First, the Bank of England is to make billions in cheap credit available to banks, which will then be doled out to growing firms as loans. Several figures are being bandied around, but Bank of England governor Mervyn King reckons the new initiative could create up to £80bn in new loans. The government is taking a hard line on this one: ‘You don’t lend; we won’t fund’ is the message from Whitehall today.
The BoE is also working with government to create a short-term capital facility that banks can access when facing ‘exceptional market stresses’. No less than £5bn every month will be made available in order to help banks maintain liquidity. The scheme will run for a minimum of four months.
George Osborne hopes that these measures will ‘inject confidence’ into the UK economy. And he’ll be pleased to see that his ‘new firepower’ is already having an effect: this morning, Royal Bank of Scotland and Lloyds shares were up almost 4%, while Barclays’ shot 2.75% higher.
So, what prompted the sudden burst of activity from Merv and George, hardly the most dynamic of duos? The Grexit, for one. Greece’s economy is tottering towards the abyss, taking all hopes of euro stability with it. The economic situations in Spain and Italy are worsening by the day, adding to the general concern. Plus, the faltering growth in the heavyweight economies of China and India has also spooked the hawks over at the BoE.
The reduced appetite for international trade is starting to hit the UK where it hurts. Truly horrible trade data, out today, shows a £4.421bn trade deficit in April compared with £2.957bn in March, the widest gap since August 2005 and the second widest since comparable records began in 1992. Export sales are deteriorating at a rate of knots, the fastest for three years. At £10.1bn, the goods deficit was the second widest on record as exports of goods slumped an eye-watering 8.6%. No one is buying.
Mervyn King looked truly bleak as he spoke about ‘the large black cloud of uncertainty’ at Mansion House. The downturn in consumer spending and business confidence is severe. And quantitative easing has only provided a short-term solution.
By flooding the UK banking system with £325bn in cash, the government was hoping some of the money would trickle down to the firms and consumers at the bottom of the food chain. But, with such volatility in the markets, and the eurozone threat, the banks decided to hoard the lion's share of cash instead, preparing for the worst.
It’s not all the banks’ fault, however. New regulations determining minimum liquidity have forced them into a bit of a bind. This is where the new £5bn pot, the Extended Collateral Term Repo Facility, comes in. King explains: ‘I want to make it clear that the Bank, through its discount window and other facilities, will provide banks with whatever liquidity they require given the prospect of turbulence ahead.’
Music to their ears, no doubt. But let’s see whether the people that need it most get a whiff of the loot.