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The U.K. Recovery Plan

Written by A Forex View From Afar on Tuesday, February 24, 2009

The U.K. government is trying at all costs to kick-start the economy, which includes expanding the lending programs throughout the nationalized banks and obligating the others to start lending.

The government plans to swap 4 billion pounds worth of preferred Lloyds shared to non-voting shares, to help the bank dodge paying 480 million pounds in annual interest rates. Instead, this money would be used by the bank to lend to its customers.

According to the latest HPI report, for the month of January, the average price of a house in the U.K. is roughly 150,000 pounds. This means that, Lloyds could potentially help up to 3200 families buy new homes, something that would probably give a small push forward in the housing market.

In addition to these funds, the U.K. government plans to lend 14 billion pounds throughout Northern Rock, the first bank that failed from the credit crunch, now also nationalized. This is a big shift from one year ago, when the U.K. authorities pledged to reduce the lending programs of the bank. The allocated funds should theoretically be enough to influence the demand side in the housing market. In January, U.K. banks approved only 23.4K new mortgages, down from an average of over 100K mortgages approved one year earlier.

Another significant boost the banking system would get is an insurance scheme, meant to stop any losses stemming from toxic assets. Even though the numbers are not official yet, news sources speculate that Lloyds and RBS would unload together around 500 billion pounds in toxic assets. For this to happen, banks are expected to pay a 3% to 4% fee, increase their mortgage approvals and take the first amount of losses. If we follow the guidelines set by the U.S. authorities, the financial institutions would support the first 10% of toxic asset losses and the rest would be absorbed by the Treasury.

Even though these projects are in the initial phase, they have the strength to influence the pound’s overall behavior. Up to now, the U.K. currency has been very sensitive to any news regarding the financials, and an improvement (or deterioration) would definitely influence it.

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