrawing funds from Britain once loans expire, rather than
roll them over.
In return for support from the government, both RBS and Lloyds had
pledged to increase lending to homeowners and businesses to
compensate for declining foreign lending. Instead Stephen Hester,
chief executive of RBS, said yesterday that demands for loans had
contracted as customers "quite properly" try to reduce their
borrowings as the recession bites.
King presents the MPC's latest quarterly inflation report next
Wednesday and speculation was rife in the Square Mile last night that
the report would contain gloomy forecasts for economic growth and
inflation, which will probably be projected as being below its 2%
target in two years' time, even though it is currently at 2.9%.
Last year King was criticised by some experts for failing to cut
interest rates fast enough as the economy slid into recession. But
from September, when US investment bank Lehman Brothers collapsed, he
led the MPC in slashing rates to an all-time low of just 0.5% and
embarked on the unconventional quantitative easing in March, a policy
the European Central Bank said on Thursday said it would follow.
Poor lending decisions by HBOS, now part of Lloyds, and RBS, along
with the rapid deterioration in the economy, mean that the two banks
in which the government has major stakes could alone account for
£25bn of bad debts by the end of the year.
Both banks believe these losses will count towards the "first loss"
they must bear before their insurance - through the government's
asset protection scheme - kicks in.
The extent of the rise in bad debts has surprised some commentators
who now believe the taxpayer could be on the hook for losses under
the asset protection scheme faster than first expected.
There has been some evidence of a small increase in mortgage lending
in Britain, [only against previous month and not against previous
year -cs] but it is not nearly strong enough to prevent house prices,
which are down nearly a quarter from their 2007 peak, falling
further. And unemployment is expected to continue rising well into
next year, something that is likely to restrain consumer spending.
Many economists have been encouraged by some better figures on
consumer confidence and forward-looking surveys into thinking that
the 1.9% contraction in the economy in the first quarter of the year
- the worst for three decades - will not be as severe in the second
quarter. But they say that this only marks a slower pace of
contraction, not a rapid return to growth.
Few share the chancellor's belief that the economy will recover
strongly in 2009, and nor does the Bank of England.
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A VERSE FOR OUR TIMES - from the 1930s
"There are Bad Times Just Around The Corner" -Noel Coward
Verse 3
From Colwyn Bay to Kettering
They're sobbing themselves to sleep,
The shrieks and wails
In the Yorkshire dales
Have even depressed the sheep.
In rather vulgar lettering
A very disgruntled group
Have posted bills
On the Cotswold Hills
To prove that we're in the soup.
While begging Kipling's pardon
There's one thing we know for sure
If England is a garden
We ought to have more manure.
Hurray-hurray-hurray!
Suffering and dismay.
Refrain 3
There are bad times just around the corner
And the outlook's absolutely vile,
There are Home Fires smoking
From Windermere to Woking
And we're not going to tighten our belts and smile, smile, smile,
At the sound of a shot
We'd just as soon as not
Take a hot water bottle and go to bed,
We're going to untense our muscles till they sag sag sag
And wait until we drop down dead.
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