Darling mulls more loan guarantees as economy stalls

Wednesday, 10 December 2008 11:24

Alistair Darling is considering increasing government loan guarantees as the credit freeze continues.

The extension to government guarantees - that already cover inter-bank lending and some mortgage lending - could cover business lending.

"We will be announcing in the near future measures which I hope will not only strengthen the banking system but I hope will ensure greater lending to business and people," the chancellor is quoted as saying last night in the Financial Times (FT).

The FT  reports the government could also reduce the charge it levies for guaranteeing loans.

Today thinktank the National Institute of Economic and Social Research (NIESR) warned the decline in the UK economy is accelerating - down  one per cent in the last three months.

The body warned the main problem that needed to be addressed was the availability of bank credit.

It warned  further interest reductions were unlikely to have much effect.

Martin Weale, director of NIESR, explained the government will have provide further guarantees to lending if the economy worsens. He added cash in  the form of further recapitalisation may have to be offered to banks.

Yesterday the mortgage lenders hit out at the pressures they are facing to increase lending and increase their capital base, while holding saving rates up and matching Bank of England interest rate cuts.

Michael Coogan, director general of the Council of Mortgage Lenders (CML), said: "To different degrees lenders are facing conflicting pressures to recapitalise against possible future losses, service government's preference shareholdings at 12%, pay a premium to access the Bank of England Special Liquidity Scheme, show forbearance to borrowers in arrears, follow base rate moves down to help their existing borrowers, keep savings rates high to support existing savers, and provide competitive rates to new borrowers and savers to maintain economic activity in a recession. "And they are supposed to ensure their long term financial stability to help the UK economy rebuild itself when we are out of the recession."

He added: "Current policy objectives are conflicting and incoherent.

"The government needs to decide on its key priority. The tug of war with lenders being pulled in every direction at once needs to end."

George Osborne, Conservative shadow chancellor,  said: "Gordon Brown's big idea is falling apart. His whole approach to the credit crunch is today condemned as conflicting and incoherent by the Council of Mortgage Lenders.

"As we Conservatives have been saying for some time, he needs to change his bank rescue plan so it starts to rescue the economy not just the banks, and set up a National Loan Guarantee Scheme to get vital credit flowing to businesses."

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