Yesterday, Bank of England announced a £50 billion liquidity injection plan, to underpin the UK financial market, and boost confidence of mortgage takers. The move, though slightly different with the Fed’s desperate cash rescue to banks in States, highlights the administration’s resolve to lift the declining economy; however, it is extremely dangerous for the government bank to shoulder all the liabilities and risks.
Let’s look at the details of BOE’s plan; banks can transfer their asset-backed securities to cash with BOE, leaving BOE as the ultimate risk bearer for all the possible defaults.
NO rosy picture at all
If the economic scenario continues to worsen, the value of assets in BOE’s hand will decline or plunge without any doubt, so will do the value of securities that are backed by these assets.
BOE’s bet is that by injecting this huge tranche of money into the market, the overall situation and outlook for the economy will improve soon in the following months, even if not dramatically. This scene reminded us of the time when big investment banks in the US were doing the same thing, buying collateralized debt obligation that triggered the credit crunch last summer. This time, the trick is played on a much larger scale, with BOE as the key player.
UK won’t be able to escape the recession
In contrast to chancellor Alistair Darling’s remarks, Mervyn King, governor of Bank of England defended the Bank’s move as to reinstate market confidence, not to encourage the banks and other mortgage lenders to lend money fervently as they did before. It is without any doubt that the Bank’s move will alleviate the capital strain for some credit-tight banks, but the overall outcome for such a contingent move is still pending to be judged.
Since UK’s economy is so closely linked with the performance of the States, now it is well-accepted that US’s economy is in a recession, the days are counted for the bubble effect to sweep across European continent, UK will not be an exception. Mr. King and Mr. Darling have put the central bank into the centre of the tornado.
