NEWS,26.06.2012

British economy in the 'middle of a deep crisis'

 

Britain's economic outlook has worsened markedly in the space of just six weeks due to the deepening euro zone crisis and signs that a global slowdown is taking root in the United States and emerging markets, the Bank of England said today.BoE Governor Mervyn King told legislators the world is not yet halfway through the financial crisis that began in 2008, and that Britain risked a downward spiral as businesses continue to put off investment due to the turmoil in the euro zone.His comments bolster expectations that the BoE will launch a new round of asset purchases next month under its quantitative easing programme, and suggested the central bank and British government may need to come up with further measures.Evoking the depression-ridden 1930s, King said it would be difficult to overcome the hit to confidence from the "black cloud" of uncertainty with consumer and business spending alone."We are in the middle of a deep crisis, with enormous challenges to put our own banking system right and challenges for the rest of the world that they are struggling with," King told parliament's Treasury Committee.Britain's economy slipped into its second recession since the start of the financial crisis around the turn of the year and fears of a longer slump have been rising as companies hold back investment and exports suffer from the euro zone crisis.The government and BoE announced two schemes on June 14 to get credit flowing through the economy, but finance minister George Osborne remains under pressure to increase spending to jump-start growth.Osborne announced on Tuesday that he would cancel a planned rise in fuel duty, providing some relief for hard-pressed consumers and businesses.An unexpected leap in borrowing in May, however, highlighted the constraints for the government, which has pledged to erase a budget deficit still at around 8 percent of GDP.Speaking two days before a European Union summit at which measures to spur growth will be a focus, King called on euro zone countries to finally accept that some of the huge debt pile will never be paid back."I am pessimistic (about the euro zone outlook). I am particularly concerned because over two years now we have seen the situation in the euro area get worse and the problem being pushed down the road," King said."In the last six weeks ... I am very struck by how much has changed since we produced our May Inflation Report," he added.Global worries Earlier this month, the central bank's Monetary Policy Committee voted 5-4 against buying more government bonds with newly created money to boost the economy.King was one of those favouring buying another 50 billion pounds of gilts, to take the total to 375 billion pounds."The remarks of Sir Mervyn King and other MPC members are pretty grim, and fan belief that the Bank of England is likely to pull the Quantitative Easing lever again in July," said IHS Global Insight economist Howard Archer.Policymakers Ben Broadbent and Spencer Dale who both voted against more stimulus in June and David Miles all identified the euro zone debt crisis as the main threat to Britain's economy in their annual reports to parliament.Chief economist Dale said he thought easing credit costs might be a better option to help the economy, while Broadbent also said he would take new schemes designed to do so into account when deciding how to vote next month.The new 'funding for lending' scheme - designed to lower banks' funding costs in return for more lending to companies and households by allowing them to swap illiquid assets for more liquid ones should be up and running within weeks, King said.Lasting damage? Britain has not recovered from the 2008/2009 slump, which left many Britons worse off. Now, fears are rising that a prolonged recession will do lasting damage to the economy."What has particularly concerned me in the last several months - why I have voted for more easing policy was my concern about the worsening I see in the position in Asia and other emerging markets," King said."And my colleagues in the United States are more concerned than they were at the beginning of the year about what is happening to the American economy," he added.The central bank governor remained adamant that QE cash injections could still stimulate the economy."We haven't run out of road in terms of our basic policy weapon, asset purchases, and we are prepared to use that if necessary," King said.But he agreed with the view of the Bank for International Settlements - published in its annual report on Sunday - that ultra-low interest rates pose dangers in the long run, and said monetary policy alone would not end the crisis.

 

'Mr Euro' named Greek finance minister

 

Yannis Stournaras, a well-respected liberal economist, was appointed Greece's new finance minister today after the sudden resignation of the first choice for the job at a crucial moment for the debt-laden country.The new conservative-led government scrambled to make a quick decision on the post after banker Vassilis Rapanos quit yesterday on the advice of doctors after spending four days in hospital with dizziness and abdominal pains.His sudden resignation threw the government into confusion at a time when it faces the daunting task of trying to persuade sceptical international lenders to ease the harsh terms of a bailout that has enraged the population.With Greece weeks away from running out of cash and in desperate need of a minister to lead negotiations with lenders, party officials said the three ruling coalition leaders quickly agreed on Samaras's choice of Stournaras, 55, who is nicknamed "Mr Euro" in Greece.He faces a difficult juggling act pushing for more time and money from sceptical foreign lenders while coaxing reluctan officials at home to push through unpopular reforms."Stournaras is a serious, respected person who will inspire some confidence in the markets.But he is entering a bad government, where many old-style, spendthrift politicians are occupying key positions," said political analyst John Loulis."He will have to wage a hard battle against them. He is entering the wolf's lair and he won't survive without the prime minister's solid support."The Samaras government has been in place less than a week but already looks accident prone after deputy Shipping Minister George Vernikos also resigned yesterdayHe had been attacked by the media and opposition for using offshore companies.Ministers are banned from using such companies, which are a common tactic by wealthy Greeks to avoid taxes.Stournaras is an economics professor at the University of Athens and the head of the influential IOBE think-tank. Most recently he was development minister in the caretaker government that led Greece to elections on June 17.Described by colleagues as affable, he is considered an ardent supporter of structural reforms to make the economy more competitive - ideas that are likely to win him favour with international lenders exasperated with the slow pace of reform.