Bank of England Governor Mervyn King unveiled measures to fight an escalation of Europe’s debt crisis as global policy makers prepare for the impact of Greek elections in two days.
Warning of a “black cloud” from Europe, King said in a speech in London late yesterday the case for more stimulus in the U.K. “is growing.” In addition to looser policy, he said the central bank will activate a sterling liquidity facility to aid banks and start within weeks a credit-easing operation that may boost lending in the economy by 80 billion pounds (£124 billion).
The measures, announced jointly with the Treasury, highlight the alarm of global central bankers over the dangers posed by the mounting euro-area debt crisis after Spain became the fourth member of the region to seek a bailout last week. Greece is due to hold elections on June 17 that may determine its future in the currency zone, and leaders of the Group of 20 nations will hold a summit in Mexico the following day.
Investors want global leaders to take action on reviving economic growth, Institute of International Finance Managing Director Charles Dallara said in a letter yesterday to leaders attending the G-20 summit. He said markets “will be looking expectantly for evidence of a globally coordinated policy response targeted to revive growth prospects.”
Reuters reported that central banks are prepared to coordinate actions if needed to boost liquidity in financial markets, citing officials linked to the G-20 nations. The S&P 500 Index rose 1.1 percent in New York. The pound fell 0.4 percent against the dollar today and traded at $1.5503 at 9 a.m. in London. The yield on the 10-year gilt fell 7 basis points to 1.66 percent.
Spokesmen and spokeswomen at the European Central Bank, Bank of England, Bundesbank, Swiss National Bank and Bank of France declined to comment when contacted by Bloomberg News on the prospect of emergency coordinated action.
King said the Bank of England’s latest measures were prompted by a rapidly deteriorating U.K. outlook.
“Banks are at risk of future losses from a further downturn in the economy and exposures to the euro area,” he said. “Not only have the euro-area problems escalated to the point where exit for Greece and other periphery countries is the subject of widespread speculation, but signs of a slowing in China, India, and other previously buoyant emerging economies, such as Brazil, are appearing daily.”
“It is clear from Governor King’s speech that he has become more gravely concerned about the economic outlook, even over just the past few weeks,” said Simon Hayes, an economist at Barclays Plc in London. “Not only has this prompted the new announcements on banking-sector support, but it also implies a much increased likelihood that the MPC will sanction more quantitative easing.”
Speaking at the same event as King at the Mansion House in London’s financial district, Chancellor of the Exchequer George Osborne, said the U.K. Treasury and the central bank will take “coordinated action” to protect the economy.
“We are not powerless in the face of the euro-zone debt storm,” Osborne said. “The government -- with the help of the Bank of England -- will not stand on the sidelines and do nothing as the storm gathers.”
The Bank of England’s liquidity plan will see it activate an unused facility to inject at least 5 billion pounds ($7.8 billion) a month into the financial system at a minimum rate of 25 basis points more than the benchmark interest rate, now at a record low of 0.5 percent. A separate “funding for lending” program will allow lenders to swap assets with the central bank in return for money to be loaned to companies and households. The Treasury said a 5 percent increase in lending would inject about 80 billion pounds into the economy.
Treasury minister Mark Hoban told BBC radio today there was no cap on the lending program. The government wanted to send businesses “a very clear signal that finance is available at a price they can afford,” he said.
With the euro area turmoil pushing up bank funding costs and making it harder to access credit, King said the lending plan will provide banks with funds below current market rates. This will be linked to their performance “in sustaining or expanding their lending to the U.K. non-financial sector during the present period of heightened uncertainty,” he said.
“Exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times,” King said.
The governor also said that European authorities won’t find a long-term solution to the debt crisis until clarity on the extent of banks’ bad loans is reached. An “honest recognition of those losses would require a major recapitalization of the European banking system,” he said.
King repeated his rejection of calls for the U.K. central bank to buy assets other than gilts as part of its QE program.
There are “reasons for treating that idea with caution,” he said. “The bank has no democratic mandate to put taxpayers’ money at risk” and “purchases by the public sector would represent a real risk to taxpayers.”
The “big picture” for the U.K. is “the need to generate a recovery while rebalancing our economy, supported by a loose monetary policy and a large depreciation of sterling, on the one hand, and a gradual but steady reduction in the structural budget deficit, on the other,” he said. “Let us all work together to show that in a market economy our financial sector can get us out of this mess.”