Following the Chancellor’s announcement of a £100 billion lending plan to UK individuals and businesses last week in conjunction with the Bank of England, it has emerged that in a u-turn, the Governor of the Bank of England, Sir Mervyn King is ordering UK banks to make more of their cash reserves available.
This would boost the cash available for lending from around £100 billion to closer to £300 billion.
Sir Mervyn has advised UK banks that they should release part f the large piles of cash he has ordered them to hoard over the last three years.
Most of this cash is invested in gilts but will now be realized and lent as loans to households and businesses.
The policy reversal underlines the deep concern the central bank has over the euro debt crisis and could become part of a global policy push that involves other central banks depending on the outcome of the Greek election.
If the left-wing Syriza party wins the election and this results in Greece leaving the euro, then central bankers in other European countries, in the US and in Japan could join the Bank of England in providing a concerted intervention to stop the financial markets from falling dramatically.
Analysts believe that the FTSE 100 could drop as low as 3,500 if Greece is forced to leave the euro and this causes the break-up of the single currency.
Sir Mervyn’s scheme would allow UK banks to keep less on deposit with the Bank of England and hold less in government bonds and improve the flow of funds in the economy.
The initiative is a u-turn by Sir Mervyn as it reverses his long-held view that banks should hold greater reserves to guard against another banking crisis.
Instead he has judged that unleashing some of these reserves could save the UK from entering an economic depression.
Sir Mervyn made this announcement towards the end of his Mansion House speech on Thursday and the euro debt crisis is the justification.
In his speech he said: The effect of the euro crisis has been to create a large black cloud of uncertainty hanging over not only the euro area, but our own economy too, and indeed the world as a whole.”
The country as a whole will be hoping his change of mind helps the UK economy to avoid the worst of the impact of the euro debt crisis and emerge from a double-dip recession.
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