VIDEO: Market fears over Greek deficit

AppId is over the quota
AppId is over the quota
3 October 2011 Last updated at 13:54 GMT Help

View the original article here

King fears crisis is 'worst ever'

AppId is over the quota
AppId is over the quota
7 October 2011 Last updated at 04:13 GMT Mervyn King: 'Quantitative easing will work'

Bank of England governor Mervyn King has said this financial crisis could be the worst the UK has ever seen.

His comments came after the Bank authorised the injection of a further ￡75bn into the economy through quantitative easing (QE).

Explaining the move Sir Mervyn told Sky News: "This is the most serious financial crisis we've seen at least since the 1930s, if not ever."

The Bank has already pumped ￡200bn into the economy.

It has done this by buying assets such as government bonds, in an attempt to boost lending by commercial banks.

Sir Mervyn said: "We're having to deal with very unusual circumstances and to act calmly and do the right thing. The right thing at present is to create some more money to inject into the economy."

The Bank's Monetary Policy Committee has been split for months over whether the UK needs a boost to the economy through QE, an increase in interest rates to stave off inflation - which at 4.5% is well over double its target - or to leave things as they are.

Only one member, Adam Posen, has consistently pushed for more QE.

Slow money

Sir Mervyn said the economic landscape was unfamiliar and the world had changed in the past three months and so had the policy response necessary.

He said the amount of money in the economy was not growing quickly enough.

Sir Mervyn also said he could not rule out a further bout of QE.

On Wednesday, data showed the UK economy grew by 0.1% between April and June, which was less than previously thought.

"The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term.

Continue reading the main story Use the dropdown for easy-to-understand explanations of key financial terms:AAA-rating GO The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is miniscule.The CBI and the British Chambers of Commerce (BCC) business groups welcomed the Bank's move to expand the QE programme to ￡275bn, but said that on its own, its impact would be limited.

"This measure will help support confidence, but we need to recognise that its impact on near term growth prospects is likely to be relatively modest," said Ian McCafferty, the CBI's chief economic adviser.

"Only once the turmoil in the eurozone is resolved will confidence be fully restored."

'Radical'

David Kern, chief economist at the BCC, said: "Higher QE on its own is not enough and we urge the MPC [Monetary Policy Committee] to look at other radical methods.

"There is a strong case for the MPC to help boost bank lending to businesses by immediately raising its purchases of private sector assets."

However, the National Association of Pension Funds (NAPF) is calling for an urgent meeting with the pensions regulator to discuss ways of protecting UK pension funds from the negative effects of QE.

QE tends to push down long-term bond yields, therefore reducing the return on the investments made by pension schemes.

"Quantitative easing makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase," said Joanne Segars, chief executive of the NAPF.

Complementary actions Continue reading the main story

If you're not sure of the quality of your ammunition, it's best to fire first. Some will see that as the explanation for the slightly early launch of QE2 from the Bank of England”

End Quote Stephanie Flanders Economics editor, BBC News Mervyn King wrote to the chancellor earlier on Thursday, setting out the MPC's case for expanding the asset purchasing programme.

In his letter of response, in which he authorised the move, Chancellor George Osborne said: "I agree that an increase in the ceiling would provide the MPC with scope to vary the stance of monetary policy to meet the inflation target."

In his speech to the Conservative Party conference earlier in the week, Mr Osborne said that the Treasury would look into "credit easing" - a way to underwrite loans to small businesses who are struggling to get credit now.

He confirmed this in his letter to Mr King: "Given evidence of continued impairment in the flow of credit to some parts of the real economy, notably small and medium-sized businesses, the Treasury is exploring further policy actions. Such interventions should complement the MPC's asset purchases."

View the original article here

Fears surface over Chinese debt

6 October 2011 Last updated at 04:28 GMT China's property market could see a slowdown With its deep pockets and buoyant growth, China has been touted as a white knight for the world economy.

But fears are growing that the country may face its own debt crisis as its economy shows signs of a slowdown.

Premier Wen Jiabao this week urged stronger financial support for cash-strapped smaller businesses.

His call comes amid reports that many private sector enterprises are facing bankruptcy due to credit tightening and an explosion in informal lending.

In the eastern city of Wenzhou, one-fifth of the city's 360,000 small and mid-sized businesses have stopped operating due to cash shortages, China's official news agency Xinhua reported on Thursday.

"Effective measures should be taken to contain the trend of usury, crack down on illegal fundraising and properly handle the problems of collateral and capital shortage in order to prevent risks from spreading and evolving on a regional scale," Mr Wen said while visiting the city.

According to Chinese media reports, more than 80 businessmen have fled the city unable to pay loans taken out from underground banks and one shoe factory owner jumped off a building and killed himself.

'Time bomb'

Continue reading the main story

We consider the informal lending market the most likely short-term time bomb for the Chinese economy,”

End Quote Dong Tao Credit Suisse Economists believe this could be the beginning of a larger wave of corporate bankruptcies.

Concern centres on China's informal lending or shadow banking market - rich individuals and businesses that offer loans at interest rates spanning from 14% to 70%.

Companies and entrepreneurs have turned to this underground sector, with Chinese banks tightening lending as part of the government's fight against inflation.

Credit Suisse says that hard statistics on the sector are hard to come by, but loans could total as much as 4 trillion yuan ($627bn; ￡406bn) - equal to 8% of the formal banking sector - and may be growing at 50% a year.

It estimates that 60% of informal loans have gone to small property developers, with the rest going to other businesses that need bridge loans.

"We consider the informal lending market the most likely short-term time bomb for the Chinese economy," Dong Tao, Asia economist at Credit Suisse, said in a recent report.

"Either Beijing takes pro-active and decisive measures to deal with the issue, or a mini credit crisis is likely to emerge in our opinion," he says.

Default swaps

Fears of an economic slowdown in China have also fuelled a surge in the trading of credit default swaps - financial instruments that insure against the risk of debt defaults.

The net value of outstanding credit default swaps on Chinese government debt has risen to $8.3bn, compared with $1.6bn two years ago, the Financial Times reported on Thursday.

Investors are worried that China's economy could experience a "hard landing" - a sudden slowdown after years of blistering growth.

The property market is thought to be particularly vulnerable, with house prices soaring in the past two years.

The country has raised interest rates three times so far this year and ordered banks to increase their reserves six times in the same period.

View the original article here