To say that today has been something of a momentous occasion in the UK would be an understatement, we have see £50 billion put up as direct investment capital for the banks and an extra £450 billion made available to the banking community in the form of commercial loans. But what does this all mean? Will it mark the bottom of the property market slump?
Many people doubted that the UK government were up to the task of bailing out the UK and while it was late it is certainly a case of better late than never. Short term the sentiment in the stock markets is relatively upbeat – even though stocks did actually fall today while traders wait for the detail of the packages announced today.
So what exactly is on offer and what does it mean to the UK public, UK banking and the UK property market?
The £50 billion equity deal with UK banks
The government has stepped forward with what they claim to be a radical package which will see £50 billion on offer to the leading banks of the UK as a way of raising extra capital. In exchange the government will either take a stake in the business via ordinary shares or look to preference shares which rank higher for a payout should the business go under. Sounds very good so far…..
However, it has been announced that the deal is voluntary which in practice may see the UK tax payer being saddled with shares in businesses which are not able to raise money on a commercial basis – the weaker of the leading UK banks. It has already been announced that Royal Bank of Scotland and Lloyds Bank have come forward to take up the offer, the details of which we will see over the next few days.
UK taxpayers will have a stake in businesses which should hopefully flourish once the troubles are over and there is confidence that the tax payer could actually see a profit from this move. On the banking side it will allow them to replenish their balance sheets and gear up their lending operations when market operations return to normal – i.e. more finance for mortgages, loans, etc.
The £250 billion underwriting operation
This has to be one of the more vital elements of the package announced today and will see UK banks able to borrow in the money markets with the UK government underwriting the amounts in question. The fact that the Bank will charge a commercial rate on the deals is no surprise but it does suggest that UK banks which are in a more desperate situation may struggle to increase liquidity and available finance.
The major banks of the UK will benefit the most because this will allow them access to funding on the best terms in the market – you cannot get much more secure than the UK government acting as guarantor. This should in turn see the banks return to the mortgage and loans markets for business and private clients which should kick start the markets again.
The £200 billion injection into the money markets
In order to try and free up the money market system while the measures announced today are given a chance to work it has been announced that the Bank of England injected a further £200 billion into the system as a mean of providing liquidity to markets. The funds will be lent on commercial terms and be repayable as they would be normally but the fact there is a serious lender in the market should see money market rates fall and lenders and borrowers return to the markets. More activity means more liquidity which means that the UK business wheels can start rolling again.
The UK property market
While there is no overnight fix to the current predicament of the UK property market there is no doubt that the combined affect of the above elements of today’s package will at worst pump some liquidity back into the mortgage market which will then free up part of the housing market. The very fact that banks will have an obligation to assist the private client and business sectors of the community with affordable finance is part of the deal with the government, in exchange for access to the massive funding announced today.
As liquidity increases and property sales perk up, as they surely will in due course, we will then see the return of the ‘real’ market where we will actually be able to give more reasonable property valuations. No more guessing what a property is worth, no more fire sales for crazy prices as slowly but surely we will see some sense return to the markets. This does not mean that markets will move ahead straight away, and we may actually see markets drift a little lower before recovering, but we will slowly be returning to a liquid market.
Continued government support
Even though there is great hope that today’s announcement and funding packages will mark the end of the troubles in the UK financial and property markets, the government has promised that they will ‘do whatever is required’ to ensure that the UK economy is given the best assistance possible. Whether these promises will be enough remains to be seen as the authorities have pretty much played all of their cards today.
Conclusion
We will probably look back on today as something of a monumental occasion in the history of the UK economy. So see £500 billion pledged to the markets and the financial sector in one day has never happened before and we are unlikely to see it again. This really is the last throw of the dice and the fact that the government has affectively remortgaged the UK economy is something of an irony when you consider it is the property and mortgage market that it is trying to refloat.
Initially it looks as though the City likes the package but the devil as always is in the detail!