- Banks will be loaned money on condition they pass it on in the form of cheaper loans and mortgages
- Huge sum represents 1/5 of all Government spending
Becky Barrow, Jason Groves and Hugo Duncan
21:01, 14 June 2012
22:27, 14 June 2012
The Coalition is to throw a £140billion lifeline to small businesses, homeowners and the banks in a high stakes gamble to jolt the economy back into life.
The Chancellor George Osborne and Bank of England Governor Sir Mervyn King unveiled the plan to unleash vast sums via the high street banks.
The Bank of England will lend to them on condition they pass it on directly in the form of cheaper business loans and mortgages.
Mansion House: George Osborne, Lord Mayor Alderman David Wootton and Mervyn King the Governor of the Bank of England
Government sources indicated that two
separate schemes will pump around £140billion over the next 12 months
into Britain’s big five banks and their smaller rivals.
This huge sum is equal to a fifth of all Government spending, and more than the current education and defence budgets combined.
But sources privately admit there is
no limit to how much money will be given to the banks, meaning the total
bill could be far higher.
A senior Lib Dem said the move was the equivalent of ‘hitting the panic button’.
The extraordinary move comes amid
rising Government anxiety that the Eurozone crisis could plunge Britain
back into a deep recession that could take years to recover from.
In his annual Mansion House speech in
the City last night Mr Osborne warned the Eurozone crisis had made the
economic outlook ‘as difficult perhaps as any our country or our
continent has faced outside of war’.
But he insisted Britain was ‘not powerless in the face of the Eurozone debt storm’.
Unveiling plans for two new bank
lending schemes with Sir Mervyn, he said: ‘Together we can deploy new
firepower to defend our economy from the crisis on our doorstep. Funding
for lending to the family aspiring to own their home and the business
that wants to expand. Liquidity for our high street banks.
‘The Government – with the help of
the Bank of England – will not stand on the sidelines and do nothing as
the storm gathers. We are rolling up our sleeves and doing everything
possible to protect British families and firms.’
Banks will be lent the cash on condition they pass it on in the form of cheaper business loans and mortgages.
Big decision: The scheme was approved by the ‘quad’ of senior ministers; Danny Alexander, David Cameron, George Osborne and Nick Clegg
Sir Mervyn said the dire economic outlook was prompting the Bank to take unprecedented measures.
He said the world’s central banks had
thrown ‘everything bar the kitchen sink’ at solving the economic
meltdown in the industrialised world, but the crippling problems remain.
In a sign of the urgency of the
situation, the schemes will be launched ‘within a few weeks’ in a
frantic effort to shore up the banking system as this weekend’s Greek
elections threaten more chaos.
The decision to order the schemes was
taken by the so-called ‘Quad’ of senior ministers, comprising David
Cameron, Nick Clegg, Mr Osborne and his Lib Dem deputy Danny Alexander,
at a meeting last month.
Government sources said a further
scheme which will see the Government underwrite tens of billions of
pounds on spending on housing and infrastructure projects will be
unveiled in the coming weeks.
Sources last night insisted that the
developments did not mean the Coalition was changing course and
switching to an economic Plan B. A Treasury source stressed no new
public spending was involved and said the new lending schemes were only
possible because the deficit reduction plan had given Britain
credibility with the markets.
The two schemes are designed to ease a
growing liquidity crisis in our banks, which has seen lending fall and
borrowing rates rise – despite record low interest rates.
The decision to press ahead with the
schemes also represents a tacit admission that the much-vaunted Project
Merlin initiative to make the banks lend has failed.
Sir Mervyn said the scale of the
problems facing Britain were so serious, which he described as ‘an ugly
picture’, that such emergency action is required.
Speaking on the eve of crucial
elections in Greece, he said the Eurozone’s problems have created ‘a
large black cloud of uncertainty’ over the whole of Europe, including
He said: ‘The black cloud has
dampened animal spirits so that businesses and households are battening
down the hatches to prepare for the storms ahead.’
The speech, which was Sir Mervyn’s
bleakest address in his nine years’ at the Bank’s helm, also made
reference to ‘the paralysing effect of uncertainty’ and ‘the Great
Depression’. He spoke of the ‘justifiable grievances’ of ‘many millions
of people’ around the world who have ‘lost their jobs, their businesses
and their economic livelihoods’ as a result of a crisis they did not
Under the two schemes, the banks will
not get the money for free. They will have to hand over their own
‘collateral’, such as a package of mortgages or small business loans,
which will be swapped for a cash equivalent from the Bank.
Supporters: Conservative MP Andrew Tyrie, left, and Lib Dem peer Lord Oakeshott have backed the initiative
An unidentified man tried to give Mr Osborne a Maths text book as he arrived at the Mansion House event
The first scheme, worth ‘at least’
£60billion this year, will provide banks with ‘whatever liquidity they
require given the prospect of turbulence ahead’.
Further details will be published
this morning by the Bank. The second scheme, worth ‘at least’ £80billion
over the next 12 months, money will be only lent to banks if they
promise to improve their lending to businesses and families.
It comes after a five-year lending
drought which has seen families unable to get a mortgage and thousands
of small business owners denied cash to grow their company.
Sir Mervyn said banks will not get
the money unless they promise to ‘sustain or expand their lending to the
UK non-financial sector during the present period of heightened
Lord Oakeshott, a leading LibDem peer, said: ‘The Governor is right to hit the panic button.
‘Even before the eurozone crisis, our
own economy would not grow and our banks would not lend. Ring fencing
retail banks [from the casino investment banks] will help.
‘But now we need far bolder action
from Government to boost investment and capital spending, especially
housebuilding, before the black cloud of fear turns into a deluge of
Andrew Tyrie, a Tory MP and chairman of the Treasury Select Committee, welcomed the Bank’s dramatic intervention.
He said: ‘These are exceptional circumstances. They require exceptional measures.’
It comes as Britain is trapped in the
first double-dip recession since the 1970s and the longest economic
downturn for a century.
In 40 years, I’ve never heard such apocalyptic talk
By ALEX BRUMMER
Chilling: Sir Mervyn painted an ‘ugly picture’ of the months ahead
THE elite of the City of London, gathered in the grand setting of the Mansion House last night, could not but have felt a shiver of fear listening to Sir Mervyn King’s big set piece speech of the year.
In several decades of listening to this address ranging from the banking and sterling crises of the 1970s to the exit from the exchange rate mechanism in 1992 it would be hard to remember a Governor of the Bank of England speaking in such apocalyptic terms.
Sir Mervyn’s burning frustration with Europe’s paralysed political classes and the pain and misery they are delivering to households and businesses in Britain and across the Continent came through loud and clear.
The better news is that the UK is better able than our European partners to deal what Sir Mervyn calls an ‘ugly picture’ that is increasingly starting to look like second Great Depression that may come to rival the 1930s.
Gordon Brown’s decision to keep us out of euroland, control over our own interest rates and credit and the Cameron government’s measures restore some budgetary discipline mean that the Treasury and the Bank do have some room to manoeuvre.
The only regret must be that the Chancellor George Osborne did not see the banking and economic tsunami coming from across the Channel a little earlier making sure that businesses of all sizes could obtain credit, at reasonable rates, so as to sustain growth.
As matters stand even with the super-charged credit measures of up to £140billion unveiled last night it is unlikely that the UK will emerge from recession until the autumn of this year at least, if not 2013.
What is most reassuring is the commitment by the Governor to the financial markets to make sure that British banks, irrespective of what happens on the Continent, are able to obtain whatever cash they may require given the turbulence ahead.
In the case of a total eurozone meltdown the UK banks would be on the hook for an estimated £168billion of losses.
Under the new schemes the Treasury and the Bank of England are promising to funnel £80billion of cheap lending to businesses and households through the high street banks. In addition the Bank is offering the high street banks the chance to borrow an extra £60billion a year directly from the Old Lady just to make sure they have enough cash in hand to prevent the financial system from freezing over.
Moreover, the Government now accepts that growth must be the priority of the Bank of England’s Financial Stability Committee rather than rushing to repair their balance sheets. The Government is at pains to explain this is not a ‘plan B’ for fear that Labour will claim credit for the sharp change of direction.
However, it is my understanding that there will be more to come before Parliament rises for its summer recess probably on July 3 when the latest Office for Budget Responsibility forecasts are released.
The Treasury is working on a bold new scheme under which Britain’s AAA credit rating and low international borrowing costs can be used to boost spending on infrastructure from roads to sewage systems.
At the heart of this plan will be more assistance for first time house buyers and loan guarantees designed to persuade the house builders to construct more new homes as rapidly as possible.
Finally, it seems our policymakers have grasped the scale of the disaster facing both the European financial system and growth and are acting with some speed to deal with it. Economic catastrophes demand dramatic solutions.