A bailout worth billions — but it’s just a drop in the ocean of mortgage debt

April 21, 2008 at 11:18 pm | Posted in economy, money | Leave a comment
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Siobhan Kennedy

What did the Bank of England do yesterday?

The Bank has announced a “special liquidity scheme” to try to get the money markets moving and boost confidence. Under the plan, Britain’s banks and building societies can cumulatively swap up to £50 billion worth of mortgage assets and credit card debt in return for Treasury bills — special bonds backed by the Government — for a fee. The bonds can then be exchanged for cash in the money markets. The bonds became available yesterday and banks have six months to swap them for their mortgages. The bonds will be issued for up to a year but can be extended for up to three years. Only AAA-rated mortgage assets, credit card debt and certain soverign paper is eligible to be swapped as part of the scheme. Mortgages linked to the US sub-prime market are not acceptable.

Why has the Bank had to do this now?

The purpose is to get the banks to start lending to each other and their customers again. Because of the knock-on effects of the credit crunch, banks have become very wary of issuing loans and interbank lending has virtually dried up. This has had a disastrous effect on the mortgage market with several banks and building societies being forced to raise their rates and reduce the amount of products on offer to first-time buyers. This has led to downward pressure on house prices, which in turn has hurt consumer spending and the wider economy. Mervyn King, the Governor of the Bank of England, said the situation has been bad for some time but became markedly worse last month. It is hoped that banks will be more willing to lend if borrowing banks pledge them government bonds — not mortgages — as collateral.

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