I'm getting more worried about our financial prospects every day.
This week has been full of rotten economic and financial news. In no particular order, here are four scary news items that have worried me:
1. Savers urged to be careful
If your bank goes bust, you’ll get all your money back - up to a limit of £85,000. The money will come from the Financial Services Compensation Scheme (FSCS).
However, if you have more than £85,000 with one bank, you won’t get any more than that amount. This also applies to any money you have with banks that share the same banking licence. For example, Barclays and Standard Life share the same banking licence.
So far, I’ve said nothing new. But the disturbing point is that the boss of the FSCS is now reminding savers of the rules that I’ve just explained.
That suggests that the FSCS is worried that the chances of a bank collapsing are on the rise. The FSCS boss may be trying to reassure savers, but for me, he’s doing quite the reverse!
2. Banks warned to keep lending
The Bank of England’s Financial Policy Committee fears that lenders will be unable to roll over existing debts and make fresh loans if they don’t attract sufficient fresh cash from savers and investors.
If the commercial banks lend less, the economy will inevitably suffer.
It’s understandable that commercial banks want to keep more cash in their ‘virtual vaults,’ but the Bank of England says they shouldn’t achieve that target by cutting back on lending. Instead the banks should retain more of their profits by cutting back on dividend payments and bonuses.
3. Libor is on the up
Libor is the rate at which banks are prepared to lend to each other. (It stands for London Interbank Offered Rate.)
In normal times, you’d expect Libor to be just a little bit higher than the Bank of England’s base rate. So back in January 2005 – long before the financial crisis – the main Libor rate was 4.89% while the base rate was 4.75%. The difference between the two rates was just 0.14%.
But if the banks are worried that other banks might go bust, they start to charge higher rates for loans they make to other banks. And when you look at the current Libor rate, it’s obvious that at least some banks are getting worried:
|
Date |
3-month Libor rate (Sterling) % |
Bank of England base rate % |
Difference between Libor and base rate % |
|
December 1 2011 |
1.04 |
0.5 |
0.54 |
|
November 14 2011 |
1.01 |
0.5 |
0.51 |
|
July 14 2011 |
0.83 |
0.5 |
0.33 |
|
March 15 2010 |
0.65 |
0.5 |
0.15 |
|
June 15 2009 |
1.25 |
0.5 |
0.75 |
|
October 1 2008 |
6.31 |
5 |
1.31 |
|
2 January 2005 |
4.89 |
4.75 |
0.14 |
Higher Libor is already feeding through into higher interest rates for mortgages. That’s worrying but the really scary point is that it shows the financial system is far from normal at the moment. I fear we’re going to see further rises.
4. Rotten UK growth figures
George Osborne’s Autumn Statement had a few good points, but some of the economic forecasts were horrendous.
The UK economy is now expected to grow by only 0.7% next year, down from a forecast of 2.5% in March. What’s more, the government will now have to borrow an extra £111 billion over the next five years – all from a government that put reducing the deficit at the top of its political agenda.
If growth slows some more, we may get to a point where investors lose faith in the UK’s ability to pay off its debts. If that happens, you can’t completely rule out an Italian-style debt crisis.
Some good news
In fairness, I don’t think that an Italian-style crisis is that likely in the UK. That’s because our non-membership of the Euro gives our policymakers more room to manoeuvre. What’s more, a large chunk of government debt doesn’t have to repaid for a long time.
And there is some good news out there: unemployment in the US is falling and Chancellor Merkel is pushing for fiscal union in the eurozone.
That said, Europe’s leaders are brilliant at mucking up their rescue plans. Overall, I’m more scared than I was a week ago. And I’m a lot more scared than I was a year ago.