Friday, June 15, 2012

UK lending plan faces risk of low take-up

Britain's Chancellor of the Exchequer George Osborne delivers his Mansion House speech during The Lord Mayor of the City of London's annual Dinner to the Bankers and Merchants, Mansion House, London Thursday June 14, 2012. Osborne said the government and Bank of England will launch an emergency bank lending scheme in an attempt to tackle a squeeze on credit. (AP Photo/Rebecca Naden/PA) UNITED KINGDOM OUT

Britain's Chancellor of the Exchequer George Osborne delivers his Mansion House speech during The Lord Mayor of the City of London's annual Dinner to the Bankers and Merchants, Mansion House, London Thursday June 14, 2012. Osborne said the government and Bank of England will launch an emergency bank lending scheme in an attempt to tackle a squeeze on credit. (AP Photo/Rebecca Naden/PA) UNITED KINGDOM OUT

Governor of the Bank of England Mervyn King delivers his Mansion House speech during The Lord Mayor of the City of London's annual Dinner to the Bankers and Merchants, Mansion House, London Thursday June 14, 2012. King say that an emergency bank lending scheme in an attempt to tackle a squeeze on credit is aimed at encouraging banks to increase their lending to the country's businesses, amid caution sparked by fears over the fate of the eurozone. (AP Photo/Rebecca Naden/PA) UNITED KINGDOM OUT

(AP) ? Emergency measures by the U.K. government and Bank of England to help banks and boost lending to businesses and families by offering up to 140 billion pounds ($217 billion) in cheap loans to lenders might have already run into difficulty, according to analysts ? there might not be anyone willing to take on the risk of extra credit.

Treasury chief George Osborne and Bank of England Governor Mervyn King announced the initiatives late Thursday night at a dinner for financiers in the City of London.

One program will offer British banks access to cheap multiyear loans, provided they pass on the funds as loans to households and companies. The central bank will also activate a liquidity facility announced in December, so far unused, to inject about 5 billion pounds per month into the country's financial system.

The Treasury and Bank of England unveiled their measures as a way to protect the U.K. economy from being caught up further in Europe's escalating debt crisis.

King warned of "a large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole" that has led to businesses and households "battening down the hatches to prepare for the storms ahead. The result is that lower spending leads to lower incomes and a self-reinforcing weaker picture for growth."

"The government, with the help of the Bank of England, will not stand on the sidelines and do nothing as the storm gathers," Osborne said.

"We are rolling up our sleeves and doing everything possible to protect British families and firms."

The cheap loans program has been launched because, in spite of Bank of England interest rates being at an all-time low, the difference between that rate and what banks charge companies and households to borrow has remained high. Banks claim this is because their own borrowing costs are rising.

What the Bank Of England aims to do with these new lower-rate loans is to reduce the banks' costs so that the saving can be passed on to bank customers in the form of reduced rates.

Shares in Britain's big banks were higher in early trading in London: part-nationalized Royal Bank of Scotland gained 6.4 percent, part-nationalized Lloyds Banking Group shares were up 4.3 percent, Barclays was up 3.2 percent and HSBC was up 1.6 percent.

However, several analysts, including those who welcomed the initiatives, were skeptical about the lending plan's chances.

"The core problem remains. Companies alarmed by the euro crisis will not be eager to borrow regardless of the cost," said Graeme Leach, chief economist at the Institute of Directors, a leading business group.

For the same reason, Mark Ostwald said "the auspices for its success are not especially good."

"With so many uncertainties about the U.K., European and global economies, it is very debatable whether entrepreneurs will be rushing to load up with new debt to invest in new projects," Ostwald said.

Official data out Friday highlighted the economy's distress.

The Office for National Statistics said the U.K. trade deficit in April was 4.4 billion pounds, compared to 3 billion pounds in March and the widest gap since August 2005. Exports of goods were down 8.6 percent month-on-month.

The statistics agency also said construction activity was down 13 percent in April from March, a drop influenced by the date of the Easter holiday and poor weather.

"With the trade deficit widening in April and construction output again disappointing, the chances of the economy avoiding further contraction in the second quarter are dwindling," said Howard Archer, chief European economist at HIS Global Insight.

With the U.K. economy in recession for the first time since 2009 after two quarters of shrinking gross domestic product, the International Monetary Fund last month urged the government and the central bank to do more to boost economic activity.

"We remain a little skeptical of the 'voluntary' scheme to have a significant effect, and look to see what measures are put in place to ensure that the cheaper cost of financing given to the banks by the Bank is passed onto to the real economy, rather than improving the profitability of the banks," said Gerard Lane, analyst at Shore Capital.

Analysts at Barclays Capital said King evidently has become more gloomy about the economy in recent weeks. "Heightened uncertainty about the euro area is increasingly infecting the U.K. outlook through tighter credit conditions and low confidence among businesses and households," they said, adding that they saw a greater likelihood that the Bank would soon expand its 325 billion pounds stimulus program of asset purchases, known as quantitative easing.

Ostwald said the announcement of new measures "confirms that the U.K. banking sector remains in an extremely poor state."

"It may only be weak credits in the business world that will be knocking down the doors of the banks" to take advantage of the new programs, he added.

Vicky Redwood, chief U.K. economist at Capital Economics, said it was "reassuring that, after criticism that they were slow off the mark in the initial stages of the financial crisis, policymakers are trying harder to get on the front foot this time."

However, she added, "Given the risky environment, banks may simply not want to lend more, even with the carrot of cheaper funding. Indeed, the Government might end up having to take the next step and guarantee bank lending itself, at least in part, therefore taking some of the risk off banks' balance sheets altogether.

Associated Press

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