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History > 2008 > UK > Economy (II)




Fuel crisis Q&A


April 30, 2008
From The Times


Why do oil prices keep on rising?

Oil is becoming scarcer and harder to produce. Several former big areas of oil production are in decline while other top oil-producing countries, including Nigeria, Russia, Saudi Arabia, Iran and Venezuela, are either unwilling or unable to lift production. Chinese demand is expected to more than double by 2030. Hedge funds and investment banks have been placing big bets that oil prices will continue to rise, amplifying the volatility in prices.

Is petrol rising in tandem with oil?

In general, yes, although there tends to be a time lag of four to six weeks between increases in global crude prices and the price on forecourts.

Is the price pressure the same for diesel and unleaded petrol?

Because of the different components that make up the two, the pressures are slightly different. Overall, diesel is in shorter supply than petrol in Europe as gasoil, which goes into diesel, is used extensively for heating on the Continent. The increase in the number of diesel cars has also increased demand for diesel.

Is the Government cashing in?

Revenue from fuel duties and taxes over the past decade has increased in line with rising fuel costs and increased production. If the Government increases fuel duty, as is expected widely, later this year it would boost revenue by between £500 million and £600 million.

What can the Government do?

The Government has little influence on global crude prices. But cutting or freezing fuel duty is possible.

Is the price rise inexorable?

The head of Opec and Goldman Sachs have said that prices could rise to $200 per barrel but other industry players have said that they are baffled by current prices because, despite the pressures in the market, there is still sufficient oil to meet global demand. High prices are also stimulating a frenzy of investment in new fields previously considered too small, expensive or geologically challenging to extract commercially. This could have a dampening impact on oil prices when more of these enter production. But production simply cannot continue to grow indefinitely. By 2035 the world will use more than twice as much energy as it does today and demand for oil could rise from 85 million barrels a day to more than 120 million barrels.

How do the oil giants justify profits?

These are global companies with huge investment requirements. Shell invested $8 billion in the three months ended March 31. Costs in the industry are also thought to be rising at about 20 per cent per year.

Are biofuels the answer?

The EU has called for 10 per cent of all fuel to come from biofuels by 2020 but they seem to be creating as many problems as they solve by hindering food production and causing deforestation.

What should Opec do?

It is unlikely to agree to boost its production soon. It argues that speculators have more influence over the market than it does.

Fuel crisis Q&A,






Darling hails banks rescue package


Monday, 21 April 2008
The Independent
By Trevor Mason and David Hughes, PA

Chancellor Alistair Darling today welcomed the Bank of England's £50 billion rescue package for banks hit by the credit crunch.

Mr Darling told MPs the announcement would help resolve problems in the wholesale financial markets.

It should subsequently assist businesses, individuals and the mortgage market.

Flanked by the Prime Minister, Mr Darling said financial markets around the world remained "turbulent" but insisted the UK financial system remained "fundamentally strong".

Shadow Chancellor George Osborne broadly welcomed the Bank's move but urged the Chancellor to promise that there would be no loss to the taxpayer.

The Bank of England's move will see banks able to swap their riskier mortgage-backed assets for Government bonds to shore up their finances.

Reporting to MPs as they returned to Westminster after the Easter recess, Mr Darling said in a statement the scheme was developed after extensive discussions with the Treasury and the Financial Services Authority.

"The UK financial system remains fundamentally strong and the Bank of England's action has helped take some of the pressure out of the system by giving the banks additional liquidity to continue their usual banking operations."

Today's scheme was a further step towards tackling the problems arising primarily from the US sub prime mortgage failure.

Under it the banks will continue "to hold the risk on the securities they provide, so it is them rather than the Bank of England that will be exposed to any fall in value".

He stressed there was no subsidy to the banking sector.

Mr Darling said maintaining economic and financial stability was the Government's key priority and promised further action to restore stability in the financial markets.

Ministers were about to finish consulting on reforms to the banking system aimed at making it easier to intervene if a bank gets into trouble.

Further discussions would be held with the industry on details of the proposals before legislation was brought forward.

"I can confirm that it remains our intention to introduce legislation this session to strengthen financial stability and depositor protection."

Insisting that he was determined to do everything he could to help homeowners, the Chancellor said he would meet major lenders tomorrow.

Banks and building societies had a duty to treat their customers fairly.

At the meeting there would be discussions on how people whose fixed rate mortgages were coming to an end could be helped, as well as on assistance for those who may get into repayment troubles.

"I want to discuss with them (the banks and building societies) how they can pass on the benefits of falling interest rates as well as wider Government support to mortgage holders."

Mr Osborne said Britain had been left "more exposed than any other European country" to the credit crunch with the "highest personal debt on record".

To Labour laughter he said it was time to look at "counter cyclical capital rules" to try to avoid "boom and bust" problems in the future.

Mr Osborne said he "broadly welcomed" the Bank's liquidity scheme. "We were recently calling for it. The difference between a well judged intervention and a bail out lies in the details and the protection offered to the taxpayer.

"Will you give us your personal promise today that, as the man entrusted with the nation's finances, you believe the guarantees are such that there will be no loss to the taxpayer."

He said the risk to the taxpayer would be be reduced further if the Government had not agreed to indemnify securities backed by credit card debt, as well as those backed by mortgages.

"Why have you done that? We are trying to keep people in their houses, not prop up credit card lending."

Mr Osborne said the scheme was designed to "keep the taxpayer exposure off the balance sheet" with the swaps lasting 364 days instead of a year, "because if they were a day longer then £50 billion of debt would be added to the national debt".

He also raised concerns that the bonds may be swapped for credit card-backed securities rather than mortgage assets.

Mr Osborne questioned whether the banks had given any commitment to pass on the benefit of the scheme to borrowers.

The shadow chancellor turned his attention to the Government's wider difficulties of unrest within Labour ranks over the abolition of the 10p income tax band.

"Doesn't the last nine months reveal the folly of a Prime Minister who failed to use the global good times to prepare for the difficult times.

"A competent government would be in a position to help people with the rising cost of living.

"Instead, this incompetent Government's 10p tax raise will add to the misery of the lowest-paid families already struggling with a rising cost of living and could broadly cancel out any help with mortgage costs that this scheme might bring."

He insisted it was not too late to back down and added that "we know ... this Chancellor is for turning".

Mr Osborne concluded: "The Bank of England is now playing its part to help families hit by the credit crunch.

"It's time for the Government to do the same. It's time for the Government to stop fighting itself and start fighting for the country.

"And it's time for a Government that is on people's side not on people's backs."

Mr Darling said it was for the Office of National Statistics to decide whether the bond issue would count against the national debt.

He insisted that any credit card debts taken on would-be "triple-A rated" but it was for the Bank to decide what collateral it accepted.

But, he added: "The Bank of England will ensure that it takes far more from the banks that it gives out in Treasury bills."

The Bank has suggested that £100 of collateral would secure bonds worth £70 to £90.

The Liberal Democrat spokesman Vince Cable also linked today's announcement to the abolition of the 10p income tax band.

"A strange day for the Labour Government when it is coming to announce that it advancing billions of pounds to the banks at the same time it is taking billions of pounds away from low-paid taxpayers," he said.

He likened the Chancellor to Little Red Riding Hood, who "went round trying to be kind and helpful but finished up being outmanoeuvred and then eaten by a wolf".

Mr Darling, he said, was "slowly in the process of being devoured by the British banking system".

At this point Labour backbencher Chris Ruane cried "Little Red Riding Hood wasn't eaten" prompting Speaker Michael Martin to quip: "Honourable Members are entitled to get stories wrong from time to time."

With order restored, Mr Cable said the banks should make rights issues to cover their losses, instead of "rattling their begging bowls" to the Government.

He said British house prices were over-valued by up to 30%, which could wipe out the safety margin insisted on by the Bank of England.

Mr Darling said: "I always thought that part of the Liberal Democrats' problem was that it did believe in fairy tales. I hadn't understood that it didn't know the ending of the fairy tales.

"I very much hope that when you go home this evening you will apologise for inadvertently misleading your grandchildren about the end of this particular nursery rhyme."

Darling hails banks rescue package, I, 21.4.2008, http://www.independent.co.uk/news/business/news/darling-hails-banks-rescue-package-812853.html






Bank of England unveils

£50bn debt market plan


Published: April 21 2008 10:03
Last updated: April 21 2008 16:16
The Financial Times
By Chris Giles, Economics Editor

The Bank of England introduced a huge new operation to ease the liquidity problems of Britain’s banks on Monday morning, offering to swap difficult to sell mortgage-backed assets for Treasury bills.

Under the new “special liquidity scheme”, which is already in place, banks are able to offload high-quality AAA-rated mortgage-backed securities that existed at the end of last year for Treasury bills for a one-year period, renewable for a total of three years.

The Bank does not have a fixed amount of government paper on offer, but expects about £50bn to be demanded from banks, making the liquidity scheme twice as big as its existing three-month lending against mortgage-backed securities, which it started in December.

That lending has proved successful, but not sufficient to address the liquidity problems of Britain’s big banks, which are hoarding cash and have what the Bank of England describes as an “overhang of [mortgage-backed] assets, which they cannot sell or pledge as security”.

Initial indications are that the conditions on the Bank’s special liquidity scheme are more draconian than expected and the price the banks must pay for the new facility – a cross between a temporary purchase of assets and a loan – will be quite steep.

This might lead to a lack of demand for its use by the banking sector or stigma being attached to the lending programme, but should ensure that taxpayers are not exposed to any significant risks of losing money.

The Bank has been trying to walk a tightrope between providing banks with the liquidity they have been demanding and avoiding any sense that the taxpayer will bail them out.

To avoid accusations of a bailout it has put three tough conditions on the swap arrangements.

First, there will be a fee charged at a rate representing the difference between the rate at which banks can borrow in the market – the three-month Libor rate – and the interest rate on three-month government paper. Currently that gap is 1 percentage point, but if the scheme works at bringing down Libor rates, the fee will drop at three monthly intervals to a minimum of 0.2 percentage points.

Second, for every £1 of mortgage-backed assets handed to the Bank, commercial banks will get significantly less government paper in return. These “haircuts” will range between 12 per cent and 22 per cent for AAA-rated mortgage-backed securities, with the highest rate for those securities with maturities longer than 10 years.

These are tougher haircuts at short maturities than the three-month lending the Bank has performed since December and there is a higher haircut for securities denominated in foreign currencies of 0.03 percentage points.

Third, the securities will be valued at “observed market prices” which are currently low and part of the problem the Bank is trying to address. With market prices being paid, the scheme is unlikely to provide the floor for mortgage-backed security prices that many banks had been hoping for.

The Bank has put in place these stiff conditions because it wants to sort out the overhang of difficult-to-sell assets on banks’ books rather than subsidise new lending. To stop new assets being used, only securities on banks’ books at the end of 2007 will be eligible.

Mervyn King, governor of the Bank, said “The Bank of England’s Special Liquidity Scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks.”

Alistair Darling, chancellor of the exchequer, welcomed the move. He told MPs it would help resolve problems in the wholesale financial markets and should in turn assist businesses, individuals and the mortgage market.

George Osborne, shadow chancellor, broadly welcomed the scheme but urged the chancellor to promise that there would be no loss to the taxpayer.

Shares in the UK’s banks fell following the publication of the details of the scheme and sterling was also weaker, having risen at the end of last week when details of the plan began to emerge.

The pound fell 0.5 per cent to $1.9883 against the dollar, lost 0.5 per cent to Y205.95 against the yen and sliding 0.8 per cent to £0.7976 against the euro.

The three-month sterling Libor rate fell slightly from Friday’s fix of 5.89375 per cent to 5.885 per cent, still well above the Bank’s base rate of 5 per cent.

Martin Slaney, head of derivatives at GFT, said: “The market reaction at least in the short term may well be one of disappointment that further funds have not been earmarked as part of a more long term plan.”

“This rescue plan has been touted as a jump start to the lending markets but it is more likely to serve as a one-off bail-out which plugs a hole for now. We are a long way off from returning to a more liquid lending market where mortgages are freely available”.

Another analyst said: “The facility is helpful but the haircuts make it more onerous than expected for banks to participate. The funding gap remains much larger than this facility.”

    Bank of England unveils £50bn debt market plan, FT, 21.4.2008, http://www.ft.com/cms/s/0/316cfef4-0f80-11dd-8871-0000779fd2ac.html






House prices fall at fastest rate since 1978

Brown meets leading bankers as fears grow over mortgage lending freeze


Tuesday April 15 2008
The Guardian
Ashley Seager, Nicholas Watt and Larry Elliott
This article appeared in the Guardian on Tuesday April 15 2008 on p1 of the Top stories section.
It was last updated at 02:17 on April 15 2008.


House prices are falling at their fastest rate since records began 30 years ago as the mortgage lending freeze continues to undermine the housing market, the Royal Institution of Chartered Surveyors says today.

In a big blow to the government, which claims Britain is well-placed to withstand the global economic downturn, the RICS paints a bleak picture, in which the number of estate agents saying house prices rose, rather than fell, has dropped to the lowest point since the survey began in 1978.

The latest monthly snapshot of the housing market shows that 78.5% more surveyors reported a fall than a rise in house prices. The gulf has widened since February and easily eclipses the previous low of 64.5% in June 1990, when the economy was heading into recession.

The survey comes amid growing government frustration with banks and mortgage lenders. Gordon Brown has summoned the heads of Britain's top banks for breakfast meetings today, and while ministers still believe the housing situation is not as severe as the 1990s slump, they are concerned that some lenders are exploiting the global financial crisis.

Caroline Flint, the housing minister, will join forces with the chancellor, Alistair Darling, next week to step up pressure on Britain's mortgage lenders to offer existing and new borrowers a fair deal. They will tell the Council of Mortage Lenders that buyers must be "treated fairly" and that people are not stretched beyond their means. The lenders will be told to ensure that "principles of responsible lending for customers are upheld and applied".

With Downing Street reeling from a series of recent polls which give the Tories a healthy lead, Brown is likely to underline the government concerns when he meets the bank chiefs. Government sources insisted the meeting was not designed as a ticking-off and that the prime minister wanted to discuss global financial instability before flying to the US tonight for a three-day trip.

While Brown will ensure that the breakfast is friendly, the past few weeks have seen a marked hardening of the government's attitude towards the banks. Brown and Darling warned at the weekend that they expected help from the Bank of England to be passed on to individual consumers.

Ministers are acutely aware that Labour's main electoral asset over the past 11 years - a long period of strong growth - is in danger of disappearing as a result of the financial turmoil of the past nine months. George Osborne, the shadow chancellor, seized on this yesterday when he launched one of his strongest attacks on Brown's economic record which he said was "in tatters".

Downing Street knows the current economic difficulties have created the most difficult period for Brown since he entered No 10 last year. Labour loyalists are threatening to rebel against the government next week over the abolition of the 10p starting tax rate which has hit childless couples.

In a sign of the nerves on the Labour benches, there has even been speculation that Charles Clarke, the former home secretary, might mount a possible stalking horse challenge to Brown. Clarke dismissed this to friends as "complete nonsense".

But Clarke believes the mood among backbenchers has become more questioning since the 10p tax row, and that some MPs will become more restless if Labour does badly in the local elections. Though it is highly unlikely that plotters will start to organise some form of challenge to the prime minister's continuing leadership just yet, some may start to contemplate the unimaginable, Clarke believes.

Brown said yesterday that he understood people's fears. "Every effort of mine, every day that I wake up is about keeping this economy moving forward," he said. "This government is aware of the insecurities people feel."

    House prices fall at fastest rate since 1978, G, 15.4.2008, http://www.guardian.co.uk/money/2008/apr/15/houseprices.housingmarket






11am BST update

Bradford & Bingley shares hit new low


Monday April 14 2008
Graeme Wearden and Jill Treanor
This article was first published on guardian.co.uk on Monday April 14 2008.
It was last updated at 11:02 on April 14 2008.


Fears over the financial stability of Bradford & Bingley sent its shares sliding to a new low this morning, despite its firm denial that it is planning a rights issue.

Shares in the bank fell by 7% in early trading to 155.5p, as nervous investors feared it would be the latest victim of the financial turmoil. By 8.30am they were still down by 5.75p at 161.5p - its lowest level in over five years. But the company's shares had climbed back into positive territory by 11am, and were trading up 0.5p at 167.75p.

B&B had attempted to head off the speculation yesterday, telling shareholders that it was "not intending to issue equity capital by way of a rights issue or otherwise".

Along with Alliance & Leicester, B&B is regarded by analysts as heavily reliant on the wholesale debt markets for funding and therefore likely to be looking to raise finance from other sources. Industry observers believe all banks could be looking at ways to use the equity market to raise fresh funds and investors are known to be braced for a round of fundraising by the big banks.

Today's share price fall means that B&B's shares have dropped by around 40% since the start of 2008.

The speculation over a rights issue came just a few weeks after rumours about HBOS, Britain's biggest mortgage lender, wiped more than £3bn off its market value in one day last month.

The Financial Services Authority is now conducting an investigation into dealings in HBOS shares, amid suspicion that speculators had spread false rumours of a Northern Rock-style liquidity crisis.

In yesterday's statement, B&B reported that it had a strong capital basis above its regulatory requirements and as a result of the bank's conservative approach has financed its business activities through 2008 and into 2009.

"In the current market environment the board will naturally continue to monitor closely the balance sheet strength of the business and its funding plans," it added.

    Bradford & Bingley shares hit new low, G, 14.4.2008, http://www.guardian.co.uk/business/2008/apr/14/bradfordbingleybusiness.creditcrunch






1pm BST update

Interest rates cut to 5%

as credit conditions worsen


Thursday April 10 2008
Ashley Seager, economics correspondent
This article was first published on guardian.co.uk
on Thursday April 10 2008.
It was last updated at 13:09 on April 10 2008.


The Bank of England's monetary policy committee today cut interest rates by a quarter of a point to 5% in an attempt to counteract the effects of the global credit crunch on mortgage markets.

The move marks the third such cut in the past five months and takes Bank rate to its lowest in more than a year.

In anticipation of the rate cut, the pound had dropped to a record low against the euro in morning trading of 80.2p, or €1.247 to the pound. It remained broadly steady after the decision but ticked up slightly against the dollar.

The MPC issued a statement saying it had cut rates because of the deteriorating situation in credit markets and a worse outlook for economic growth despite rising inflation.

It said disruption in financial markets could slow the economy sufficiently to pull inflation back below the 2% target in the medium term. Analysts said that pointed to further interest rate cuts in the coming months.

In the run-up to the Bank of England's announcement, though, both Alliance & Leicester and Nationwide said they were again raising rates on some of their mortgages - a sign of the continued tension in money markets.

Alliance & Leicester said it was raising rates on its entire mortgage range for the second time in a week. Most are going up 0.2% but some by 0.35%.

The Nationwide said it would raise the cost of some of its fixed-rate mortgages by between 0.12% and 0.32%. Less than two weeks ago it pushed up its fixed rates by 0.2%. But it also said it would offer a three-year fixes at lower rates than before, between 5.75% and 6.45%, depending on the loan-to-value ratio.

But after Threadneedle Street's announcement, the Nationwide said it would cut its standard variable rate by 25 basis points, as did the Halifax, the country's largest mortgage lender.

Vince Cable, the Liberal Democrat Treasury spokesman, said: "A quarter percent cut in interest rates seems like welcome respite for the million of households struggling to meet mortgage repayments. However, the reality is that this will make little, if any, difference for the vast majority of people.

"There is currently a fundamental disconnect between the Bank of England's interest rate and the rates high street banks are willing to offer customers.

Earlier, the latest quarterly survey from the British Chambers of Commerce highlighted the Bank's dilemma as it showed that price pressures within British firms have hit their highest level in a decade but that demand, both at home and abroad, had come off the boil.

The BCC's economic adviser David Kern advised the Bank to go further. "Although this move was expected, sadly it is overdue and a reduction to 5% is no longer sufficient. We urge the MPC to consider a further cut in rates in May to 4.75%," he said.

Michael Coogan, head of the Council of Mortgage Lenders added: "This is good news for those borrowers with mortgages tracking the Bank base rate.

"But in these dysfunctional market conditions, the base rate is not in itself a good guide to the cost or availability of funds to lenders. To improve the market in which lenders are operating and restore consumer confidence, the Bank needs to coordinate successive base rate cuts with further injections of more widely available liquidity.

Paul Dales, analyst at Capital Economics, thinks the worsening news from financial markets and weaker economic activity will see the MPC cut rates to as low as 3.5% next year.

The European Central Bank announced in Frankfurt that it was leaving its key interest rate for the countries in the euro zone steady at 4%, as widely expected by financial markets. Eurozone inflation hit a record high of 3.5% last month, well above the ECB's target of 2%. Inflation in Britain is also above the Bank's 2% target, but only at 2.5%.

    Interest rates cut to 5% as credit conditions worsen, G, 10.4.2008, http://www.guardian.co.uk/business/2008/apr/10/interestrates.interestrates






IMF cuts UK growth forecast

Published: April 9 2008 10:00 | Last updated: April 9 2008 12:39
The Financial Times
By Norma Cohen and Peter Garnham


The IMF has cut its UK growth forecast for this year and scaled back sharply the outlook for 2009, according to a leaked report of its World Economic Outlook projections set for release later on Wednesday.

The revised growth projection of 1.6 per cent for 2008 - down from 1.8 per cent - and a similar level for next year compared to an earlier forecast of 2.4 per cent, comes less than a month after Alistair Darling, the Chancellor, cut his own forecasts for the UK economy.

The report also comes just a week after the Washington-based institution said that UK house prices are overvalued by nearly 30 per cent. Its view on UK house prices is underscored in the latest report where it is forecasting a drop of 10 per cent in values.

The report, leaked by the Daily Telegraph newspaper, cites the risks to the world economy of collapsing house prices where housing values have run up sharply in recent years.

But in an interview with the BBC ahead of the release of the report later on Wednesday, the Chancellor played down the effects of the IMF’s report.

”The IMF has downgraded every country’s growth forecasts,” said Mr Darling. ”It’s not surprising.”

In his Budget last month the Chancellor cut his own growth forecasts for the UK economy following the impact of the US downturn and the turmoil in the world’s financial markets.

Mr Darling insisted on Wednesday he was sticking by his revised forecast that the UK economy would grow by between 1.75 per cent and 2.25 per cent in 2008 and by 2.25 per cent to 2.75 per in 2009.

The Chancellor’s comments follow similar reassurances about the prospects for the UK economy from Gordon Brown, the UK’s prime minister, who said the fall in UK house prices was “containable”.

Signs that growth in the UK housing market is slowing grew after the Halifax bank confirmed earlier this week that prices are now on average lower than they were a year ago. It said prices fell by 1 per cent in the first quarter of 2008. This was the first year-on-year fall in house prices since the start of 1996, Halifax said on Tuesday.

The Halifax and the Nationwide, the country’s two largest mortgage lenders, are now forecasting modest declines in house prices this year.

However, there were fresh signs on Wednesday that UK manufacturers were weathering the global downturn.

The Office of National Statistics said in its latest survey that manufacturing output rose 0.4 per cent in February from January. The rise, the second in a row, was higher than analysts’ forecasts for growth of 0.1 percent.

The surprising strength of the manufacturing sector will give the interest rate setting Monetary Policy Committee pause for thought ahead of its latest interest rate decision.

Most analysts were expecting the Bank of England to cut interest rates by 25 basis points from 5.25 per cent to 5 per cent after its monetary policy meeting on Thursday.

However, calls for a cut by as much as 50 basis points after a string of recent weak economic data may be silenced following the manufacturing figures.

The pound, which dropped to a record low of £0.8000 against the euro in early trade on Wednesday, rallied to stand flat at £0.7972 against the euro and up 0.1 per cent at $1.9710 against the dollar.

But Paul Dales at Capital Economics said the better news on the UK’s industrial sector did little to offset the dire news on the UK housing market seen in recent days.

“The MPC is still odds on to cut interest rates on Thursday,” he said. “We doubt that industry will be able to offset the consumer slowdown.”

    IMF cuts UK growth forecast, FT, 9.4.2008, http://www.ft.com/cms/s/0/af4c0a4c-060f-11dd-802c-0000779fd2ac.html






3.50pm BST update

PM dismisses fears of a property crash


Tuesday April 8 2008
Andrew Sparrow, Jim Griffin and agencies
This article was first published on guardian.co.uk on Tuesday April 08 2008.
It was last updated at 16:08 on April 08 2008.


Gordon Brown today dismissed fears of a crash in the housing market, as figures showed the biggest monthly fall in house prices since the early 1990s.

The prime minister insisted that the drop in prices was "containable" and that the underlying state of the economy was sound.

But the Liberal Democrats warned there would be "an epidemic of repossessions" unless lenders took steps to ease the burden on homeowners having difficulty meeting their mortgage repayments.

Brown was speaking in response to the publication of figures from Halifax showing house prices falling by 2.5% in March.

The lender said the drop was the largest since 1992, and followed a decrease of 0.3% in February. As a result, prices are down 1% in the first quarter of the year, to leave the average UK property costing £191,556.

The fall in house prices follows the tightening of credit in recent weeks, as numerous lenders have adjusted their mortgage offers in response to the international credit crunch.

In an interview with the BBC, the prime minister insisted that today's figures should be seen in the context of rising prices over the last decade.

"We've seen house prices rise by about 180% over the last 10 years and they have risen by about 18% over the last three years, so a 2.5% fall is something that is containable," Brown said.

He added that the number of homes being repossessed was a "fraction" of the number being repossessed in the early 1990s, but insisted that the government was "always vigilant".

Ministers would be meeting with the Council of Mortgage Lenders to discuss what steps could be taken to help homeowners and homebuyers, he said.

"If you look back 15 years, we had 15% interest rates, 10% inflation, rapidly rising unemployment, public spending having to be cut, taxes having to rise dramatically," Brown said.

"If you look at this situation, because we've got low inflation we can cut interest rates, because we've had low debt we can afford to keep our public spending programme in line and to borrow at the right time to help the economy come through difficult times."

That was why growth in Britain was expected to be higher than in other countries, Brown said.


Heading for a fall

Vincent Cable, the Lib Dem Treasury spokesman, said today's figures showed the housing market was overvalued. "We are only at the early stages of a market fall," he said.

"The government is only just waking up to the problem, despite the fact it has been warned for years that there were great economic dangers from the bubble in the housing market, linked to exceptionally high levels of personal borrowing."

He said homeowners whose fixed-term mortgages were coming up for renewal were struggling to cope with the new terms of their mortgages, and that many of them would not be able to afford to pay.

"There will be an epidemic of repossessions unless the government forces mortgage lenders to moderate the process by offering shared ownership and payment holidays to keep people in their homes," he added.

Speaking for the Conservatives, shadow chancellor George Osborne said: "Today is the day that millions of homeowners are confronted with the consequences of Gordon Brown's economic incompetence.

"This week, instead of being able to help people, Labour are putting up taxes on millions, including the lowest paid in Britain.

"Gordon Brown failed to prepare - he borrowed in a boom and allowed the debt bubble to grow. Now the whole country is paying the price."


Slowest growth rate since 1992

Today's figures from the Halifax mean in the three months to March the annual rate of house price inflation fell back to just 1.1% - the slowest rate of growth in 12 years - from 4.2% in February and a peak of 11.4% last August.

Martin Ellis, chief economist at the Halifax, said: "We expect there to be a modest fall in UK house prices this year.

"Any declines, however, should be viewed in the context of the significant price rises over recent years. The average price has risen by £120,860 during the past decade from £70,696 to £191,556 - an increase of 171%."

He added that strong economic fundamentals were supporting house prices and a strong labour market was the key driver of the housing market.

The data follows figures from Nationwide which showed that prices fell by 0.6% month-on-month in March - a fifth successive decline.

This is a marked change since before Christmas when the society's three-month figures were still showing price rises.

Howard Archer, chief UK economist at Global Insight, said: "It is important not to put too much emphasis on one piece of data, and it should also be borne in mind that house prices are still only down 1.0% quarter-on-quarter in the first quarter of 2008.

"Nevertheless, the overall impression is that house prices are buckling markedly under the substantial pressure emanating from increased affordability constraints and markedly tighter lending conditions."

As a result of the latest figures Archer now expects house prices to fall by 7% in 2008 and 8% in 2009.

"We had previously forecast prices to fall by 5% in both years, but the recent escalation of the credit crunch means that there is a markedly increased danger that a sharp housing market correction could occur.

"Current rapidly deteriorating sentiment over the housing market also heightens the risk that house prices could fall more sharply over the next couple of years.

"Indeed, there is now a very real danger that a drop of more than 20% in house prices could occur over the next couple of years."

Despite falling prices and recent cuts to the Bank of England base rate, affordability pressures on borrowers are increasing as the credit crunch forces lenders to reprice mortgages and adjust lending criteria.

In recent weeks, numerous lenders have readjusted their mortgage offers as it becomes increasingly difficult to obtain credit.

Alliance & Leicester and Cheltenham & Gloucester both capped their maximum loans at 90%, while Halifax reduced its maximum loan to 95%.

Today, Abbey became the last lender to withdraw its 100% mortgage, meaning borrowers will have to put down a deposit of at least 5% to obtain a deal.

    PM dismisses fears of a property crash, G, 8.4.2008, http://www.guardian.co.uk/money/2008/apr/08/houseprices.property






House prices fall at fastest rate since 1990s


Tuesday, 8 April 2008
The Independent

House prices fell during March at their fastest rate since the 1990s' house price crash as the credit crunch continued to take its toll on the market, figures showed today.

Britain's biggest lender Halifax said the average cost of a home dropped by 2.5 per cent during the month, the biggest monthly fall since September 1992 and the second largest drop ever.

Annual house price growth also slowed to just 1.1 per cent, its lowest level for 12 years, meaning property prices are now falling in real terms on an annual basis.

Drops in the cost of property were even more dramatic on a regional basis, with house prices in the West Midlands falling by 5 per cent during the first three months of the year, while the average cost of a home has dropped by 4.7 per cent in Wales and by 2.6 per cent in the South West.

Annual house price growth has also turned negative in three regions, with prices 5.3 per cent lower in Wales than they were a year earlier, while they have fallen by 3.7 per cent in the West Midlands and 3.3 per cent in the South West during the past 12 months.

The housing market has been coming under increasing pressure in recent months due to a combination of the problems in the mortgage market and stretched affordability following previous strong price growth.

Figures from the Council of Mortgage Lenders, also released today, showed that the number of mortgages taken out by people buying a home fell for the fourth month in a row during February to reach a new low.

Just 49,000 home loans were advanced to people buying a property during the month, 30 per cent less than in February last year, and the lowest figure since the group first began to collect data in this format in 2002.

The CML said the February figures related to completions of transactions started several months ago, and warned that the ongoing tightening in lending criteria would lead to further falls in new business going forward.

The mortgage market is changing on a daily basis, as lenders raise their rates and increase the deposits they demand, making it harder for people to borrow the sums they need to buy their first home or trade up the property ladder.

Hard-pressed first-time buyers were dealt a further blow today when Abbey announced it was withdrawing from the 100 per cent mortgage market.

The group had been the only mainstream lender still offering mortgages to people without a deposit.

Its exit leaves only Bank of Ireland and Bristol & West, which are part of the same group, offering 100 per cent mortgages, although these deals need to be taken out with a parent or close relative.

There are now just three different 100 per cent loans available, down from 123 a year ago, while the number of 95 per cent mortgages has more than halved during the past 12 months.

Across the whole mortgage market there are now only 4,065 different products available, down from 5,392 at the beginning of last week and 15,599 in July last year before the credit crunch first hit.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "The sharp fall in the Halifax house price index in March highlights the growing pressure on the residential market as lenders continue to scale back their activity in the market."

Howard Archer, chief UK and European economist at Global Insight, said it was important not to put too much emphasis on one piece of data.

But he added: "Nevertheless, the overall impression is that house prices were buckling markedly under the substantial pressure emanating from increased affordability constraints and markedly tighter lending conditions even before the latest escalation of the credit crunch."

He added that he had increased his forecast for house price falls in 2008 from drops of 5 per cent during this year and next year to falls of 7 per cent in 2008, followed by a further 8 per cent drop in 2009.

He said: "Current rapidly deteriorating sentiment over the housing market also heightens the risk that house prices could fall more sharply over the next couple of years.

"Indeed, there is now a very real danger that a drop of more than 20 per cent in house prices could occur over the next couple of years."

But Martin Ellis, Halifax chief economist, said the group still expected there to be only a "modest fall" in house prices for the whole of 2008.

He said: "Sound economic fundamentals are supporting house prices. A strong labour market, low interest rates and a shortage of new houses underpin housing valuations.

"Our research shows that the labour market is the key driver of the housing market. Employment is at a record high and unemployment continues to fall."

The gloomy data on the housing and mortgage market increases the likelihood that the bank of England will cut interest rates by a further 0.25 per cent to 5 per cent on Thursday.

But new borrowers are unlikely to feel much of the benefits of any reduction, as base rates would have to fall by 0.75 per cent just to put mortgage rates at the level they would normally be at if interest rates were at 5.25 per cent.

    House prices fall at fastest rate since 1990s, I, 8.4.2008, http://www.independent.co.uk/news/business/news/house-prices-fall-at-fastest-rate-since-1990s-805846.html






Mortgage approvals fall to near decade low as two more banks suspend lending


Thursday, 3 April 2008
The Independent
By Sean Farrell

Mortgage approvals fell close to a decade low in February as the property market slumped and cash-strapped banks reined in lending, Bank of England figures showed yesterday.

The figures were revealed as two more banks took action after First Direct suspended lending on Tuesday. The Co-Operative Bank has withdrawn its two-year mortgage deals, while Lehman Brothers, the US investment bank, stopped lending at its two British mortgage businesses, South Pac-ific and Preferred, last night.

Banks approved 73,000 loans for house purchases, down from 74,000 in January and 39 per cent lower than a year earlier. The figure is the second-lowest since records began in 1999. Mortgage lending was stable at £7.4bn, the equal-lowest figure since mid-2005 and well below the £8.2bn average for the previous six months.

The figures underlined the impact of the credit crunch on the housing market as banks ration lending and refuse to pass on interest rate cuts to customers. First Direct has withdrawn mortgages for new customers to cope with soaring demand after other lenders raised rates. The Bank of England has cut interest rates by a quarter point twice since December but banks and building societies have increased rates as they ration lending and seek higher returns for risk. Average interest rates on new fixed-rate mortgages rose to 5.88 per cent in February from 5.74 per cent in August.

The booming housing market has been a key driver of the economy in recent years as homeowners have taken confidence from rising prices and have released equity to pay for spending. The Bank of England's figures indicated that the shortage of mortgage finance may be forcing consumers to switch their borrowing from secured loans to more expensive overdrafts and credit cards.

Home equity withdrawal fell sharply to £7.3bn in the fourth quarter of 2007, the lowest since the first quarter of 2005 and down from a high of £13.7bn in the final quarter of 2006. In February, consumer credit jumped to £2.4bn from £0.9bn the previous month as personal loans and overdrafts recorded their biggest increase since 1989.

Howard Archer, chief UK and European economist at Global Insight, said: "February's jump in consumer borrowing is very surprising and could be a consequence of people looking to borrow while they can amid fears that tightening credit conditions will make this increasingly difficult over the coming months."

Economists are increasingly betting on a further rate cut at next week's meeting of the Bank of England's Monetary Policy Committee. But with banks unwilling to pass on the cuts, many mortgage customers coming off fixed-rate deals will be pushed into paying higher interest rates.

Mike Ellis, finance director of HBOS, Britain's biggest mortgage lender, warned that mortgage prices would continue to increase this year. "No one can be in any doubt that the cost of medium-term wholesale funds has risen and that this will be passed on to the consumer," he said. Mr Ellis added that estimates for housing transactions and net lending – previously estimated at £80-90bn – were likely to be revised downwards significantly.

Banks and building societies became increasingly reliant on borrowing money in wholesale markets rather than from retail depositors to fund their lending. But with the wholesale markets frozen by the credit crunch, they are now battling for business from individual savers.

The Building Societies Association reported net deposit inflows of £1.35bn in February, the highest level for that month since 1997.

    Mortgage approvals fall to near decade low as two more banks suspend lending, I, 3.4.2008, http://www.independent.co.uk/news/business/news/mortgage-approvals-fall-to-near-decade-low-as-two-more-banks-suspend-lending-804062.html






Personal debt soars as borrowers rush for cash


April 2, 2008
From Times Online
Gary Duncan, Economics Editor


Unsecured personal borrowing leapt by £2.4 billion in February, the biggest rise for more than five years, as consumers rushed to borrow what they could as the credit crunch tightened its grip.

The sharper-than-expected rise in unsecured borrowing, mainly through personal loans and overdrafts rather than on credit cards, startled the City. The data has been released just a week before the Bank of England's Monetary Policy Committee will decide whether to cut or keep the UK interest rate at 5.25 per cent.

Detailed breakdowns of the Bank of England figures showed that, within the £2.4 billion total, banks' unsecured lending to consumers leapt by nearly £1.6 billion - four times January’s increase.

Some economists concluded that the rise in lending was explained by a dash for borrowed cash by consumers fearful that access to funds may dry up as the cried squeeze worsens.

“Together with the news that secured lending is getting harder and harder to come by, this could be a worrying sign of distress,” Fathom, the economic consultancy, said.

“Consumers are simply resorting to unsecured borrowing in their time of need,” said Vicky Redwood of Capital Economics. “A similar pick-up in consumer credit was seen in the United States as its own slowdown gathered steam in the middle of 2007. Either way, a rise in unsecured borrowing out of desperation would hardly be a positive development.”

Unsecured borrowing was probably given a further boost as households that might previously have raised funds by borrowing against the increased value of their homes found this avenue blocked by the drought in mortgage funding markets.

So-called mortgage equity withdrawal, which in the past has been a huge source of funds for consumers, tumbled in the final quarter of last year as the housing downturn deepened and homeowners became more wary of cashing-in on previously rising property values.

Equity withdrawal tumbled in the final three months of last year to a relatively modest £7.3 billion - equal to 3.2 per cent of households’ incomes after tax, the Bank of England also reported.

This was down sharply from £10.8 billion in the third quarter, or 4.8 per cent of households' incomes after tax, and peaks of more than 8 per cent of incomes in the earlier part of this decade. City economists had expected a figure of £9.5 billion for the fourth quarter.

The drop in equity withdrawal is a further symptom of the impact on homeowners’ sentiment from the housing downturn, and came as the Bank’s data on mortgage lending and approvals suggested that the property market remains on course for a further slowdown.

Net mortgage lending for house purchases, as opposed to remortgaging, rose by a slightly stronger than expected £7.4 billion in February, matching January’s increase.

    Personal debt soars as borrowers rush for cash, NYT, 2.4.2008, http://business.timesonline.co.uk/tol/business/economics/article3668178.ece






Ex-Northern Rock boss gets £750,000

Chief at helm when bank almost crashed will also draw on £2.5m pension as shares plunge to 5p


Sunday March 30 2008
The Observer
Richard Wachman, city editor
This article appeared in the Observer on Sunday March 30 2008 on p2 of the News section.
It was last updated at 00:45 on March 30 2008.


Northern Rock will ignite a storm of controversy tomorrow when it reveals that its former boss Adam Applegarth received a £750,000 pay-off when he left last December.

Applegarth, who is 46, is also entitled to draw on a pension pot of £2.5m at the age of 55, built up since joining the bank as a graduate trainee almost 20 years ago. Experts say that could bring him retirement benefits of up to £200,000 a year.

Vince Cable, Treasury spokesman for the Liberal Democrats, said it was 'outrageous that someone who brought the bank to the brink of destruction and subjected taxpayers to liabilities worth billions of pounds should be rewarded for failure'.

In September, Northern Rock came close to being brought down by the credit crunch as customers queued to withdraw their money in the first run on a British bank for more than 100 years. The bank was nationalised in February after being kept afloat with emergency funding from the Bank of England. It owes the taxpayer £25bn.

'It doesn't look good that the government appears to be sanctioning pay-outs of this size to someone who played a big role in the bank's demise,' added Cable. 'Many people said well before Northern Rock hit the skids that it was lending too aggressively and that its business model was risky.'

Last week, the City watchdog, the Financial Services Authority, admitted to failures in its supervision of Northern Rock. The FSA said there was 'a lack of adequate oversight and review' and that too few of its officials were assigned to monitor its activities.

Northern Rock is expected to point out that Applegarth will not receive his 2007 bonus and that the £750,000 is being paid on a monthly basis and will be reduced if he finds another job.

Northern Rock, now headed by Ron Sandler, who revived the Lloyd's of London insurance market in the early Nineties, will reveal details of directors' remuneration tomorrow when it publishes its annual report and accounts. These will show that Northern Rock paid millions out of the public coffers to investment banks such as Citigroup and Goldman Sachs for advising it on funding options and a possible sale of the business.

Northern Rock was nationalised after potential bidders for the bank, including Richard Branson's Virgin group, failed to agree terms with Chancellor Alistair Darling last month.

Applegarth joined the then building society from Durham University and in 2001, aged 39, was made chief executive, one of Britain's youngest bosses of a major company.

Northern Rock floated at 463p a share in October 1997 and peaked at around £12 early last year. When dealings were suspended this month, the bank's shares stood at only 90p.

Shareholders say they want 'fair recompense' for the compulsory purchase of their shares by the government and are considering legal action in pursuit of their claims. Small investors want up to 500p a share, but the most they are currently expected to get is 5p.

    Ex-Northern Rock boss gets £750,000, O, 30.3.2008, http://www.guardian.co.uk/business/2008/mar/30/northernrock.banking






House prices fall further in March


Friday March 28 2008
Hilary Osborne
This article was first published on guardian.co.uk on Friday March 28 2008.
It was last updated at 07:47 on March 28 2008.


House prices fell for the fifth month running in March, bringing the annual rate of growth to its lowest level in 12 years, the UK's biggest building society said today.

The 0.6% fall is the biggest drop since last November and brings the average price of a home in the UK down to £179,110 - just 1.1% or £2,027 more than this time last year, Nationwide said.

The society's figures show the annual rate of growth has fallen by 10% since June, with almost £7,000 being wiped off prices since October.

Over the past three months average prices have dropped by 1.5%, suggesting a real change in sentiment since the period before Christmas, when the society's three-month figures were still showing price rises.

Nationwide's chief economist, Fionnuala Earley, said consumers' confidence in the housing market had been falling since September, driven by turmoil in the stockmarket, the problems at Northern Rock and signs of a slowdown in price growth.

"While consumers' estimates of the precise rate of future house price growth has not been a good measure of turning points in the market, nor a good predictor of the actual rate of price movements, once a general trend in expectation has been formed its effect is likely to be highly influential on both transactions and price levels," said Earley.

"This happens, first by removing the urgency to move and second by giving buyers a bigger incentive to drive a harder bargain in order to hedge against any possible falls in prices."

Earley said the outlook for UK house prices was "clearly more downbeat" than it had been in November when the society predicted a 0% movement in the market over the course of 2008.

"We expect a modest fall in house prices during the year, but such a fall should be seen in context," she said.

"If prices were to fall in line with consumers' expectations they would still be higher than two years ago.

"A moderate fall in prices at this stage should not be unwelcome and should help to ensure greater stability in the market going forward."

Falling confidence

Figures published earlier this week show just how low consumer confidence in the market has fallen.

On Tuesday, the National Association of Estate Agents reported the number of potential homebuyers on its members' books had fallen to a record low, while yesterday the British Bankers' Association said the number of mortgages approved for house purchases in February had fallen by 33% over the past year.

And despite price falls and recent cuts to the Bank of England base rate, affordability pressures on borrowers are increasing as the credit crunch forces lenders to reprice mortgages and adjust lending criteria.

Today, Nationwide joined a number of lenders in putting up rates on tracker and fixed-rate home loans for new borrowers.

Howard Archer, chief UK economist at Global Insight, said: "The Nationwide data indicate that house prices are continuing to buckle under the substantial pressure emanating from increased affordability constraints and markedly tighter lending conditions.

"This was even before any impact from the recent escalation of the credit crunch."

Archer added that he was sticking to his forecast of a 5% fall in prices in 2008, but warned: "The current escalation of the credit crunch means that there is an increased risk that a significantly sharper housing market correction could occur."

    House prices fall further in March, G, 28.3.2008, http://www.guardian.co.uk/money/2008/mar/28/houseprices.property






Debt-Gorged British Start to Worry That the Party Is Ending


March 22, 2008
The New York Times


LONDON — At one point, Alexis Hall had more than 50 pairs of designer shoes and handbags. It never occurred to the 39-year-old media relations executive from Glasgow that her £31,500 in debt ($63,000) would be a problem.

“It was so easy to get the loans and the credit that you almost think the goods are a gift from the shop,” she said. “You don’t fully realize that it’s real money you are spending until you actually sit down and consolidate your bills and then it’s a shock.”

As the United States economy weakens, many Americans are being overwhelmed by personal debt, but Britons are even more profligate. For most of the last decade, consumers here went on a debt-financed spending spree that made them the most indebted rich nation in the world, racking up a record £1.4 trillion in debt ($2.8 trillion) — more than the country’s gross domestic product.

By comparison, personal debt in the United States is $13.8 trillion, including mortgage debt, slightly less than the country’s $14 trillion G.D.P.

And while the Federal Reserve in Washington has cut interest rates, in an effort to loosen lenders’ grip on credit, the Bank of England’s interest rate increases last year are trickling through to mortgages at the very time home values are dropping and banks are becoming more reluctant to lend.

Until now, debt has mostly been a good thing for Britain. In the hands of free-spending consumers, it fueled economic growth. The government borrowed heavily in recent years to invest in infrastructure, health and education, creating a virtuous cycle: government spending led to job creation, which led to greater consumer confidence and more spending, which, in turn, stimulated growth.

Economists say Britain’s relationship to debt is complex, but at its core is a phenomenon more akin to recent American history than European trends. As in the United States, a decade-long housing boom and strong economic growth bolstered consumer confidence, creating a perception of wealth almost unknown in countries like Germany and Italy.

“Culturally, maybe also because of the defeat in the war, Germans remain reluctant to borrow and banks are often state-owned, pushing less for profits from lending,” said Alistair Milne, a professor at Cass Business School in London.

Since many younger Britons have never lived through a period of slow growth, few now see the need to hold back on borrowing, not to mention saving.

“The general mantra is spend now, think later,” said Jason Butler, an adviser at Bloomsbury Financial Planning. “It’s easier to get a loan or a credit card these days than to get a savings product.”

The average British adult has 2.8 credit or debit cards, more than any other country in Europe. A growing number are borrowing to pay for vacations, furniture, even plastic surgery. As a result, Britons are spending more than they earn, racking up a household debt-to-income ratio of 1.62 compared with 1.42 in the United States and 1.09 in Germany.

To her parent’s generation, Ms. Hall said, owing money beyond a mortgage was “shameful,” an admission of living beyond one’s means. Debt was also more difficult to get.

That changed in the late 1990s when American lenders, including Citigroup and CapitalOne, pushed into the British market with a panoply of new lending products. Fierce competition among banks meant potential borrowers were suddenly bombarded with advertising and offers for low- or no-interest loans and credit cards.

While Britain’s financial regulators watched the explosion of retail lending from the sidelines, their counterparts in Germany and France were more restrictive. As a result, the British market became the largest and most sophisticated in Europe.

The growth was also fueled by soaring demand for debt on the back of rising real estate prices and relatively low interest rates in the late 1990s and early 2000s. Those who did not own a house rushed to join the homeowners watching their property triple in value.

The trend on the Continent was the opposite. Home prices in most European countries barely moved, mainly because markets were more regulated, there was more housing stock and renting was more popular.

Liz Bingham, head of restructuring at Ernst & Young in London, blames the obsession with homeownership on Britain’s “island mentality”: land is seen as a finite good and a valuable asset.

“The housing boom automatically made people feel richer than they actually were and people went on to use the equity locked up in their property almost as a bank account they can dip into every time they want to buy a new car,” Ms. Bingham said.

As the perception of wealth grew, the social stigma around debt disappeared. Borrowing became such an accepted part of life that today one in five teenagers does not consider being in debt to be a bad thing, a survey by Nationwide Building Society showed.

Debt levels increased further as it became easier to get loans, and retailers, like computer chain PC World, offered both goods and the loans to buy them. Consumers happily accepted, thinking that as long as they were deemed creditworthy, they were not in danger of defaulting.

Andy Davie is a case in point. Even after he had racked up £70,000 in personal debt trying to keep his fruit and vegetable business afloat, credit card issuers kept increasing his credit limits.

“You tend to use credit to pay for credit and as far as the banks are concerned you are fine,” said Mr. Davie, 41.

He was finally forced to declare bankruptcy. Though still painful, the process made the prospect of defaulting slightly less daunting.

“Rather than showing up at court you just fill in an online form and speak to someone on the phone,” said Mark Sands, director of personal insolvency at KPMG in London.

The ease of the bankruptcy process, the availability of debt, the property boom and strong economic growth, lulled consumers into a “false sense of security that is now coming to haunt us,” said James Falla, a debt adviser at London-based Thomas Charles.

“It’s all good as long as the economy is doing well, but if that changes people will really get caught short,” he added.

And things are changing. Growth has already started to slow this year, and the government lowered its 2008 forecast to 1.75 percent to 2.25 percent, after 3.1 percent growth last year.

Home prices are falling, despite a dearth of housing and an influx of wealthy Middle Easteners and Russians, especially in London. Last year, housing foreclosures reached the highest level since 1999 and are expected to rise still further this year.

And more than one million homeowners have adjustable-rate mortgages that are expected to reset in the next 12 months — to significantly higher rates.

The prospect of rising costs has already prompted some consumers to change their spending habits. The camera retailer Jessops and the fashion store French Connection are among retailers feeling the squeeze and reporting lower sales since the end of 2007.

But changing spending habits will not be enough to solve the problem of rising debt levels, said Mr. Butler, the debt adviser. Consumers will also have to learn to save.

According to a survey for the Office of National Statistics, less than half the population saves regularly, and more than 39 percent said they would rather enjoy a good standard of living today than save for retirement. Ms. Hall said she was among that 39 percent. She recently took out new loans, planning to repay her existing debt. But she ended up spending the money on more luxury goods instead.

This year, she published a book about her experiences. She said she did not expect the book’s proceeds to repay her debts, but it may help the growing number of people in similar positions cope with theirs.

    Debt-Gorged British Start to Worry That the Party Is Ending, NYT, 22.3.2008, http://www.nytimes.com/2008/03/22/business/worldbusiness/22debt.html






Bank of England urged to ease crisis with cash injection

· Mortgage trade body says its market is freezing up
· Retail lenders hold up Fed and ECB as models


Friday March 21 2008
The Guardian
Jill Treanor and Ashley Seager
This article appeared in the Guardian on Friday March 21 2008 on p35 of the Financial section.
It was last updated at 00:08 on March 21 2008.


Britain's big banks pleaded yesterday with the Bank of England to pour more liquidity into the money markets, amid warnings that mortgage lending was freezing up because of the credit crunch.

A confidential meeting between senior executives from the "big five" banks and the Bank of England governor, Mervyn King, took place as shares in HBOS recovered most of the losses they suffered on Wednesday from selling caused by "unfounded and malicious rumours".

The "big five" - Lloyds TSB, Barclays, Royal Bank of Scotland, HSBC and HBOS - are thought to have asked the Bank to extend its money-market operations, accept a wider range of collateral for its loans and act more like the European Central Bank and US Federal Reserve, which they say have been more responsive to the credit crunch.

The ECB lent banks an extra €15bn (£11.6bn) yesterday for the Easter holiday period, while the Fed will make $75bn (£38bn) of treasury securities available to big investment firms next week.

The big five also discussed plans to change the system for dealing with possible bank failures, which is being examined by the Bank, the Treasury and the Financial Services Authority.

King is thought to have given the banks a sympathetic hearing but reiterated his views about "moral hazard".

The banks refused to discuss the meeting. HSBC said it was "a positive, constructive and useful meeting".

The Bank of England broke its tradition of refusing to discuss conversations with bank executives by saying: "Representatives of the UK banking industry met today with the Bank of England for a regular meeting to discuss current market conditions and the tripartite consultation document on financial stability and depositor protection.

"The Bank of England and the banks agreed to continue their close dialogue with the objective of restoring more orderly market conditions."

Before the meeting, the Bank added £5bn of liquidity to its routine weekly money-market operations in its latest effort to relieve tensions caused by the retail banks' reluctance to trade with another. The auction offer was three times oversubscribed, although Bank sources described that as "normal".

The Council of Mortgage Lenders also called on the Bank yesterday to do more to improve liquidity to enable lenders to improve the range of mortgages on offer. The CML said mortgage lending slumped 6% in February from a year ago.

Michael Coogan, CML chief, said: "Demand for mortgages remains strong but cannot be fully met from existing funding. This has led many lenders to reduce their product ranges, increase their mortgage prices and, in some cases, to reduce their lending capacity."

Some analysts agreed that the extra funds offered were insufficient. Philip Shaw, chief economist at Investec, said: "Given that overnight rates have generally remained above the Bank rate since Monday, the level of extra liquidity is a little disappointing."

Money markets remained tight yesterday as the three-month interbank interest rate rose to its highest level of the year at 5.98%, its 10th consecutive daily rise.

As bankers were making their plea for more liquidity, the Financial Services Authority had begun to contact City players in its attempt to find the source of the rumours that inflicted the damaged on HBOS's shares. Its investigation is into trading in the shares of a range of financial institutions, not just HBOS.

An email claiming that the Financial Times was planning a story that could cause difficulty for HBOS was being looked at but most of the FSA's efforts were focused on analysing daily trading reports from City firms, and following up leads from brokers and traders.

Ireland's financial regulator is working with the FSA because it believes "false and misleading rumours" may have affected trades in the republic.

    Bank of England urged to ease crisis with cash injection, G, 21.3.2008, http://www.guardian.co.uk/business/2008/mar/21/creditcrunch.bankofenglandgovernor






London 'most expensive city'


Tuesday March 18 2008
Hilary Osborne
This article was first published on guardian.co.uk on Tuesday March 18 2008.
It was last updated at 16:21 on March 18 2008.


London is the most expensive city in the world to live and rent a property, while residents of Zurich can get the most for their (typically large) pay packets, according to research published today.

In a comparison of prices and earnings in 71 cities around the world, the Swiss banking giant UBS found renters in London faced higher living costs than those in any other major capital.

When rents were excluded from the calculations, those living in the UK's biggest city fared slightly better, with the prices of common goods and services ranking third highest behind Oslo and Copenhagen.

Salaries in the two cities make up for the high cost of living: according to UBS Copenhagen boasts the highest wages before tax, and is closely followed by Oslo.

London only makes it to 10th on the list, after cities such as Dublin and Frankfurt.

Zurich ranks number three in terms of gross salary, but when tax and other deductions have been made and net earnings are compared, the inhabitants of the Swiss city take home the most cash.

Zurich residents also possess the highest purchasing power, UBS said, with workers having the most to spend for the hours they work.

The report said fluctuating exchange rates had pushed eurozone countries up the cost-of-living rankings.

These include Dublin, which has seen rising living costs push it from the 13th most expensive city in which to live in 2005, to the fourth this year.

"Other cities notorious for their high prices have ceded their places," the report said.

"The US dollar's sharp depreciation - at the time of our editorial deadline, down almost 18% against the euro since our last survey – has made New York a much more affordable place for European shoppers.

"London is now 26% more expensive."

    London 'most expensive city', G, 18.3.2008, http://www.guardian.co.uk/money/2008/mar/18/consumeraffairs.renting






Leading article: A gloomy outlook, especially in this country


Tuesday, 18 March 2008
The Independent

One week ago, the markets responded to the £100bn injection of funds by the US Federal reserve and the European central banks by marking up shares in a brief burst of relief and optimism. Yesterday, they responded to the Fed's action in organising a rescue of the Bear Stearns investment bank by marking stocks down by as much as five per cent across the globe. This, as Alan Greenspan, the legendary former head of the US Fed said yesterday, is shaping up to be the worst financial crisis since the Second World War. It made a mockery of the sanguinity of the British Chancellor, Alistair Darling, about British prospects in last week's Budget. And it raised urgent questions about how far this crisis could feed across the world, stemming growth, curbing lending and undermining confidence.

What started out as the just rewards for imprudent lending by US financial institutions in poorly-backed mortgages has now blown up into a crisis which has caused the financial markets virtually to seize up. Banks, uncertain of their own exposure and suspicious of the state of other banks, have ceased to lend. Interest rates in the inter-bank markets have risen way above the levels set by the central banks. Rumours have abounded as to which bank is next in trouble and this in turn has made the markets even more jittery, which in turn has started to affect investment and the stock markets – and hence consumer confidence.

Will the latest actions by the US Fed and by the Bank of England to increase liquidity in the market in the wake of the Bear Stearns collapse prove any more effective than its measures last week? Certainly, the US Fed and Treasury have acted with impressive determination and speed (in marked contrast to the stuttering response to the collapse of Northern Rock by the Bank of England and the Treasury). The Bear Stearns rescue, the reduction in lending rates and the added liquidity are all there to prove that the US authorities will do whatever they think it takes to stop this crisis spreading and restore confidence.

That is all well and good. The trouble is, however, that so long as there is no certainty about exposure, nor about the state of the housing market, then banks will continue to be cautious about lending. So long as this is true, reducing interest rates and even increasing liquidity will not serve to open up the credit markets. The added problem is that the troubles in the financial section are occurring just as the US is moving into recession, while the economies of China and India, the new engines of growth, are beginning to slow under the pressure of rocketing raw material and commodity prices and rising domestic inflation. When the US sneezes, the rest of the world no longer necessarily catches pneumonia. But when the American economy freezes just as the price of raw materials goes through the roof and the banking system seizes up, then the global outlook is gloomy.

This is not the end of capitalism. Eventually, the bottom will be reached in the US housing market, the financial institutions will have a clear idea of their liabilities and, slowly, confidence and lending will return. But who knows how long this will take? In the meantime, the world faces the depressing prospect of a prolonged period of slowdown as the ramifications of a crisis caused by profligate American bankers are worked out around the globe. That uncertainty is particularly profound in the UK, which has a similar reliance on housing prices as its main engine of growth, plus a greater dependence than any other major country on financial services as a mainstay of its economy, foreign earnings and investment. After this weekend, Mr Darling's sanguinity of last week looks not just over-optimistic but positively irresponsible.

    Leading article: A gloomy outlook, especially in this country, I, 18.3.2008, http://www.independent.co.uk/opinion/leading-articles/leading-article-a-gloomy-outlook-especially-in-this-country-797149.html






From homes to jobs – how ill winds from Wall Street will hit you


Tuesday, 18 March 2008
The Independent
By James Daley and Sean O'Grady

The collapse of the global investment bank Bear Stearns has lent a new ominous perspective to the credit crisis. While some had dared to believe that the worst was over, yesterday's events made it abundantly clear that chronic uncertainty could continue for many months, and that even the world's largest banks are not safe from danger. Nevertheless, while conditions are continuing to get tougher for UK consumers, credit is still available and the onset of economic recession is by no means a certainty. For those who hold their nerve, and follow a few sensible guidelines, it's still possible to get everything you need from Britain's banks and building societies.

Mortgages & Housing

Getting a mortgage is undoubtedly much harder than it was six months ago – and even though the Bank of England has cut interest rates twice since December, the cost of borrowing is continuing to rise. A year ago, when interest rates were at exactly the same level they are today – 5.25 per cent – the cheapest two-year tracker mortgage, according to the price comparison site www.moneyfacts.co.uk, was offered by Cumberland Building Society at 4.73 per cent, more than 0.5 percentage points below the base rate. Today, the cheapest is offered by HSBC, and comes in at 5.24 per cent. On a £250,000 mortgage, that works out at about £100 more each month.

For first-time buyers, conditions have become particularly difficult in recent months – especially those without a deposit. Until a month ago, it was still possible to borrow the full purchase price of the house, and get an additional unsecured loan worth up to 25 per cent of the new property's value to pay for furniture and moving costs. But all these products have been withdrawn over the past few weeks, while many banks and building societies have also stopped lending any more than 90 per cent of a property's value. People with a patchy credit history will find it very difficult to get a home loan; those who do get a loan are likeley to find that the interest rate on offer is very high. Nevertheless, for the vast majority of people who are coming to the end of a fixed rate mortgage deal, and who now need to remortgage, it is still possible to find the money you need. With far fewer products on offer, it's well worth using a mortgage broker to help find the best deal. London & Country (www.lcplc.com) and Charcol www.charcol.co.uk both offer a fee-free service.

The tightening in the credit markets is also having an effect on the overall housing market. According to the Nationwide, prices fell 0.5 per cent in February, and are expected to fall faster and further over the months ahead. Whether the market lapses into a full-scale crash depends on how the wider economy, and levels of employment, hold up.


As the old joke goes, it's a recession when your neighbour loses his job, but it's a depression when you lose yours. The jobs market is the key to whether the UK economy can escape the worst effects of the credit crunch. Unemployment, and the fear of it, kills confidence. This is what went wrong in the economy during the last recession, in the early 1990s, when the property market and consumer spending collapsed, creating their own downward dynamic. Now it is pushing America into recession.

So far, Britain's performance has been relatively strong: The number of unemployed, the unemployment rate and the claimant count have all fallen. Indeed, the number of people in work is at its highest since the modern series of statistics began in 1971. But the more forward-looking surveys on employers' intentions paint a more sombre picture.

Unsurprisingly, businesses in the City are gloomiest about future prospects, and the longer the credit crunch drags on the more jobs will be lost in the financial services sector, concentrated in London and the South-east. More broadly, the UK's exceptionally flexible labour market and moderate wages growth should protect businesses, investment and employment from too much harm. But high inflation and a squeeze on living standards feeding through to higher pay demands could put that at risk.

Pensions & Investments

The credit crunch has played havoc with the world's stock markets. Yesterday alone – following the news of the cut-price takeover of Bear Stearns – the FTSE 100 fell by almost 4 per cent, and since the highs of last summer it is now down almost 20 per cent. The same story has unfolded in the US, Europe and Japan – although emerging markets such as China have proved much more resilient.

The carnage in developed markets has wiped billions of pounds off UK pension funds, and some retail investment funds – which held large positions in the banking sector – have also been badly hit. However, long-term investors with a well-diversified portfolio should not be worrying.

Although developed stock markets have been falling, commodity prices have continued to soar in recent months, while corporate bond investors have also seen a sharp rise in yields. Investors in these asset classes will have done very well so far in 2008. Anyone nearing retirement should already have transferred most of their pension money away from equities. For those who have 10 or more years to go, now is the time to sit tight and keep making your monthly contributions. Continuing to drip feed new money into a falling market ensures that you are buying stocks when they are at their cheapest.

Credit cards & loans

Just as mortgage lenders are becoming increasingly reluctant to lend to all but those with squeaky clean credit records, credit card and personal loan providers are also now cherry-picking their new customers, as well as cutting levels of risk within their client portfolio.

As a result, millions of people have had the limits on their credit cards slashed, sometimes by as much as 90 per cent. Others, such as 161,000 customers of the internet bank Egg, have been told their accounts are being closed.

But for those with a good credit score, it is still possible to get credit at cheap rates. Lenders such as Moneyback Bank and Barclaycard are offering personal loans for as little as 6.7 and 6.8 per cent APR respectively. Virgin Money, Abbey and even Egg are still offering 0 per cent balance transfer deals on credit cards, with no interest to pay for over a year.

Unfortunately, if you're refused a loan or credit card, it's often difficult to find out why. In these cases, it's worth checking your credit file, using sites such as www.creditexpert.co.uk or www.equifax.co.uk, to see if there's any reason for rejection. To find the best personal loan and credit card deals, visit www.moneyfacts.co.uk or www.moneysupermarket.com


The other winner from the credit crisis has been the savings market. As banks have struggled to raise the money they need in the capital markets, they have been forced to offer more attractive savings rates, to try to persuade more customers to put their money with them.

As a result, it's now possible to get rates as high as 6.5 per cent on instant access savings accounts – one and a quarter percentage point above the Bank of England base rate. Alliance & Leicester is even offering a rate of 10 per cent for cash ISA customers who also switch their current account.

It's important not to save more than £35,000 with one provider, however – unless it is the Government-backed National Savings & Investments or Northern Rock. Although the Government has strengthened the Financial Services Compensation Scheme – which protects consumers if banks goes bust – it only promises to guarantee the first £35,000 of any savings.


The effect of the credit squeeze on prices is hard to gauge. The only direct effect will be to make credit more expensive, especially for less credit-worthy customers of the banks, though the Bank of England's programme of interest rate cuts may mitigate that to some extent. So, for some, overdrafts, car loans and mortgage repayments will cost more to arrange than was the case in the past. More widely, the squeeze on investment and consumption that comes with a credit squeeze will tend to depress demand and dampen inflation. Business plans are cut back; consumer promotions postponed; holidays and meals out curtailed. However, there would have to be a truly catastrophic collapse in demand to push back the current round of increases in oil and other commodities such as food.

The most likely result of the credit squeeze, therefore, is for the economy to suffer from stagnant output and from inflation at the petrol pumps and the supermarket – and a return to the "stagflation" last seen in the 1970s.

Tips to help you survive with your finances intact

* Check your borrowing. Take a look at all your credit card, loan and mortgage borrowing, and make sure you're getting the best possible rates for each. Sites such as moneysupermarket.com and moneyfacts.co.uk will help you search for the best mortgage, loan and credit card deals. Once you've done that, get to work on paying off your debts as quickly as possible.

*Make sure you could still afford your mortgage if you were to end up on your bank's standard variable rate (SVR).

If conditions get worse, some borrowers may find that they're unable to remortgage when their fixed-rate deal comes to an end, in which case they'll be forced to stay with their current lender on its SVR.

*Take advantage of high savings rates. If you haven't moved your savings within the last six months, the chances are you could get a much better deal by taking them elsewhere. The best instant access accounts on the market now pay interest of 6.5 per cent. Furthermore, if economic conditions worsen over the next year, it makes sense to have a good pot of savings in case you find yourself out of work, or being forced to pay higher interest payments.

*Get protected. If you've got a wife and children who depend on your income, or are saddled with high debts, it may be worth buying an income protection policy to cover you in the event that you lose your job or are unable to work due to ill health. If you have a family, you may also want to think about getting life insurance so that your mortgage and debts can be paid off if you die.

*Hold off buying a house. Although you may be impatient to get a foot on the housing ladder, it's a risky time to buy, especially if you've not got a sizeable deposit.

If you're putting up less than 20 per cent of your new home's equity, you should be prepared for the possibility that house prices will continue to fall, and you could be left in negative equity. This may stop you selling your property when you want to. In the early 1990s, many people were trapped in their first homes for years, after house prices collapsed.

*Invest wisely. Stock markets are likely to remain volatile over the months ahead, so be sure to keep your investments well diversified.

James Daley

    From homes to jobs – how ill winds from Wall Street will hit you, I, 18.3.2008, http://www.independent.co.uk/money/invest-save/from-homes-to-jobs-ndash-how-ill-winds--from-wall-street-will-hit-you-797118.html






Darling cuts growth forecasts

in first budget


Wed Mar 12, 2008
4:25pm GMT
By Sumeet Desai


LONDON (Reuters) - Chancellor Alistair Darling cut forecasts for growth and ramped up borrowing on Wednesday, as the economy battles with a global credit crunch and his government slides in the polls.

In his first budget, Darling also jacked up taxes on alcohol and gas-guzzling cars, found a bit of cash for pensioners and tackling child poverty and postponed a planned rise in fuel duty, but the overall package was fairly neutral.

***Have your say on the Budget here***

Government borrowing will rise far more than expected -- by 7 billion pounds alone in the coming fiscal year. Part of that was refinancing loans to nationalised bank Northern Rock but either way analysts said the public finances were in bad shape.

Darling blamed the world economy.

"Turbulence in global financial markets which started in the American mortgage market has affected all economies from the United States to Asia, as well as Europe," the 54-year old Scot told parliament.

He now sees the economy growing by around 2 percent in 2008 and 2.25 percent in 2009, half a percentage point lower in both cases than the forecast made only last October. Analysts polled by Reuters predict 1.8 and 1.9 percent respectively.

Darling said government borrowing would hit 43 billion pounds in the coming financial year and 38 billion the year after, well above the 36 billion pounds and 31 billion that he had predicted in October.

Government bond futures fell sharply as Britain said debt issuance over the fiscal 2008/09 year would be much higher than expected, at 80 billion pounds.

"These numbers are still based on pretty benign forecasts for the economy," said Jonathan Loynes of Capital Economics. "Even if the intention is to make way for a pre-election (spending) splurge, I think that is unlikely to materialise in practice."


Darling's Conservative opponents said the government had failed to sort out public finances when times were good and so could do little for the economy now, pointing the finger firmly at his predecessor, Prime Minister Gordon Brown.

"In the years of plenty they put nothing aside. They didn't fix the roof when the sun was shining," Conservative leader David Cameron told parliament. "The Chancellor was put in a hole by the prime minister and they both kept digging."

In the job since last June, Darling has had a tough time dealing with the credit crisis and Britain's first bank run in more than a century, which resulted in the government having to nationalise the country's fifth-biggest mortgage lender.

Business has also reacted angrily to his plans for capital gains tax reform and a levy on rich foreigners living in the UK.

After initially riding high after succeeding Tony Blair last year, opinion polls have turned sour on Brown and he now lags the opposition Conservatives by a significant margin.

With money so tight, few analysts predicted a radical budget as cuts in corporation tax and income tax, to come into effect in April, were already announced by Brown last year.

For the Labour party, any giveaways would probably better targeted before an election, expected next year or 2010 at the latest.

Darling announced a number of limited measures designed to sell the budget as good for the environment but which green pressure groups said fell far short of what was needed.

He tweaked car duties to hit gas-guzzling vehicles and give a boost to low emission cars and said British retailers must charge customers for the 13 billion plastic bags they now get free every year or the government will force them to.

But he delayed a rise in fuel duty following pressure to scrap the increase after soaring oil prices sent the cost of petrol sharply higher. Fuel duty had been scheduled to go up by 2 pence per litre in April. It will now come in October.

"Darling's safe pair of hands have dropped the ball on climate change," said Greenpeace director John Sauven.

For the so-called "sin taxes", Darling said alcohol duty would increase by 6 percent above the inflation rate and tax on cigarette will rise by 11p on a pack of 20.

(Additional reporting by Christina Fincher, David Clarke, Peter Graff, Jodie Ginsberg, Jeremy Lovell and Chloe Fussell)

(Writing by Mike Peacock, editing by Stephen Nisbet)

    Darling cuts growth forecasts in first budget, R, 12.3.2008, http://uk.reuters.com/article/domesticNews/idUKL1244846920080312






FACTBOX - Key points from the budget


Wed Mar 12, 2008
1:56pm GMT


LONDON, March 12 (Reuters) - Chancellor Alistair Darling cut growth forecasts and raised borrowing plans in his first budget on Wednesday.

Below are the key points:


- Economic growth forecast cut to 1.75-2.25 percent from 2.0-2.5 percent for 2008, bringing it more in line with private sector forecasters

- Forecast for 2009 cut to 2.25-2.75 percent from 2.5-3 percent

- Global credit crunch blamed for downgrade


- Borrowing forecast raised to 43 billion pounds in 2008/9 from an estimate of 36 billion pounds made in October

- Borrowing forecast at 38 billion pounds in 2009/10 -- up from a previous estimate of 31 billion pounds -- and 32 billion the following year


- Darling said credit crunch posed a major risk to the world economy

- The minister said that given action taken last year to curb inflation, Britain was better placed than other economies to withstand the slowdown in the global economy


- Reform of the car tax system starting in 2009. From 2010 new zero rate in first year for cars emitting less than 130 grammes of carbon per kilometre, higher rate for most polluting vehicles

- Climate Change levy to rise in line with inflation from April

- Threat to legislate from 2009 if retailers do not start charging customers for plastic shopping bags


- Fuel duty increased by 0.5 pence per litre in real terms from 2010 for environment reasons

- Planned 2 pence fuel duty hike postponed to October from April to support the economy and help business and families


- Non-domiciled individuals to pay "reasonable charge" after seven years to maintain the right to be taxed differently from other UK residents

- Government will not seek to charge tax on offshore income or capital gains that is not brought into the UK

- No further changes to this regime for the rest of this Parliament or the next


- Alcohol duty to increase by 6 percent above the inflation rate from midnight on Sunday

- Tax on cigarettes will rise by 11p on pack of 20


- Key workers such as teachers and nurses, and first time buyers, will be able to borrow money from new-shared equity schemes from April

- Stamp duty on shared ownership homes will not be required until buyers own 80 per cent of the equity in their home


 (Editing by Mike Peacock)

    FACTBOX - Key points from the budget, R, 12.3.2008, http://uk.reuters.com/article/topNews/idUKMOL25001620080312






INSTANT VIEW - 2008 Budget


Wed Mar 12, 2008
2:34pm GMT


LONDON (Reuters) - Alistair Darling delivered his first Budget to parliament on Wednesday.

Following are analysts' and politicians' initial reactions.


"The Institute of Directors (IoD) welcomes the low-key nature of the Budget, which is what business needed after the recent ill-thought-through announcements on Capital Gains Tax and non-doms.

"We welcome the plan to impose a 1.9 percent restraint on public spending beyond the next Comprehensive Spending Review. However, what we now need to see is a permanent commitment to 2 percent per annum spending growth, set in a fiscal rule."


On taxes for non-domicile UK residents:

"The Chancellor has clearly listened to the City's overall concerns, but we need to be sure that the detailed HMRC rules to implement this do not, even inadvertently, do any further damage. The City now needs to re-establish it long-held reputation around the world as a welcome place for wealth-creators and knowledge workers."


Earlier comments:


"Those (borrowing forecasts) are truly dreadful figures...and we have the highest interest rates in the G7.

"And today, for the second time in his very short period as Chancellor, he downgraded his growth forecast once again. So high debt, high interest rates, high taxes and now lower growth. Those are facts that this budget can't hide. They tell the story of just how badly we are prepared for the downturn."


"The outward revisions to borrowing look big given the size of the downward revisions to GDP growth.

"The reality is that these numbers are still based on pretty benign forecasts for the economy. He's (the Chancellor) still expecting growth of 2.5 percent next year, which is above the consensus forecast and above what the Bank of England is forecasting.

"So even if the intention is to make way for a pre-election (spending) splurge, I think that is unlikely to materialise in practice."


"On balance it's what we we're expecting, but these are notable revisions (on government borrowing) from the 2007 Budget figures.

"With the speculation about an election next year, this could be a precursor to a (spending) splurge. But on the other hand, the Chancellor does not have that much room for manoeuvre."


"It's really just reaffirming that the global economic outlook is presenting little room for manoeuvre in terms of government finances.

"Growth numbers are more optimistic than our numbers. We see growth just at 1.5 percent this year and the consensus is just 1.7 percent. So that's (the government's forecast) certainly above where most analysts are and that does indeed pose a further downside risk for the public sector borrowing numbers they are currently predicting."


"The cut in the Chancellor's growth forecasts for both 2008 and 2009 by a quarter point was expected, but our own forecasts are still towards the bottom of the Treasury's forecast ranges -- in our view the Chancellor's expectations remain relatively optimistic, therefore.

"Partly as a result of weaker growth, the Chancellor has had to raise his forecasts markedly for the budget deficit in the near-term, but the government's view that the deficit will fall in future years relies on an assumption of a relatively swift improvement in growth prospects going forward. This in turn will depend on how the credit crisis plays out, and crucially its impact on the real economy."


"The Chancellor cut his GDP growth forecasts for 2008 and 2009, but they still look too high... Global Insight expects GDP growth to be 1.8 percent in both 2008 and 2009, and around 2.5 percent in 2010. Furthermore, we consider the risks to these forecasts to be to the downside.

"There is a very real danger that the PSNBR and current budget deficits will be significantly higher than the Chancellor now forecasts, given that his GDP growth forecasts look optimistic."


"They revised down the economic (growth) forecast for 2008, as expected, but it is quite a bit more optimistic than we had expected, and the same for 2009 as well."


"The downward revisions to growth over the next couple of years are no surprise, though we'd argue that with the 2.25-2.75 percent for 2009 the Chancellor is being a little optimistic

"On borrowing, again no surprises that the figures for the subsequent fiscal years have been pushed up, and it's quite notable that the current budget position does not return to surplus until 2010-11."


"With the price of petrol at the pump rocketing, the Chancellor was right not to introduce the proposed 2 pence rise in fuel duty.

"However, as the Chancellor reduces his own economic growth forecasts, he should have said that he is scrapping the 2p rise rather than merely deferring it. Businesses and motorists are being squeezed by higher fuel costs and the government is getting an unexpected windfall due to higher duty receipts. There is no justification for a 2p rise in October."

    INSTANT VIEW - 2008 Budget, R, 12.3.2008, http://uk.reuters.com/article/Internal_ReutersCoUkService_2/idUKZWE25246120080312






House prices fall again


Friday, 29 February 2008
The Independent

House prices fell for the fourth month in a row during February, dropping by 0.5 per cent, Britain's biggest building society said today.

The fall helped pull the annual rate of price growth down to just 2.7 per cent, its lowest level since November 2005, and well down on January's figure of 4.2 per cent.

Nationwide said it was the first time since 2000 that house prices had fallen for four months in a row.

But despite the slide, the average home in the UK is still worth £179,358, having gained around £12.75 a day during the past year.


Fionnuala Earley, Nationwide's chief economist, said: "The trend in prices is clearly weakening, but the size of the drop in the annual rate between January and February perhaps overstates the rate of cooling, as it partly reflects the particularly strong increase in prices in February last year.

"The three-month on three-month rate of price growth rate fell to minus 1 per cent in February, down from minus 0.4 per cent the previous month."

The Nationwide data, which shows house prices to have fallen by 2.3 per cent since the beginning of November, is considerably more gloomy than some other recent indexes have been.

The Land Registry yesterday said house prices in England and Wales rose by 0.9 per cent during January.

Property website Rightmove recently said prices in England and Wales surged ahead by 3.2 per cent during the four weeks to 6 February, although the group cautioned against reading too much into the rise, saying it was likely to have been distorted by the final roll-out of the controversial Home Information Packs.

But property information group Hometrack said house prices in England and Wales fell for the fifth month in a row during February, while annual house price growth dropped to just 1.4 per cent.

Nationwide said the softening in house prices during February was not unexpected given the falls in demand that have been seen recently, with mortgage approvals for house purchases falling back sharply since the autumn.

The group said reluctance on the part of buyers to enter the market was not surprising given the current uncertainties, and it is unlikely that activity will return to trend levels for some time.

But it added that while there were several factors that were slowing housing market demand, including stretched affordability and lenders tightening their lending criteria as a result of the credit crunch, the fact that the UK did not seem to be heading for a recession would provide some support.

Ms Earley said: "Overall, it seems clear that we will not see recent rates of growth, in either the UK economy or housing market, repeated for some time.

"There is currently an unprecedented amount of uncertainty about future economic conditions, but if the Bank of England's central projection that the economy continues to grow is correct, conditions for the UK housing market are perhaps less gloomy than some would have us believe."

    House prices fall again, I, 29.2.2008, http://www.independent.co.uk/news/business/news/house-prices-fall-again-789495.html






Homebuyers told to pay 25% deposit or penal interest rate

· Nationwide leads lenders' borrowing clampdown
· Bank of England accused of 'unhelpful' stance


Monday February 25 2008
The Guardian
Patrick Collinson
This article appeared in the Guardian on Monday February 25 2008 on p23 of the Financial section.
It was last updated at 10:53 on February 25 2008.


Nationwide will tell homebuyers today that unless they have a deposit of 25% or more of the value of a property they will face higher mortgage rates, in the latest illustration of the clampdown on lending caused by the credit crunch.

The move will be a blow for first-time buyers struggling to save for a deposit and comes amid the virtual disappearance of high loan-to-value mortgages. The credit crunch is already slowing the housing market. The Hometrack survey out today shows that prices fell for the fifth month in a row during February.

Until today, those with a deposit of 10% or more were able to get Nationwide's best mortgage deals. This week the cost of borrowing for loans of between 75% and 95% of the value of a home will rise by 0.2 of a percentage point, wiping out the impact of the last cut in the Bank of England's base rate. The rise only affects new borrowers. A spokeswoman said: "Our costs of funding are higher and like all lenders we have to adapt to changes in the marketplace."

Nationwide's caution comes at a time when mortgage experts are trying to predict the winners from the credit crunch and concluding that Abbey could come out on top because of the funding available to its Spanish parent, Santander, through the European Central Bank.

Ray Boulger, of brokers John Charcol, said Abbey already has the best-buy two-year fixed rate deals, particularly for borrowers seeking larger mortgages. "The ECB is accepting mortgages as collateral, while the Bank of England is being pretty unhelpful. So anyone with a parent group that is based in the ECB area, such as Abbey or Bank of Ireland, is able to tap into funds that aren't so easily available to the pure UK retail banks."

Other major lenders are expected to cite the credit crunch as they raise margins after years of cut-throat competition. Melanie Bien, of Savills Private Finance, said: "We're not seeing anybody going after market share. Instead they are increasing margins. Six months ago you could find tracker rates at just below the Bank of England base rate, but now they are at least 0.5% above base rate."

At London & Country Mortgages, one of the biggest direct brokerages, David Hollingworth expects to see a "managing down" of capacity across the marketplace in 2008. "The lenders are no longer scrambling over each other to launch the best deals," he said.

Smaller building societies which have always financed their mortgages from deposits have emerged almost unscathed by the credit crunch. One small lender that is proving to be a winner from Northern Rock's demise is its next-door-neighbour, the Newcastle Building Society. It benefited from Rock's depositors looking for a new home for their savings. Now mortgage brokers report that it has some of the best deals in the marketplace.

    Homebuyers told to pay 25% deposit or penal interest rate, G, 25.2.2008, http://www.guardian.co.uk/money/2008/feb/25/houseprices.mortgages






Thousands of jobs to go at Northern Rock

Darling to tough out opposition from shareholders, unions, banks and EU


Tuesday February 19 2008
The Guardian
Larry Elliott
This article appeared in the Guardian on Tuesday February 19 2008 on p1 of the Top stories section.
It was last updated at 01:57 on February 19 2008.


Alistair Darling was braced last night for heavy job losses at Northern Rock in the coming months as the government came under pressure from the European commission, UK high street banks, the company's shareholders, and trade unions over the nationalisation of the Newcastle-based lender.

While fending off Conservative calls for his sacking, the chancellor accepted that the Treasury's rescue plan would fall foul of Europe's strict rules on state aid unless the new management team reduced the size of Northern Rock's business.

Ron Sandler, the new chairman of Northern Rock, told staff yesterday that the bank would remain in state hands for several years but would shrink in size after its rapid expansion in the past decade. Ministers are resigned to the bank still being in state hands at the time of the next election but Darling sought to prevent Labour being blamed for future job losses by stressing repeatedly yesterday that it would be run at arms' length from Whitehall. The chancellor insisted that the nationalisation plan - due to be rushed through parliament by the end of the week - would meet European criteria. Treasury sources said this would leave Northern Rock's high street rivals with no reason to complain about unfair competition.

Ministers are prepared, however, to face down threats of a legal challenge from Northern Rock's shareholders, who said yesterday that the government's plan for a temporary period of state ownership infringed their human rights.

Darling made it clear that he did not expect existing shareholders to gain any compensation, pointing out the company would have gone bust but for the Bank of England's guarantee. Shares in the mortgage lender were suspended from stockmarket dealings yesterday. They closed on Friday at 90p, valuing the company at around £380m. A year ago it was worth more than £5bn.

Sandler has yet to reveal how many of the 6,000 jobs at Northern Rock will be axed, although there are fears that as many as half will need to go initially. The union Unite, the largest single donor to the Labour party, yesterday urged the government to strengthen the legislation for public ownership to ensure that there are no compulsory redundancies.

One of Sandler's first appointments to the new board was Tom Scholar, a senior member of Treasury staff who was formerly Gordon Brown's chief of staff. He will probably be the chancellor's eyes and ears on the board.

With strong backing from the prime minister yesterday, Darling appeared to have withstood the immediate political fallout from the government's decision to admit failure in its search for a private buyer. The government's financial adviser, Goldman Sachs, is understood to have told Darling shortly after last September's run on Northern Rock branches that nationalisation was the only alternative to administration.

Treasury chief secretary, Yvette Cooper, refused to confirm reports that taxpayers faced a £100m bill for advice on the crisis from City lawyers and bankers.

However, she defended the government's need to take "serious legal advice" and accepted that large sums would be indirectly borne by the public purse through Northern Rock.

Speaking at his monthly press conference yesterday, Brown rejected Tory accusations of dithering, arguing the right decisions had been taken at the right time. He said the government had protected depositors' savings, prevented the bank's problems spreading to the rest of the financial sector, and had been right to spend months seeking a private buyer.

"We have lost nothing by doing so, we have lost no taxpayers' money by doing so, we have not had to put further capitalisation into Northern Rock, so it was right to look at the options available to us."

The shadow chancellor, George Osborne, said Darling was "a dead man walking", but the Tories were accused by both Labour and the Liberal Democrats of having no coherent plan for Northern Rock.

The high street banks were seeking reassurance from the government that a nationalised rival will not leave them disadvantaged in the search for savers.

Sandler fanned their fears by saying he wanted to return the bank to the private sector "as a vibrant, thriving enterprise, and, of course, repaying the taxpayer". He made it clear that the bank would "compete vigorously" for business.

"We will be looking very closely at how this thing looks competitively," said one senior banker, who said opinions had been voiced to Darling. The chancellor said he was "very aware of the banks' concerns and I want to be fair by them".

Treasury sources said the UK had campaigned for tough rules on state aid to prevent unfair competition. "Clearly the business plan that Ron Sandler puts together and that we put to the commission will abide by the rules on state aid."

The government has until March 17 to convert its current bailout into restructuring aid under EU rules. "This requires the company to be restored to viability so it can survive in the future without any further injections of public money," said a spokesman for Neelie Kroes, the competition commissioner.

Competition lawyers said Kroes was likely to be extremely tough, but will realise the highly sensitive political issues involved.

    Thousands of jobs to go at Northern Rock, G, 19.2.2008,






4pm GMT update

Nationalisation in taxpayers' best interests,

PM says


Monday February 18 2008
This article was first published on guardian.co.uk on Monday February 18 2008.
It was last updated at 16:12 on February 18 2008.


Prime minister Gordon Brown today defended the government's controversial decision to nationalise Northern Rock amid growing anger from shareholders in the bank, who are expected to receive little or no compensation.

Speaking to reporters at his monthly Downing Street news conference, and flanked by chancellor Alistair Darling, Brown insisted that nationalisation was in the best interests of taxpayers.

"We will and always have put the interests of taxpayers first," he said.

Brown defended the record of his successor at the Treasury, who has come under increasing fire over his handling of the Northern Rock crisis and a series of other controversies.

"We are dealing with a global financial situation; I believe we have been better prepared because of the actions of Alistair Darling in the Treasury than in other countries," Brown said.

This afternoon the chancellor put forward the emergency legislation in parliament. In his commons statement at 3.30pm, Darling said the draft bill would begin its passage through parliament tomorrow and would only be used to nationalise Northern Rock even though the legislation could be interpreted more widely than that.

Darling reiterated that the bank would continue to "operate as a bank on a commercial basis" at "arm's length" from government. He said more details would be published shortly of how the relationship between the government and the bank would function.

Unions were meeting today with Northern Rock's new executive chairman Ron Sandler, to discuss potential job losses among the 6,000 or so staff. At a lunchtime press conference in Newcastle Sandler said his priorities were to return the bank to the private sector "as a vibrant, thriving enterprise, and, of course, repaying the taxpayer".

Repayment of the loans was a "feasible prospect," he said, but it would be "some years" before the bank would be able to clear the loans.

He refused to indicate what would happen to the workforce, saying it was his "first day at the bank".

Sandler, who is being paid £90,000 a month to head Northern Rock, made it clear that the bank would "compete vigorously" for business. This is likely to alarm rival mortgage lenders, who are concerned that a state-owned business might have an unfair competitive advantage.

Darling said earlier that he was "very aware of the banks' concerns and I want to be fair by them." But, he added: "I think they also recognise that we have got to have a situation where Northern Rock can continue to trade."

Shares in the stricken mortgage lender were suspended from stock market dealings earlier today. They closed on Friday at 90p, valuing the Newcastle-based company at around £380m. A year ago it was worth more than £5bn.

In a statement to the stock exchange, the board of Northern Rock made its first comments on the move, which is the first nationalisation of a British company since the 1970s.

The board, led by chairman Bryan Sanderson, said it was "disappointed" by the government's decision.

It also made it clear that the new management team, led by executive chairman Ron Sandler, would be expected to run the bank with "commercial autonomy" and "at arm's length from the government".

Northern Rock said: "It has been important to have had the time to ensure there were a number of private sector solutions available. The Board hoped that at least one of those options would succeed and is very disappointed that the Government concluded that it was unable to provide funding to support a private sector solution and, in particular, the proposal put forward by the company, which the Board believed satisfied the interests of all stakeholders".

Shareholders had been willing to back a scheme outlined by the Northern Rock board which would have involved the bank being run by former corporate financier Paul Thompson.

But they are now thought to be considering a legal challenge against the government. Jon Wood, head of the Monaco-based hedge fund, SRM Global, said it was "a very sad day for the stock market, banking industry and the reputation of the UK as a financial centre".

SRM is Northern Rock's largest shareholder, with a stake of over 10%. "The only thing missing from the podium yesterday was Arthur Scargill. It was just appalling," Wood told City AM newspaper, adding that Northern Rock shares were worth at least 425p.

Shares in another hedge fund, RAB, which has just over 8% in the bank, plunged this morning, tumbling 9% to 63p.

Darling, who has his own mortgage with Northern Rock, made it clear earlier today that the government is still open to offers for the bank. "If people have proposals, of course we will listen to them," he told the BBC, although he cautioned that the current state of the financial markets meant it was "not an ideal time" for a deal.

He again stressed that the nationalisation was a temporary move - "the government can't run a bank; governments don't do that" - but said that the timing of a return to private ownership would depend on market conditions.

    Nationalisation in taxpayers' best interests, PM says, G, 18.2.2008,






Britain to Nationalize Troubled Mortgage Lender


February 17, 2008
Filed at 11:55 a.m. ET
The New York Times


LONDON (AP) -- Treasury chief Alistair Darling said Sunday that struggling bank Northern Rock PLC will be nationalized after the government rejected two private takeover bids.

Darling told a news conference that the ailing mortgage lender would be placed under temporary public ownership because both bids had failed to meet the government's demands.

He said neither a proposal from Richard Branson's Virgin Group nor an in-house management team delivered "sufficient value for money to the taxpayer."

The government had said more than 25 billion pounds (US$49 billion; euro33 billion) in government loans must be paid back within three years.

"Taking into account the wider considerations, I've concluded this is the right approach," Darling told the news conference.

"It is our belief that the company can be moved back into the private sector at the earliest and most prudent opportunity," he said.

Northern Rock ran into trouble in September because it relied too heavily on short-term money markets instead of deposits for funding. A subsequent profit warning and appeal to the Bank of England for an emergency loan led to the first run on a British bank since 1866.

The government had been in the middle of an auction process to find a private buyer for Northern Rock, with revised bids submitted this weekend by Virgin and the in-house management team.

Darling had a deadline of March 17 to chose between the bids and nationalization. That is the date when he must submit a restructuring plan to the European Union for state aid approval.

Corporate troubleshooter Ron Sandler has been appointed head of the newly nationalized bank, Darling said.

An ex-head of Lloyd's of London insurers, Sandler is regarded as close to Prime Minister Gordon Brown. He also has previously helped the Treasury on pension policies.


On the Net: http://www.northernrock.com

    Britain to Nationalize Troubled Mortgage Lender, NYT, 17.2.2008, http://www.nytimes.com/aponline/business/AP-Britain-Northern-Rock.html?hp






Northern Rock to be nationalised


Press Association
Sunday February 17 2008
This article was first published on guardian.co.uk on Sunday February 17 2008.
It was last updated at 16:47 on February 17 2008.


The Treasury today announced that the beleaguered bank Northern Rock will be nationalised.

In a statement, the chancellor, Alistair Darling, said that "under the current market conditions" neither of the two last-minute bids - submitted by Richard Branson's Virgin consortium and the Northern Rock management team - delivered "sufficient value for money to the taxpayer".

It marks the failure of the government to reach a deal with the private sector over the future of the bank. Emergency legislation will now be rushed through parliament.

Mr Darling said the move met "our objective of protecting taxpayers' interests".

He said he had been told by the Financial Services Authority that the bank was solvent and that its mortgage book remained of good quality.

Ron Sandler, the former chief executive at Lloyd's of London, will now run the business.

Northern Rock to be nationalised, G, 17.2.2008,




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