Sunday, July 26, 2009

Groundhog Day

Huge gilts row barely registers as the UK sleepwalks into stagnation

The UK's inter-bank market remains gridlocked largely because banks are still unwilling to lend to each other. That gums up the wheels of finance, starving credit-worthy firms and households of the cash they desperately need. This inter-bank torpor stems from fear of counter-party risk, because our banks continue to sit on billions of pounds of toxic liabilities which they still refuse to reveal.

Posted by devo @ 11:18 AM (3716 views)
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8 thoughts on “Groundhog Day

  • Hang on, if the banks aren’t lending to each other just because they don’t trust each other but there are still firms out there that the banks consider to be worthy of their credit, why don’t the banks with money to lend just advertise in business papers and the high street to get the worthy businesses borrowing from them directly.

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  • Can anyone verify or add anything to the following quote from the article?

    “On Thursday, following the biggest auction of index-linked sovereign debt in UK history, a massive dispute broke out, with investors publicly accusing the authorities of bad faith after the Bank hinted, just 20 minutes after the sale had closed, that it may soon stop buying gilts.”

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  • “Can anyone verify or add anything to the following quote from the article?”

    No, but it should not have come as much of a surprise. That the QE program was about to be suspended has been doing the rounds of the rumour mill for a couple of weeks now.

    Having indicated that QE will put on hold (but not before printing a collossal £125bn), the BOE is taking a bit of a gamble.

    If the stock market rally continues, there will not be much appetite for Gilts, while the DMO continues to have a monstrous issuance calendar.

    This could force Gilt yields sharply upward, and put pressure on the BOE to resume the QE program.

    However, if they start a second round of QE, the question will be asked “how many more rounds will there be?” – which in turn could spark an exodus from Sterling investments, especially from overseas investors.

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  • stillthinking says:

    The government’s bank guarantee must be viewed as meaningless. If the interbank market is still frozen then participants must still consider losses to be forthcoming. The only way then to unfreeze must be to crystallise the losses so everybody knows where they are. Or proceed with a managed bank default, which is what should have happened originally.

    The solution to interbank lending thus far seems to have been to coalesce the banks into mega-banks, thereby disappearing the requirement for interbank loans ! While this looks like a fix to interbank lending, it does not address the root cause, which are bank losses, now hidden because the interbank market has disappeared. But the interbank market will grow again as new banks arise. Tesco, Bank of China, Santander, and it is hard to see the existing new UK mega banks making back their losses in time. Hiding losses is a road to nowhere.

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  • Methinks Santander is not without some skeletons in the cupboard, and Bank of China is saddled with some legacies of past state interference..

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  • Enough Already says:

    For every 10% of private sector job losses – the Public Sector should take a 10% pay cut.

    That should wake ’em up to the situation.

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  • little professor says:

    Devo – here’s more information on the row in question:

    Bank of England attacked for gilts sell-off

    Angry investors blasted the Bank of England on Thursday when it sparked a sell-off in the gilts market after one of the biggest government bond offerings of the year.

    In an interview published 20 minutes after the £5bn bond deal was finalised, Andrew Sentance, an external member of the Bank’s interest rate-setting monetary policy committee, said it was considering whether to put on hold its quantitative easing programme designed to pump money into the economy.

    His remarks raised expectations in financial markets that the Bank might be ready for a sustained pause in its injections of cash into the economy through the purchase of government bonds.

    Scott Thiel, head of European fixed income at BlackRock, said: “This is one of the biggest single gilts transactions of all time, and the Bank jolts the market with significant market-moving information only minutes after the deal has been sealed.”

    Mr Sentance’s comments irked government officials. One said: “The problem with the external members of the Bank of England is that they live in this cocooned, separate world and do not consider how they might move the markets.”

    Benchmark 10-year gilt yields, which have an inverse relationship to the price of bonds, jumped 0.12 percentage points to 3.96 per cent on investor nervousness that quantitative easing could be nearing its end.

    Investors said that, although yields on the inflation-linked bond sold on Thursday remained steady, Mr Sentance’s remarks spooked the market and could have repercussions for holders of gilts across all maturities.

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  • Incidentally, the BBC’s yield calculator for Gilts went haywire some time ago – but no-one seems to have noticed..

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