Banks given cheap credit

“Uncertain,” “Paralysing,” and “Pessimistic.” Those were the words Sir Mervyn King used to describe the effects the eurozone crisis has had on the UK economy at his annual Mansion House speech on Thursday evening.

The Bank of England Governor was joined by UK Chancellor George Osborne as he addressed an assembly of the city’s most prominent players in the banking world.

He warned the outlook for the country looked bleak thanks to ongoing austerity in Europe and stifled growth, and outlined his emergency measures to boost UK banks with an £80bn cash injection to provide cheap credit to banks.

The plan, to be launched jointly with the treasury, will allow banks to be able to swap loans for cheap government bonds, as long as the cash benefits businesses at cheap rates.

Osborne said the credit will increase confidence in the economy and get it back on track: “We are not powerless in the face of the eurozone debt storm,” he said. “Together we can deploy new firepower to defend our economy from the crisis on our doorstep.”

King also promised to be highly flexible when it comes to providing banks with liquidity, and said at least £5bn a month will be given to “combat market-wide stress of an exceptional nature.”

According to analysts, the economy could be heading for a second slump as damaging as the 2007 crisis, if this new “funding for lending” scheme, expected to start operating within weeks, doesn’t make an impact.

Business editor Allister Heath warns the scheme could easily backfire: “It’s a major gamble,” he said. “It could encourage dodgy lending, given that the Bank of England will underwrite some risks, and if the view is that small firms are being deprived of funds, then why subsidise all loans?”

It emerged this morning that UK banks’ shares have increased dramatically in the wake of the new plans. Lloyds and RBS were up four percent and Barclay’s saw growth of 2.75 percent.


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