Latest bailout may turn the tide.
Posted on January 26th 2009
The government’s latest bailout plans may well be the turning point that we have been looking for. They have acknowledged that a bank that does not lend money to householders and business is of no use whatsoever. The insurance backed guarantees for the most toxic assets comes with a demand that any bank that uses them must lend more money. Banks who use the insurance will have a much better chance of being able to attract new investors through securitisations and covered bonds and investors
will have the comfort of knowing that losses will be controlled by the government guarantee.
With new investors comes liquidity and liquidity has been at the epicentre of the UK’s problems. Although this financial crisis has been named as a credit crunch, this term is not a good description of the UKs problem, a much better description is liquidity crunch. UK mortgage borrowers continue to pay their mortgages and although we are seeing arrears levels and repossessions rise the stats are not disastrous and there is still time to turn things around.
Unemployment however, will continue to rise until consumers gain confidence and start to spend again. The recent cuts to BBR have been
very welcome to consumers but most have been using the savings to shore up their personal balance sheets rather than being spent on the
high street. Consumers have been behaving a lot like banks in this respect, until they have confidence about their financial security they will hoard cash rather than spend it.
