Last October’s banking rescue package, as we now know, “was only a sticking plaster remedy”, as Jeremy Warner put it in The Independent. So this week, as RBS (LON:RBS)announced it had lost up to £28bn last year, saw the launch of a second package to bolster the banks and stimulate lending. The government will guarantee asset-backed securities issued by banks in an attempt to re-open the wholesale funding market and will also insure risky debt. The banks will be liable for just the first 10% of losses. In return, they will pay a fee and commit to keep lending. The hope is that this will put a floor under the value of toxic assets on bank balance sheets, reducing uncertainty and encouraging further lending.
Will the bank rescue work?
A key problem is that we don’t know how much the banks will pay for this protection, or how many billions the state will insure. This uncertainty, along with fears of further losses and nationalisation, sent bank shares into freefall this week. Meanwhile, boosting lending significantly is a tall order, given that foreign lenders are also retrenching. Along with non-bank firms they accounted for 50% of the corporate lending market over the past decade, said the Wall Street Journal. And it’s hard to see how this addresses “the heart of the problem”: banks just don’t want to lend now that the economy is “freefalling into recession”, said Capital Economics.
This week we also learnt that unemployment is rising at the fastest pace since 1991 and is poised to exceed two million. Ernst & Young’s Item Club is now pencilling in a fall in GDP of 2.7% this year and warning of the biggest peacetime contraction since 1931. Inflation has tumbled to just 3.1% (from 4.1% last month) and weakening demand is putting strong downward pressure on prices: core inflation fell from 2.1% to 1.1% in December. Deflation could soon become a hot topic here too.