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U.K. Banks Still In Need Of Capital

Written by A Forex View From Afar on Tuesday, November 25, 2008

In testimony today, Mr. King, head of the Bank of England said banks still need much more capital, before they will be able to function near normal conditions. Right now, credit lines are starting to dry up in the U.K., sending the economy into a recession for the first time since 1991.

In the last few months, the U.K. Government nationalized the three largest banks, HBOS, Lloyds and Royal Bank of Scotland in a $56 billion bailout. Furthermore, Mr. Brown, the U.K. Prime Minister announced a plan for a $38.7 billion stimulus plan by next year, roughly 1% of the economy.

Most analysts expect the central bank to continue the rate-cut cycle, in order to support the economy and avoid a dangerous deflationary period ahead. The current 3% overnight rate is already the lowest seen in the last few decades.

The direct implications of these two actions, in normal market conditions, (not driven by the fear factor), are a weaker currency. The stimulus plan would take the government deficit to the highest level since the late 1980’s, implying that more currency would have to be printed, and put further downward pressure on interest rates.

Until now, reports have shown that the U.K. economy was the hardest hit among the G7 from the credit crunch, contracting 0.5% in Q3, or 2% annualized. As such, the pound is expected to continue to weaken against the other major currencies, including the dollar, as long as the market is in a risk aversion mode.

The ironic thing is that, Britain was the place where the technique of “spending” the way out of a recession by increasing the Government’s expenses and devaluating the currency, first derived. The genius behind this method was Keynes, and the practice helped revive the world economies after the Second World War. Wonder if it will work now?

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  1. 1 comments: Responses to “ U.K. Banks Still In Need Of Capital ”

  2. By Mberenis on November 25, 2008 at 10:28 PM

    The increase in stimulation of the american economy will trickle down into other nations economy, as the trades are intigral. Even consumers in USA are starting to get the bennefits, but most fail to find them. Most people don't realize how much money there is out there. During economic times like this, there is more money to be had than ever. Because of the bailouts and economy, lenders are bending over backwards to bail you out too. Believe it or not, there is people getting tons of cheap money nowdays to start businesses, buy homes, pay off debt, and more. Bailouts for Everyone

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