UK launches bid to insure £500bn of toxic assets
Scheme aims to revive lending
February 27, 2009
By Sumeet Desai and Holger Hansen
Britain launched a huge scheme on Thursday to insure toxic assets that have brought many banks to their knees as Royal Bank of Scotland reported the biggest loss in British history.
Increased unemployment in Germany, Europe's biggest economy, and a tightening of credit further reflected a grim picture across the continent.
The British scheme, which could end up insuring more than £500 billion (R7.2 trillion) worth of risky assets, marked the latest drive by world governments to drag their economies out of crisis.
The Asset Protection Scheme will offer protection to eligible banks against huge losses. It aims to get them lending again as British business and consumers cry out for credit.
"The object of this is to provide that certainty and that confidence that will maintain lending and that's essential for each and every one of us," said finance minister Alistair Darling.
Many banks around the world took on assets during the economic boom at huge cost, only to find they had little value as the US property market collapsed, setting off a chain of events that has ravaged economies across the globe.
Darling described the assets covered by the scheme in measured terms. "These are things like commercial loans or mortgages, which are worth less now than perhaps they were a few months ago, which we hope will increase in value as we get through this recession."
Economic data on Thursday offered little hope that Europe could recover soon from recession. German unemployment rose in February by 40 000 month-on-month in seasonally adjusted terms, the labour office confirmed.
That took the adjusted jobless total to 3.311 million, giving an unemployment rate of 7.9 percent.
The rise was a little less than most economists' forecasts. But Philipp Jaeger of DZ-Bank was gloomy. "There is a change of trend towards the worse and we will see further deterioration on the job market. The number of unemployed could even rise above five million over a longer time period."
European Central Bank (ECB) data showed how the flow of credit is slowing across Europe. Money supply growth in the euro zone slowed more than expected last month, while annual growth of loans to the private sector also eased, the ECB reported.
"The very sharp slowdown in loans to the private sector is a clear indication that tightening credit conditions are impacting more on both companies and individuals, which has serious repercussions for euro zone economic activity and is of major concern for the ECB," said Howard Archer at IHS Global Insight.
On a more positive note, annual inflation in three German states eased in February, pointing to a drop in price pressures across the euro zone. This should allow the ECB to make a widely expected interest rate cut from two percent to 1.5 percent when it meets next week.
Meanwhile, British banks lost an appeal on Thursday against a decision to allow the UK consumer watchdog to scrutinise current or cheque account charges, in a ruling that could lead to customers reclaiming millions of pounds of fees. - Reuters
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