Fortification of banks crucial to bring about UK recovery, says IMF

Gary Duncan, Economics Editor

Shoring up Britain’s banks is the most urgent task facing the country to ensure an economic recovery that remains fragile and is set to be “slow and subdued”, the International Monetary Fund warned yesterday.

The IMF used its annual healthcheck of the UK economy to throw the spotlight again on the role of the banks’ intense squeeze on lending in holding back a revival in the economy.

It said: “The growth of credit has fallen to nearly zero, and is expected to remain low in the near term … The financial system may not yet be repaired to a level where banks are ready to increase lending sufficiently to underpin a strong recovery.”

The report pointed to banks’ continuing curbs on loans as they struggle to rebuild their shattered finances. It warned that pressures on the banking system, and so the dangers to an emerging upturn, could escalate as recession led to more loans to businesses and consumers going bad.

“Significant uncertainties remain about the adverse impact of the recession on [banks’] asset quality,” it said. It cautioned that banks could be forced to make substantial further write-offs and that fresh losses could leave them in a state of renewed vulnerability. One risk came from the slump in the housing market, with the IMF concluding that the crash in prices could have farther to go. It said: “Forward-looking indicators suggest the housing price adjustment is yet to be completed.”

The fund called for the Treasury to take steps to encourage banks to raise more capital, with some of its directors cautioning that the Treasury should be ready to inject more public funds into the banking system if needed.

The IMF repeated its recent assessments that the UK economy was stabilising and set to return to meagre growth of perhaps 0.2 per cent next year. But it said that growth could remain hamstrung as banks and debt-laden households repaired their finances. It fuelled anxieties over the threat of a “double-dip” downturn, with a recovery followed by a relapse. “It is possible to get a double-dip growth path, with a stronger rebound in mid-2009, followed by some weakness later,” the report warned.

The IMF again turned up the heat on Gordon Brown and Alistair Darling over huge government borrowing, which it expects to reach 13 per cent of GDP this year and next, with the national debt set to double to almost 100 per cent of national income over five years.

Ajay Chopra, who headed the IMF’s annual mission to the UK, said that markets had given Britain the “benefit of the doubt” so far and not punished it over the scale of the budget deficit. “But this benefit of the doubt will not last for ever,” he said.

The report called for an ambitious effort to rein in borrowing. “Once the economic recovery is established … the focus should be on putting public debt on a firmly downward path faster than envisaged in the 2009 Budget,” it said. Mr Chopra said that the main focus should be on public spending curbs but that tax rises would also be necessary given the scale of the deficit. (Gary Duncan, The Times).  http://business.timesonline.co.uk/tol/business/economics/article6717196.ece

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