| LONDON, June 15
LONDON, June 15 Britain's wall of cash built
with new offers of cheap funding to banks will limit the threats
from the raging euro zone crisis, economists said On Friday,
although the economy may need more action to engineer a proper
The Bank of England and government coordinated scheme
announced on Thursday to get credit flowing through the
recession-hit economy by lowering banks' funding costs cheered
markets and drew praise from most economists.
But finance minister George Osborne in particular remains
under pressure to spend money directly on infrastructure to
create jobs as many companies and households lack the confidence
to borrow for investment or consumption.
"Such schemes can stop a meltdown in your banking system in
times of very severe stress," said Jonathan Portes, head of
macro-economic think tank NIESR. "This is time of stress, so
it's absolutely right to put them in place now."
However, just making credit cheaper may amount to pushing on
a string, Portes said. "It may not be about the banks but about
business confidence," he said. "Most of the problem with
business investment is on the demand side."
In the first coordinated policy move since the height of the
financial crisis, the BoE and the government announced a plan to
provide cheap long-term funding to banks, allowing them to swap
company or consumer loans if they pledged to increase lending.
Details and the ultimate size of the package remain unclear.
Officials said it could unlock 80 billion pounds - or 5 percent
of GDP - in new lending, but Treasury minister Mark Hoban
admitted demand would define the size.
And the head of the British Chambers of Commerce called for
more radical measures. "Growth cannot wait," John Longworth
said, calling for a state-backed business bank and government
steps to kick-start infrastructure spending.
The BoE also activated an emergency liquidity tool,
providing at least 5 billion pounds per month in six-month
funding, in a move to mitigate the stress in the banking system
from the escalating crisis in the euro zone.
Markets took heart from the central bank actions, driving
the pound and prices of shares in banks and other risk-sensitive
companies higher, while pound LIBOR rates fell, indicating the
desired relief for banks' funding costs.
The banks' funding costs have risen since the escalation of
the euro crisis started in August 2011, and lenders are passing
the rise on to clients, driving up rates for mortgages and
business loans despite the central bank's ultra-low base rate
and 325 billion pounds in quantitative easing asset purchases.
All observers agree that Britain's economy can do with all
the help it can get as the euro zone - its largest trading
partner - faces recession, and mayhem looms should Greek voters
not elect a government seen able to keep the country in the euro
Britain is still reeling from the 2007-2009 financial crisis
that has left many Britons worse off and forced the country to
rescue its banking system with tens of billions of taxpayers'
money, drilling a deep hole in public finances.
Britain's coalition government of Conservatives and Liberal
Democrats have made the reduction of the deficit - still around
8 percent of GDP - the cornerstone of their policy. But the
Labour opposition is accusing them of choking off the recovery.
A slump in exports in April raised the prospect that the
economy is shrinking for a third quarter running, dealing a
further blow to the fragile confidence, and even minimal growth
for the full year looks increasingly unlikely.
Most economists now expect the Bank of England to restart
its quantitative easing (QE) purchases of government bonds with
newly created money - which it halted in May - after governor
Mervyn King said on Thursday the case for more easing had grown.
And while the funding moves are welcomed, more and more
economists say further steps to stimulate demand are needed.
"Having expressed our concerns that the marginal impact of
QE was fading, we regard these steps as unambiguously positive
for the outlook, even as we are disappointed - though not
surprised - that the Chancellor continues to show little
flexibility on the issue of infrastructure spending, initially
funded directly and undertaken by the state," said JP Morgan
analyst Malcolm Barr.
But NIESR's Portes - who has long argued for a spending
boost - said there were signs that Osborne's team was shifting
the focus, pointing to announcements that the government was
looking into ways to use guarantees to underwrite house-building
and infrastructure projects.
The political hurdle for any up-front government spending
boost is high, as it would be quickly portrayed as a U-turn from
Osborne, who has said strict austerity was essential to defend
Britain's top-credit rating.
Labour's finance spokesman Ed Balls already said the latest
measures showed the government's policy had failed.
At least markets may be more forgiving, said Vicky Redwood
from Capital Economics. Even if the rating agencies decided to
strip Britain of its priced AAA rating, the market impact was
likely to be limited.
"It would be a personal blow to the Chancellor," she said.
"But I don't think markets would be too concerned about it."