Banking on a Recession? Business Editor Sion Barry Assesses the Turmoil in Global Financial Markets after the US Rejection of Its Planned EUR700bn Bail-Out of Toxic Debt and the Impact on the Welsh Economy as the UK Faces Up to the Likelihood of Recession

Western Mail (Cardiff, Wales), October 1, 2008 | Go to article overview

Banking on a Recession? Business Editor Sion Barry Assesses the Turmoil in Global Financial Markets after the US Rejection of Its Planned EUR700bn Bail-Out of Toxic Debt and the Impact on the Welsh Economy as the UK Faces Up to the Likelihood of Recession


Byline: Sion Barry

IF a week is a long time in politics, then in the financial markets it must seem like a lifetime.

Monday will rank as one of the most momentous in the history of the financial services sector, with the part nationalisation of Bradford & Bingley in the UK; a series of European bank bail-outs; more central bank liquidity injections and then to top it all the US House of Representatives voting down the EUR700bn troubled asset relief programme (Tarp).

However, while politicians in the US are rightly angered at the prospect of having to bail out irresponsible banks who created the current crisis in the first place, they really have to look at the wider global picture to see that inaction could have hugely negative implications for the global economy.

All is surely not lost on the rescue plan front - which in effect is based on the US Treasury buying out distressed mortgage and property related assets from banks in the hope that over time they can be sold back into the marketplace when calmer waters return - will be tweaked in the comings days and approved.

However, whether EUR700bn will be enough - some commentators say it could need two trillion dollars - only time will tell.

However, there is an urgent need for an injection of liquidity into international money markets.

The rate at which banks are prepared to lend to eachother-the benchmark London Interbank Offered Rate, or Libor - has moved further out from the Bank of England's base rate in recent days.

This is bad news not only for the banks themselves, but the people they lend to, whether individuals looking to finance a home extension or a Welsh company looking to secure debt finance for a job creation expansion.

There is a serious danger of lending retreating further, which could put more financial institutions on the at-danger list, impacting further into the corporate arena and the high street.

Finance is the lifeblood of companies with aspirations for growth. Unless they are fortunate enough to have healthy cash reverses, they need to raise finance to expand.

With banks still reluctant to lend to each other, there is a danger that it could result in preventing more firms from executing growth strategies. If that were to happen it would turn them into static or stagnating ones, resulting in a loss of market share and the need to make efficiency savings, which often means job losses.

With unemployment on the rise in the UK, the last thing we need is companies facing such problems. It doesn't take a genius to work out that if you take more disposable income out of the economy then things are going to get a great deal more challenging for UK plc. So yes, banks have a great deal to answer for, as well as politicians for sitting back and allowing things to get out of hand.

On the back of the credit bubble banks have made record profits in recent years - by providing cheap finance which should never have been lent in the first place with little in the way of assessing if the borrower(s) - particularly in the US subprime mortgage market - had the ability to repay.

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Banking on a Recession? Business Editor Sion Barry Assesses the Turmoil in Global Financial Markets after the US Rejection of Its Planned EUR700bn Bail-Out of Toxic Debt and the Impact on the Welsh Economy as the UK Faces Up to the Likelihood of Recession
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