The
Government's asset purchase scheme has 'spent' £375bn buying up gilts (UK
Government Bonds) from our distressed banking sector, what they call Quantitative
Easing (QE). The scheme was meant to be self financing but this week The Bank
of England stressed that although likely deliver a £17bn profit, its possible that losses made
on the sale of the gilts would rise to £75bn, producing a net loss of £8bn to
the public finances in 2020. As well as pointing out some long term risks
they also confirmed that more QE is unlikely to beneficial, what a surprise!
QE - keeping the lights on! |
In a parallel universe within the
Bank the Deputy Governor, a Mr Bailey, confirmed that despite this massive
commitment to asset purchasing our 'too big to fail' banks may still need a
further injection of Capital, he said “I agree there is a need to
strengthen the capital position,” he told
MPs. . He hinted that the extra Capital might be necessary before Lloyds and RBS are
returned to the private sector. Some 'experts' suggest the figure could be as high as £50bn
The Bank of
England and the Labour Government missed a big opportunity to resolve our
banking crisis back in 2009 when they decided to prop up the banks rather than
buy up the distressed assets to create a Nationalised 'Bad Bank'. The
coalition Government have also kept their heads firmly in the sand on this
since 2010. The result is that after four years on and with £375 billion
spent on QE we still have a broken banking sector.
If the
Government had broaden the asset types for the QE programme we could now be in
a situation where Lloyds, RBS and Barclays could be providing the credit and
lending services that our economy so desperately needs. Meanwhile the
Bank of England could be managing the run-off of asset sales from 'Bad Bank'.
It's now emerging that this 'Bad Bank' construct maybe needed to bail-out
the UK's over-blown and poorly regulated Private Equity business. When it rains ......!
Yet another Bank
of England study (my they have been busy) has confirmed that
many UK
businesses have been left “fragile and susceptible to default” by private
equity’s leveraged buy out (LBO) model. In the first decade of this
century Private Equity sector used leveraged finance to 'buy' many of our best
UK companies, actually what they did was to borrow a load of money and then pass these debts on to the balance sheet of the acquired business. Companies like Boots, Manchester United, Saga, Debenhams and all suffered the same fate. These businesses are now loaded with the debt estimated at £160bn. See the chart on the left.
When people
think of Zombie business we image small run down family companies hardly able
to meet the pay-role, the reality is much more serious. We now have some
of our best business over loaded with debts that they will take years to pay
off. This is killing productivity and we are losing the opportunities to
expand exports and employment at home because of the greed in our
financial service industry. This may is some way explain the UK's terrible productivity performance sine 2008.
But setting up a 'Bad Bank' the government could free both our banks and our leading businesses from the effect of the credit boom and bust setting the economy on a course of recovery. The next question will be how do we get our money back from the Private Equity millionaires who have done their bit to wreck our economy.
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