Moody’s Investors Service downgrades 12 UK banks even as the central bank pumps in another £75 billion with warning of high inflation.
After deciding to pump in £75 billion into the British banking system, Bank of England governor Mervyn King said the current financial crisis was the most serious one since the Great Depression of the 1930s, “if not ever”.
King told Sky News: “We’re having to deal with very unusual circumstances and to act calmly and do the right thing. The right thing at present is to create some more money to inject into the economy.”
King’s views drew consensus at the government treasury. Chancellor George Osborne said quantitative easing was the right thing to do, a marked change of view since 2009. Under the previous Labour government, the BoE had, in November 2009, pumped in £200 bn, causing inflationary worries. Osborne had then been highly critical.
The BoE has also warned that the fresh pumping in of £75 billion could push up inflation. Some experts have predicted this could go up by 1.5-2 per cent.
The broad idea of the current move is to enable banks to improve lending, mainly to small businesses. Ahead of Christmas, the government is hoping to give a big push to growth prospects through stronger consumer spending.
Meanwhile, Moody’s has downgraded 12 UK banks, a move forewarned in May this year by the rating agency. Moody’s said the downgrades were caused by its reassessment of the support environment in the UK. There has been removal of systemic support for seven smaller institutions and the reduction of systemic support by one to three notches for five larger, more systemically important, financial institutions.
According to Moody’s, the announcements made, as well as actions already taken by the authorities, have significantly reduced the predictability of support over the medium to long term.
It believes the government is likely to continue to provide some level of support to systemically important financial institutions, which continue to incorporate up to three notches of uplift. However, it is more likely now to allow smaller institutions to fail if they become financially troubled, Moody’s said today. It also said the downgrades of financial institutions do not reflect a deterioration in the financial strength of the banking system or that of the government.
The rating actions include a one-notch downgrade of Lloyds TSB Bank, Santander and Co-Operative Bank, and a two-notch downgrade of RBS and Nationwide Building Society. There were downgrades of one to five notches of seven smaller building societies.
