£50bn rescue package brings no relief for homeowners

Permalink: £50bn rescue package brings no relief for homeowners
by Kay Murchie

The Bank of England has announced plans to pump £50 billion into the financial system to prevent the credit crisis causing more harm to the UK banking system and economy.

Despite the rescue plan, Chancellor Alistair Darling, admitted that many homeowners could have to wait a long time before mortgage rates fall. He endorsed the scheme hoping that it will lead to cheaper mortgage lending and prevent a 1990s-style housing crash.

Under the scheme, billions of pounds of taxpayers’ money will be injected into banks which have been damaged by the credit squeeze.

Banks will be able to exchange their mortgage debts for secure Government bonds to enable them to operate during the credit squeeze.

Experts believe that banks and building societies will continue to restrict mortgage lending as the economy slows, with high-risk borrowers such as first-time buyers will be pushed out of the market in the medium-term.

Richard Lambert of the Confederation of British Industry (CBI) said the scheme is not designed to bail out the mortgage market, though in re-establishing confidence in the whole financial services system, it should benefit as part of the wider process.

Liberal Democrat Treasury spokesman Vince Cable warned that the move could be a bad deal for taxpayers, leading to a situation where the banks are able to privatise their profits and nationalise their losses.

The Government has been urging banks to pass on lower interest rates to homeowners and just last week, Prime Minister Gordon Brown met with bank chiefs from Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide and the Royal Bank of Scotland to discuss this issue.

It seemed that Mervyn King, the Bank of England’s Governor, was defending banks by not fully passing on interest rate cuts to borrowers despite pressure from Government.

Mr King said while the measures made it more likely that interest rates cuts were passed on it was not aimed at a return to the excessive lending of a year or more ago.

It is certainly not part of the scheme to prevent desirable adjustments in the mortgage market from taking place, added Mr King. He denied that the use of taxpayers’ cash was to bail out ailing banks. The purpose is to protect the rest of the economy from the banks, said Mr King.

Commenting on the £50 billion rescue plan, Alan Clarke, an economist at BNP Paribas, said this is not going to undo the harm that’s already been done to the economy. It might just stop things getting any worse.

A spokesperson for the British Bankers’ Association said the asset-swapping arrangements were an innovative and unique policy response and the banks expect it to make a significant contribution to alleviating the pressures in the UK money markets.

Property website Rightmove said the mortgage crisis could have a devastating effect on the UK housing market if the Bank of England’s £50 billion emergency rescue plan does not work.