Beware the Threat of a Double-Dip Recession; Fears about New Losses at Bailed-Out Banks Such as Lloyds Are Casting a Shadow over the Stock Market as Hopes of Recovery Stall; ECONOMIC ANALYSIS

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Byline: Hugo Duncan

"MAKE no mistake: this ain't over yet." This stark warning from Glen Moreno, the acting chairman of UK Financial Investments, may have related to the world's financial markets but it could just have easily applied to the UK economy.

For all the talk of green shoots, the UK economy will not enjoy a sustained recovery until bank lending picks up significantly.

And for all the talk that banks are open for business, most lenders at home and overseas are reluctant to issue loans in any great volumes while the financial markets remain fractured and the recession rumbles on.

So while there are signs the worst of the recession, and indeed the financial crisis, have passed, it is pure fantasy to suggest a meaningful recovery is on the way.

"Banks still face considerable losses from past excesses and the current recession," warned Moreno. He should know. As chairman of UKFI, he is in charge of the Government's stakes in part-nationalised banks Royal Bank of Scotland and Lloyds Banking Group.

City analysts reckon Lloyds is poised to write off as much as [pounds sterling]13 billion on disastrous loans to commercial property, businesses and mortgage holders in the first half of the year alone, resulting in losses of [pounds sterling]6 billion. Total write-offs this year could hit [pounds sterling]20 billion, to add to the [pounds sterling]20 billion already squandered.

This reflects not only catastrophic lending practices by HBOS, which Lloyds took over with the help of Gordon Brown after the collapse of Lehman Brothers, but also the fact that previously low-risk borrowers, whether businesses or households, are struggling to make ends meet and cannot repay their loans.

In other words, Lloyds, like many other lenders, is feeling the pain of rising unemployment, falling house prices, and businesses going bust - in short, the recession.

While Lloyds chief executive Eric Daniels will no doubt be as upbeat as possible about the underlying performance when he reports the results early next month, he cannot hide from the fact that the bank and the economy face a very bumpy couple of years at least.

Stephen Hester, chief executive of rival basket-case Royal Bank of Scotland, knows it. "Some commentators are beginning to talk about economic recovery but we do not see green shoots, and we expect 2009 and 2010 to be very difficult years for the economy and RBS," he said recently. …