Citigroup said the BoE should adopt a slate of targeted measures
Posted on 03/25/2008 8:45:34 PM PDT by bruinbirdman
Citigroup has called for radical measures to end Britain's financial crisis, rebuking the Bank of England for moving too slowly to meet liquidity needs and waiting too long to head off an economic downturn.
"The downside risks to UK growth are sufficiently severe that the Bank of England should now be adopting a more determined approach to easing financial market strains. Relative inaction has a cost," said the bank's chief UK economist, Michael Saunders.
Citigroup said the BoE should adopt a slate of targeted measures
The blunt criticisms come as Britain's interbank borrowing market began to sieze up again.
Comment: BoE seems to think crisis is just a storm in a teacup
Three-month LIBOR rates rose yesterday for the 11th session in a row to 5.995pc.
"The UK money markets have become dysfunctional. Three-month money rates are up 50 basis points since mid-January. The Bank of England seemed to think that the problem would fade away of its own accord. Instead, it is getting worse," Mr Saunders said.
"They still seem to be concerned about moral hazard, but we are long past that. It is not a question of bailing out the City. We're faced with the threat of unnecessary damage to the real economy," he said.
The Bank is in part hamstrung by its rigid anti-inflation mandate. Rising energy and food costs are likely to push inflation back over 3pc in coming months, making it very hard for the Monetary Policy Committee to justify pre-emptive measures to cushion the downturn. The US Federal Reserve has a broader licence to follow its instinct.
Citigroup said the Bank should adopt a slate of targeted measures proposed by Willem Buiter, a former MPC member. These include accep-ting a much broader range of collateral in exchange for loans, outright purchases of different kinds of private securities, and longer maturities for borrowing. These steps could alleviate financial strains without fuelling inflation.
Tim Bond, from Barclays Capital, echoed the concerns, fearing that the Bank has been left behind as the Fed and the European Central Bank opt for more expansive and creative measures to ease the crisis.
"Britain risks being the odd man out. The reason why we had a bear raid on HBOS last week is because people question whether the Bank of England is there to backstop the system. We need a clear framework to restore confidence, " he said.
"They need to do two things: increase the volume of liquidity available, and widen collateral. The good news is that the authorities are looking at a lot of ideas and are sensitive to the problem," he said.
The Bank met with the heads of major UK lenders on Thursday to try to soothe concerns and to explore bolder measures after the Fed's decision last week to invoke a Depression-era clause to take on $30bn of Bear Stearns liabilities and lend directly to broker-dealers. Citigroup said there had been a rise of 100 basis points in spreads for fixed-rate mortgages in Britain since the credit crunch began, negating the effects of two quarter point rate cuts.
"Forward rates in money markets imply an extended period of extreme stress." said Mr Saunders. Liquidity has dried up in the Gilt market, while net redemption of bonds and shares by UK companies reached £2.6bn in February.
Citigroup has cut its UK growth forecast to 1.25pc for 2008, even lower than the CBI's latest downgrade to 1.7pc-1.9pc.
Just like a junkie who’s trying to buy crack for the third time on a Sunday morning.
Many don’t realize the effects of the credit crisis on the UK economy and housing market are way worse than what we are seeing in the US.
The speculative housing bubble over there was even bigger than ours and their economy has become increasingly dependant on financials for all their growth and job creation. This growth was also fueled by a lot of foreign money from Saudi Arabia and Russia investors.
A year ago, there was all these articles talking about how London was going to overtake Manhattan and be the financial center of the universe.
But they have a currency that’s worth twice as much as ours. Nothing bad can happen to a country if they have a strong currency.
In all seriousness though I wish our friends across the borde4r all the best. The brits are tough they’ll get through this mess without any real trouble.
Citigroup should not be lecturing anybody. They should be apologizing and explaining to anybody unfortunate enough to be holding their stock for the past year.
"All" is correct from every sources I have seen.
One would suppose that those in the know understand why UK needs the Lisbon Treaty and EU.
yitbos
It bears repeating, "If the average Brit can get his hands on a pound, it is indeed worth $2." Big deal.
yitbos
brits are tough, yes, but they are in a world of trouble.
strong currecies don’t amount to much when bank runs are occuring.
I freely admit I have no clue how badly these bailouts are needed or if they are warranted. If it saves our economic systems, then it has to be done. If it is just there to prop up the usual bigwigs in the industry, then screw em. But I can’t tell the difference. All I know is that the liquidity crisis is real and severe and potentially catastrophic. It may just be we need these bailouts to save our financial system. I just don’t know.
OTOH, it seems like you can’t solve a problem created with cheap, easy money by shoveling out more cheap, easy money. At some point, the chickens must come home to roost.
This is beyond my comprehension and anybody who thinks they know the full scope and potential damage from this severe crisis is either ignorant or unrealistic. I don’t like the bailout because they seem unfair on the face of them. But if the alternative is a complete meltdown of our banking system, then there is no choice. Who knows? I’m thoroughly confused.
I do recall the articles of the cost of living space in London.
Interesting times...
One of the better posts on this subject that I’ve seen. I concur.
Everybody blames the lender when the borrower turns liar and walks. Why do you suppose that is?
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