More Cash Injected As Banks Tread With Fear
Bank of England Governor Mervyn King has admitted that the financial system is in a 'palpable sense of fear', which could send the global economy into a downward spiral. He also warned that the freeze on wholesale money markets is likely to last as long as the UK winter with the thaw not coming until March at the soonest, while banks try to sort out the mess they have got themselves into with their investments in US mortgages.
The Bank of England and the European Central Bank had just piled another £260bn into money markets to help with cash funding when King said that more work would have to be done to prevent the economy from racing down the slippery slope.
Last week's emergency cash injection should help to give some stability to bruised money markets, but it will only really return to normal when banks regain the confidence to invest in each other.
Mr King said: "Banks are awash with cash ... but there's been a palpable sense of fear about the capital positions of banks."
So far financial institutions around the world have taken a £40bn hit from the sub-prime crisis that began in the US, but there are worries that 'another layer of exotic losses is coming down the road,' to use King's words. As banks rebuild their battered balance sheets, it could take two or three months for them to gain real clarity of their positions.
Economist at Insinger de Beaufort, Marc Ostwald, said: "It is a serious signal that the ECB means to break the logjam and get banks to lend again. We have reached the point of almost complete seizure in the credit market."
The unprecedented cash injection was seen as a sign of emergency, and being beyond end of year tidy-up. The banks of the world joined forces last week to make a joint announcement, but the cash from that was evidently insufficient.
On Tuesday morning £10bn was auctioned into the UK money markets, and the three month wholesale lending rate fell, but only by 0.04% to 6.39%. One bid for part of the £10bn even reached as high as 6.6%, which only serves to demonstrate the lack of available cash on the capital markets. The wholesale rate is well above the 5.5% base rate, yet historically the two have been fairly close to each other.
The plight of Northern Rock brought the crisis of credit into the public eye in September, and it remains the worst and highest profile victim in the UK. Mr King advised the House of Commons treasury Select Committee on Tuesday that the government should have clear procedures for dealing with failing banks when problems begin to surface - just like other members of the G7 do.
Mr King would not be drawn into any forecast about his future as Governor of the Bank of England.
Chief executive of the British Bankers' Association, Angela Knight, recently told the same committee that the Northern Rock problems had dealt a blow to London's reputation as a centre of financial services.
Published on December 28, 2007
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