King tells MPs of 'emergency' loan of £61bn

Nov 25 2009 by Iain Laing, The Journal

THE Bank of England has revealed that it lent Royal Bank of Scotland (RBS) and HBOS £61.6bn in a "dire emergency" at the height of the financial crisis.

In its submission to the Treasury Select Committee the Bank said it stepped in as a lender of last resort just weeks after the collapse of Lehman Brothers to buy time until the Government could take action.

The Bank kept the loans secret until yesterday, when it judged that the danger of collapse had passed and there were no further consequences for the financial system.

Bank Governor Mervyn King gave evidence to MPs in the wake of the institution’s most recent predictions for the future of the economy.

Mr King gave a gloomy assessment on the ability of the UK to return to pre-recession levels of gross domestic product (GDP).

He said figures from the International Monetary Fund (IMF) and those underpinning the Bank’s own Inflation Report suggest that from pre-recession levels between 5% and 10% of the UK’s entire economic output – around £100bn – will be lost for the “indefinite future”.

“I suspect eventually we will claw it back and get back to that level but it will take many years, so it will be a considerable period of output well below the level that we would otherwise have attained,” he said.

The Governor also said the Bank’s growth predictions for 2011, widely interpreted from its most recent report to be around 4%, were actually lower at closer to 3%.

He urged the next government to produce a plan for tackling the fiscal deficit within the lifetime of a Parliament – around five years.

He said the proposals should set out different measures depending on the strength of the economic recovery.

Simon Hayes, of Barclays Capital, said the statement seemed to be at odds with the current Government’s intentions.

“It seems doubtful to us that the Government’s plan, as set out in the budget, to roughly halve the structural deficit over the next four years would meet the Governor’s criterion, and he has said before that if the economy grows as the Treasury was predicting the Government should be more ambitious in its deficit reduction plans,” he said.

Mr King said he was “encouraged by signs that a recovery will soon be under way”, but warned the economy still faced “profound challenges”.

The Bank indicated that it hoped its £200bn quantitative easing (QE) scheme was coming to an end and Mr King said he hoped the Bank would begin unwinding the programme and raising rates within two or three years.

Following the “extraordinary” events of the past year, he said “it is right that households and companies expect fundamental reform to the structure and regulation of our whole financial system”.

The governor also warned that lingering banking sector problems would cut credit to households, while worries over unemployment and the need to address the stretched public finances with tax rises or spending cuts would hit spending levels for a “considerable period”.