The UK's central bank has offered to swap 60 billion euros in government bonds for mortgage debts in a bid to restore confidence in British credit markets. London's property market is already feeling the pinch.
The Bank of England unveiled a plan on Monday to swap government bonds for commercial banks' mortgage debt, injecting cash into the financial system to boost lending and ease the effects of a credit crunch on consumers.
"Discussions with banks suggest that use of the scheme is initially likely to be around 50 billion pounds" (63 billion euros), the Bank of England said in a statement. The package involves swapping gilt-edged government bonds for mortgage-backed securities.
"The Bank will be making money available to the British banking system ... the idea behind it is it will open up the market and it will begin the process of opening up the mortgage market, " Finance Minister Alistair Darling said on Sunday .
The move would free up bank balance sheets so they can lend more to consumers suffering the effects of an economic downturn, with falling house prices and soaring oil and food prices.
The global credit crunch which followed a slump in the U.S. subprime mortgage market left UK banks wary of lending to each other or offering new home loans, and led to the forced nationalisation of mortgage lender Northern Rock this year.
The British property market, which had been booming for over a decade, is at risk: "Nearly one out of three transactions fail because the buyer cannot get a mortgage", said FRANCE 24 business journalist Sylviane Bähr.
RBS latest hit by credit crisis
The last time Royal Bank of Scotland (RBS) made global headline news was when it snatched Dutch banking giant ABN AMRO for 71 billion euros last year.
This week, RBS is expected to announce a share issue in a move which analysts believe could raise over 10 billion pounds (12 billion euros). According to the Financial Times, RBS will also post 4 billion pounds in losses for the first quarter of 2008.
The British finance minister said other UK banks were likely to follow suit with efforts to shore up their balance sheets.
"We are doing our bit and I would like to see the banks pass on the benefits of the three interest rate cuts we've had over the last few months," Darling said in a BBC interview.
The British authorities are stepping in as the effects of the credit crisis are beginning to take their toll on the UK's economy. Redundancies have been piling up in the financial sector. "Some papers have talked about 3,500 job losses there. We can see this as a minimum", said FRANCE 24 business journalist Easey.
Date created : 2008-04-21