THE newswires are heavy with reports of the impact of recession on the UK economy. Retail sales have been weak and only achieved with heavy discounting (good for consumers, but not for retailers’ profits), investment plans have been cut back and there are daily reminders of the human cost in the form of rising unemployment.
A necessary process of reducing debt has been accelerated by the collapse in confidence in the banking system. Banks appear uncertain what losses they face, while markets are unwilling to provide additional capital until both the banks' solvency and the outlook for the economy are clearer.
The Government announced a number of measures to address liquidity problems and confidence in the banks during January, and was reportedly dismayed when the immediate market reaction was a meltdown in bank share prices. However, the sharply critical tone of ministerial statements towards the banks left investors wondering whether the Government was seeking to punish the sector or work with it in combating recession.
The pregnant silence on the subject of nationalisation (while possibly designed to put pressure on banks to lend) led to fears of further dilutive equity injections at a time when private capital lacked the confidence to invest. Markets began to price in the effective nationalisation of RBS, Lloyds and Barclays, thus cutting off the likelihood of any private capital being injected to strengthen the banks' balance sheets.
Who would want to buy a security that might be nationalised on unknown terms within weeks?
Criticism of some banks' behaviour in recent years is warranted. Those responsible are rightly being called to account. However, the immediate priority should be to re-establish normal lending so that credit-worthy borrowers can access funds on commercial terms.
This is not about the taxpayer shelling out billions to enable "a few bankers to keep driving Maseratis" (as a billionaire retired hedge fund manager recently stated, apparently with a straight face) but about ensuring the banks have adequate capital and confidence to resume their normal function in the economy.
The victims of the credit crunch are the individuals and companies whose lives are turned upside down by the resulting recession.
It is also worth noting that the majority of the owners of bank shares and bond securities are pension fund and insurance managers looking after private savings. The repercussions of allowing the banks' securities to be wiped out when they currently appear to be solvent would be widespread.
Ultimately, taxpayers will be rewarded for their interventions by a rise in the value of the Government's stakes in the banks, by their restoration to profitability and by the earliest possible end to the recession, boosting government tax revenues. At present, there is a toxic interaction between the deepening recession and the banks' risk aversion. This negative feedback loop has to be broken, with more carrot and less stick.
Those in positions of responsibility should stop playing Russian roulette with market confidence.
Andrew Bell
Head of Research, Rensburg Sheppards
