Friday, 2 May 2008

₤50 billion does not bring much stability

So far, the special liquidity scheme hasn't brought much relief to the stagnant interbank lending market. Spreads between 3 month interbank lending and equivalent maturity repos are still elevated.

Between April 23-30, spreads fell by about 14 basis points. However, on May 1st, spreads rose again by 5 basis points. Overall, spreads are some 75 basis points above where they were before the credit crisis.

I will give you a free forecast. Within a few weeks, we will see the UK banks again complaining that the Bank of England hasn't done enough to revive credit markets. It won't be long before we hear "Oh, credit conditions are too tough, there isn't enough liquidity and its all the Bank of England's fault. If only they would cut interest rates, and provide more support, then Britain's economy future would be again secured".

Just wait, the banks will be back for more public sector support. They will be again looking for the public sector to cough up for their mistakes.


Anonymous said...

Yup, the prediction will be proven true. But it's no mean feat seeing as they've being saying essentially the same thing since August.

Nonetheless I enjoy your presentation and analysis of the details.


aSteve said...

Of course the special liquidity scheme hasn't brought much relief to the stagnant interbank lending market. The SLS is not a bale-out.

The banks can scream blue murder - but the government's hands are tied. The central bank has played - and now it is time to stick, twist or fold for the gamblers.

Alice Cook said...


Over the last couple of weeks, I have read carefully what you have written about the SLS. I have come around to accepting much of what you said, particularly regarding the terms of the scheme. I am beginning to think it wasn't quite what the banks wanted.

Taking your point of view one step further, it may be the case that banks find the terms too onerous and don't actually use the scheme in significant numbers.

This is why I suspect that we will see a further push from the banks to get the BoE to "do more".

BTW, did you see what the Fed announced today? I have just posted something on it.


aSteve said...

I'm badly informed about the most recent Fed stuff... "pumping liquidity" - it looks moderately dangerous on the surface... but I've not investigated properly. Timing is interesting - just after a suggestion that 2% funds rate might be the slashing limit for the Fed for some time... they were rapidly running out of ammunition on the rate-cutting score.

I'm pleased I've talked you around a bit on the SLS. I found public outcry at the SLS frustrating - especially when the same people were silent about accepting mortgage and credit card debt in open market operations since last year... it misses the point spectacularly.

The usage of the SLS will definitely be interesting. Five months to go - and counting down. That puts publication on-target for shortly after the fallout for the second wave of mortgage resets for 2008.

I am absolutely certain that banks will want the central bank to "do more" - why wouldn't they ever? If I ran a bank I'd be demanding to be paid to borrow and for my farts to be acceptable collateral... it doesn't mean that the central bank should take my demands seriously, though. The BoE is in a stronger position to deny a bale-out if it can show a move that a bank can take to avoid being forced to use lender-of-last-resort facilities. I think the strategy is to slowly asset-strip banks to force them to write down their losses rather than kite them as long-term debts. I think it might work... it's the best idea I've seen to date.