Ongoing Banking Problems Will Help to Keep Interset Rates Low
Posted on 14 April 2011 by
Yesterday in the US a Republican Senator, Tom Coburn, who co-authored a new US Senate panel report on the banking crisis, said, “Blame for this mess lies everywhere – from the Federal regulators who cast a blind eye, Wall Street bankers who let greed run wild, and members of Congress who failed to provide oversight.”
When I read this my immediate impression was that if one changed a few words and added in Gordon Brown’s weekend mea culpa what he said could just as easily apply to the UK, i.e. “Blame for this mess lies everywhere – from the FSA who cast a blind eye, investment bankers who let greed run wild, and members of House of Commons and House of Lords who failed to provide oversight.”
Another interesting economic comment yesterday was from the IMF, which said that the “most pressing” challenge facing the global recovery is funding banks and governments. It said that £2.2 trillion of debt matures in the next two years alone and that Irish and German banks faced the most “acute” need to roll-over their debt, making the point that Europe’s banks posed a particular threat to the financial system.
It highlighted the fact that “nearly all” banks in Ireland, Greece and Portugal, as well as some in Spain and Germany, were priced out of the wholesale markets and will probably need more help from taxpayers.
With the huge amount of interbank lending plus bank lending to those Eurozone countries which will eventually have little option but to default, whatever the ECB says, the risk of serious contagion from the domino effect of failing banks and sovereign default should not be underestimated.
With the IMF highlighting the problems facing many German banks Germany’s ability to continue bailing out the Eurozone periphery becomes questionable. Add to this the fact that Angela Merkel and her party have already paid a heavy electoral price for supporting those Euro bailout measures already implemented and it becomes increasingly difficult to see the Euro surviving in its current form for much longer.
The Euro started off as a political currency bereft of economic common sense. The possibility of the economics ever stacking up looks increasing remote and if the electoral cost of continued support for the Euro from politicians in countries like Germany is political oblivion the politicians will eventually vote with their feet.
Despite the UK very sensibly retaining control of its own monetary policy by not joining the Euro the UK would not be immune from problems which would result from a breakup or realignment of the Euro. In addition the significant risk highlighted by the IMF of further problems in many Eurozone banks highlights that there are still many risks facing the UK’s financial system.
These factors will inhibit our banks’ ability to lend and hence negatively impact on the speed of our economic recovery, with PWC suggesting that the deleveraging of European banks will take “at least another 10 years.”
Almost from as early as March 2009 when Bank Rate was cut to 0.5% many economists have been forecasting it would start to increase soon and they have to keep putting back their estimates for the timing of the first increase as events prove them wrong. Roger Bootle, principal of Capital Economics, went out on a limb when, soon after Bank Rate fell to 0.5%, he forecast it would remain low for 5 years. He increasingly looks like having the last laugh amongst his peers, as do mortgage borrowers who have stuck with a variable rate mortgage.
The blog postings on this site solely reflect the personal views of the authors and do not neccessarily represent the views, positions, strategies or opinions of Charcol Limited. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.