Well, here we are on the cusp of what would appear to be a fairly momentous announcement by the UK Government: the partial nationalisation of the UK banking sector. If the speculation is correct – and it appears that it likely is – Alistair Darling will announce that the government is to take a huge equity stake in UK banks. 50billion pounds is the figure being talked about, and this is probably not far from the mark if this is to be anything more than a gesture.
I’m not normally one for back-slapping on government decisions, but this time I think it’s the right thing to do, and underscores quite sharply the serious position we find ourselves in.
So why is this all happening?
So what’s driving this move by the government? Well, forget about share prices – the absolute price at any time means little. No, you should look to the bond markets for the real answers.
I won’t get too technical here (this is supposed to be a property blog, after all), but what is happening is investors are pursuing what is known as a ‘flight to quality’. In other words, everyone wants to buy government issued bonds rather than ones issued by the banks because they see the banks as a huge risk at the moment. Since this is one of the principal ways in which banks and companies raise money, this is a serious problem for the banks and their share prices will continue to be battered whilst this remains the case.
The government is trying to reduce the perceived gap in risk between IOU’s (i.e. bonds) issued by them and by the banks by simply owning part of the banks themselves and hoping the confidence in them increases as a result. Is it that simple? Will it actually work? Well, we should all hope that it does because we’re all in trouble if the banking system becomes unstable.
How does this affect property?
After the detour above, back to the property markets. In the UK particularly, the property market is tied strongly to the banks and the fate of one is the fate of the other. I would not be surprised to see a 0.5% base rate drop from the Bank of England. I would be amazed if we don’t see a 0.25% drop. Will that get passed on by the lenders? Good question…my guess is that even though they won’t want to they’ll be under pressure to give the market a boost by making some reductions, even if they are only small. But I wouldn’t be putting money on this call as there are too many factors to play out yet.
Tags: banks, bond, credit, interest rates
Very informative post. Thank you.