Telegraph:

[mbga9pgf]

Doesnt look like the markets like it either....

http://www.telegraph.co.uk/finance/economi...d-says-IMF.html

The Fund believes that although the drastic measures to prop up Royal Bank of Scotland, Lloyds Banking Group and other major lenders had prevented them from collapse, more public money needs to be poured in if the economy is to get back to full strength. The alternative is a "zombie" recovery as banks continue to withhold lending for years, the IMF has told the Treasury.

The warning formed part of a stark assessment of the UK economy. In a double-pronged assault on the Budget, the Fund praised some of the rescue plans but dismissed the Chancellor's claim that the recession will be over by Christmas. It said he must start paying back debt significantly earlier than he projected last month.

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However, it is the IMF's assessment of the financial system which will cause more jitters, since many have assumed that enough public money has now been put into the banking sector. The Fund's concluding statement, following a week-long visit to the UK, said; "The financial system may not yet be repaired to a level where banks are ready to increase lending sufficiently to underpin a strong recovery. Although banks are expected to continue to remain above minimum regulatory capital requirements, further shocks will lead to an erosion of capital buffers."

It added that the Government must encourage banks to raise more capital, and to "stand ready to provide further public support where needed."

Although it is not explicitly stated in the report, the Fund believes further injections of public money may prove inevitable if the Government wants to increase lending from its current low levels, and help bring an end to the credit crunch. In comments which will spark fears among bank investors, the Fund also suggested banks should preserve their capital by "restraining dividends if required and converting preference shares to common shares."

The assessment follows a similar warning from Bank of England Governor Mervyn King last week.

The Fund maintained that the economy will shrink by 4.1pc this year - the biggest peacetime contraction since the 1930s, and by a further 0.4pc next year. More damaging is its criticism of the Budget's borrowing forecasts. It said: "The success of the current policy package hinges on the continued trust in the sustainability of the fiscal position", adding that the Government must "put public debt on a firmly downward path faster than envisaged in the 2009 Budget."

The Fund favours sharper spending cuts and bringing the Budget back in balance over an electoral term.

As for green shoots of recovery, has anyone bothered to calculate the effect of losing Mortgage Equity Withdrawl on the market? I figure we need a 4-5% contraction to cope with the loss of MEW alone. This is ignoring secondary effects such as the resulting joblessness...

[DeepLurker]

It's interesting that the same IMF report was also covered by the BBC, who gave a very different slant to this story - "IMF praise for UK recession plan". The BBC article was discussed on this site yesterday.

[Caveat Mortgagor]

As for green shoots of recovery, has anyone bothered to calculate the effect of losing Mortgage Equity Withdrawl on the market? I figure we need a 4-5% contraction to cope with the loss of MEW alone.

I did a calculation on this a few months ago. I believe that if you directly deduct the amount of mew money from GDP (even without adding in any multiplier effect generated from that spending) then the recession started 3 years earlier than is generally accepted.

As Gordo says, no more Boom and Bust, strong fundamentals and the problems are entirely american in origin. Damn our colonial cousins!

[Timm]

What is confusing me on this is how they hope to keep up the Green Shoots message at the same time as they are handing more billions to our banker freinds to avoid systemic collapse.

[Guest DissipatedYouthIsValuable]

What is confusing me on this is how they hope to keep up the Green Shoots message at the same time as they are handing more billions to our banker freinds to avoid systemic collapse.

Do not question the Wisdom of the Recovereh.

Your puny brain cannot see it's Light.

[laurejon]

How very predictable, a Government limping to the elections pumping out disinformation on the way, operating a scorch and burn policy, when in fact we are in serious trouble.

This news alone should promt all politicians who have the British Publics interest at heart to demand a general election and a change of Government.

Gordon Brown and his friends should be investigated for fraud and corruption when we have a new Government and No apologies accpeted, they should be handled in a court of law just like every other citizen of this nation.

[VeryMeanReversion]

I did a calculation on this a few months ago. I believe that if you directly deduct the amount of mew money from GDP (even without adding in any multiplier effect generated from that spending) then the recession started 3 years earlier than is generally accepted.

I think that is a reasonable way to look at it. Although the definition of recession is the result rather than the cause, adjusting GDP for MEW does give you an early indication of trouble.

Effectively selling part of the house to pay for ongoing consumption isn't going to end well.

VMR.

[Sybil13]

If there were Q's in March about whether the Government can raise the £220bn it needed for this year how can they give MORE money to the banks to lend whilst also saving the Building Societies and giving them more money to lend?

Lending is already down £200bn on 2007 due to the collapse of the RMBS market , isn't it obvious that nothing can fill this hole?

Britain is now one of the most indebted countries in the world.

We have personal debts of £1.5 trillion; national debt rising to £1.4tn; unfunded public-sector pension liabilities of another £1tn; and all this on top of a £1.3tn bank rescue programme. Britain is in deeper debt now than after the second world war and our children will be paying it off for most of their working lives.

The surest sign of this was the way the Budget made no serious attempt to explain how the government intends to pay back the colossal debts racked up during the bubble years, other than to make fantasy assumptions about growth returning to 3.5% in 2011. This "forecast" was an insult to the intelligence of the electorate, and the chancellor has rightly been condemned for delivering it. No serious economist believes that such a "trampoline" bounce-back is possible.

Yet even on these fantasy forecasts, the government is still planning to borrow more over the next five years than the total sum of all government borrowing for the last 300. There are doubts about whether the government will be able to raise even the £220 billion it needs this year to keep its head above water. Public borrowing is running at 12% of GDP: the highest in the G20 nations. Not even Ireland is in such a bad way.

The IMF in March said:

Britain's homeowners must brace themselves for a prolonged slump in the housing market, according to the International Monetary Fund, which delivered a grim assessment of the UK economy this weekend, in stark contrast to Alistair Darling's prognosis.

While the chancellor insisted in last week's budget that he expected to see green shoots before the year is out, the Washington-based lender believes the housing crash is far from over, with property still over-valued.

House prices have already fallen by around 20% in the UK; but despite the rising optimism of Britain's estate agents, the IMF said the housing downturn in the UK.......have "a considerable distance left to run".

Its experts pointed out that the boom in the UK was bigger than the bubble in America. House prices in the US have been falling since 2006, but the pace of decline is still increasing.

With the catastrophic loss of wealth from falling house prices weighing on people's confidence, the IMF expects recession in the UK to continue well into 2010. Britain is also dogged by higher inflation than in any other major economy, at 1.5% this year.

The IMF's analysis, published to coincide with the gathering of the world's finance ministers in Washington this weekend, will make uncomfortable reading for the chancellor.

Darling stuck by his budget forecasts of an upturn later in 2009, despite news of a worse than expected 1.9% contraction in GDP in the first quarter, telling reporters in Washington, "my forecast is based on what will happen in the future".

So what are the IMF saying now, the government should try to STOP THE HOUSING CRASH, despite the BOE warning Darling, "not to stop the housing crash"?

But can they?

Can the BOE print enough to save the banks building societies and given them enough to lend when there were Q's in March about whether they could raise what they needed for this year before needing to give the lenders A LOT MORE?

[R K]

John Mauldin had an up to date chart of GDP adjusted for MEW but I can't lay my hands on it.

There is this article from Calculatedrisk in '06.

I don't think it would be over-egging it to say that adjusted for MEW the US has pretty much been in a recession overall since 2001.

http://www.calculatedriskblog.com/2006/09/...t-mortgage.html

[porca misèria]

Translation: underlying inflation and market interest rates being both firmly in double-digits percentage, the banks will continue to lose money so long as they're lending at much lower rates. So current interest rates will require more bailouts.

[Ash4781]

All these tax rises, further nationalisations, spending cuts will have to happen post a general election (whoever gets in).

Recovery pencilled in for 2010-12 ?

"Whoever wins the next election, tax hikes and sharp spending cuts will be the order of the day -- but today's announcement by S&P puts that much more pressure on the next government to act quickly," Colin Ellis of Daiwa Securities said.

http://www.reuters.com/article/ousiv/idUSTRE54K2A320090521

[yellerkat]

As for green shoots of recovery, has anyone bothered to calculate the effect of losing Mortgage Equity Withdrawl on the market? I figure we need a 4-5% contraction to cope with the loss of MEW alone. This is ignoring secondary effects such as the resulting joblessness...

Here's a pretty graphic from Alice Cook's excellent blog, UK Bubble.