April 21, 2008	Monday	Rabi-us-Sani 14, 1429

The financial sector in Britian seems to have been caught between the deepening credit crunch and expanding housing slump with the medium to smaller mortgage lenders facing certain collapse.

Both the government and the banking sector have, predictably,hit the panic button. The former because the general public’s confidence in Prime Minister Gordon Brown’s ability to pilot the country out of the stormy waters is waning rapidly and the later because London’s pre-eminence in the world of finance has come under severe threat with massive job loss projections in the city.

In the upshot it is intervention time for the champions of the market economy. It was, therefore, natural for all of them from both sides of fence to put their heads together and come up with a plan to use the tax payers money for a bail out.

So, mid-way through last week leading bankers in Britian met Prime Minister Gordon Brown and told him that the serverity of the credit crisis could force dozens of smaller lenders to stop offering new mortgages unless the government intervened with, of course, tax payers money.

Mr Brown had already indicated that he was willing to intervene in the markets to save the banks from going bankrupt because of their own follies, provided they would respond by offering loans to first-time buyers and others struggling to find mortgage offers—a condition of no consequence at all.

The Bank of England has also indicated that it was close to finalising the terms for such an intervention, which would see it taking over mortgage loans that are stuck on banks’ balance sheets to break the logjam in the money markets. Under this plan the bank is expected to swap securities backed by UK mortgages for government bonds for a period of one to three years.

However, the cut-off date for the bank to accept mortgages is end December last year. The aim of the Bank seems to be clearing the overhang of mortgages stuck on banks’ balance sheets and not supporting new lending or exposing taxpayers to significant credit risk.

Bankers who would have opposed tooth and nail this time last year any level of government intervention in what was looking like a never ending carnival of currencies and would have called it violation of principles of market economy told Mr Brown on Tuesday last that he needed to move quickly to prevent smaller building societies (which had accounted for 47 per cent of mortgages last year) being forced from the market, leaving only a handful of large banks to offer new loans.

Obviously, after the medium and the small, it would be the turn of the larger banks to face the looming disaster. So, the banks want generous injections of liquidity and a significant cut in the interest rates. In fact some even advise the British authorities to move in unison with their counterparts in the US on this front. Last Tuesday’s meeting at Downing Street came amid predictions that the credit squeeze would hurt the City of London.

JPMorgan has been quoted by media saying there could be as many as 40,000 job losses in the City of London with some 28,000 job losses in the financial sector – an increase on previous estimates that about 20,000 financial jobs could be lost during the economic downturn.

The forecast is said to have emerged in a note from the property team at the investment bank, which used the figure to forecast a fall of 16 per cent in rents in the city. The numbers suggest about eight per cent of financial jobs will be lost in the next two years, with five per cent lost across all City occupiers.Before he left for the US on last Tuesday evening, Mr Brown reassured his countrymen that he understood their fears over the economy and insisted that keeping it on track was his “ sole focus”.

With his eyes on his plummeting political popularity he said his government was on the side of home owners, business and individuals and as in the past crises the government would do “ everything in our power to keep the economy moving.”

Meanwhile, the pressures of high commodity prices and a weakening currency has hit UK manufacturers in March, with output price inflation rising to a 17-year high and cost inflation reaching the highest levels on record.

Data released on Monday last by the Office for National Statistics said annual inflation in factory gate prices rose from 5.9 per cent in February to 6.2 per cent in March, above forecasts and the highest since 1991. The annual rate of increase in input costs rose from 19.7 to 20.6 per cent, the highest since records began in 1986.

Some saw the combination of high commodity prices and a weaker pound limiting the scope for policymakers to cut interest rates and inject liquidity, until they are sure the economy has slowed enough to keep retail price inflation in check.

Paul Dales at Capital Economics predicted that the Monetary Policy Committee’s inflation concerns were unlikely to fade soon. He said that a weak retail environment would limit the scope to pass on cost increases.

The monthly rise in output price inflation was largely due to a fresh surge in petrol prices and to increases in duty on tobacco and alcoholic drinks, outlined in the March Budget.

Critics of the government opined that it had evidently paid a high price for its indecision during the Northern Rock crisis. Though overall levels of taxation have barely changed in the past year, rising food and fuel costs have also stoked public resentment.

The Bank of England has neither been as decisive as the Federal Reserve, with its frequent rate cuts, nor as stern in its anti-inflationary rhetoric as the European Central Bank. The three rate cuts it has delivered so far do not look sufficient to revive the housing market but they may have been enough to make investors worry about its determination to tackle price pressures.

In a related development the pound is getting a battering from the euro at a time when its value against the dollar is on the rise.

Pound’s loss against euro is seen by some as a good thing for exports while its strength against dollar is not being viewed with any degree of concern because of deepening recession in the US which in any case is expected to limit imports into the American markets. But if things continue in the same way on the financial market front as at present the pound could even lose its relative strength against the dollar.