David Prosser: It's time for Government to keep its word and get banks lending again
Outlook: The cost of mortgage funding in the current low interest rate environment continuesto squeeze all life out of margins in this business
Tuesday 01 June 2010
Here's an interesting question for George Osborne and Vince Cable: when is the new Government going to begin to make good on the pre-election promises made by both coalition partners to get the banks lending more freely?
The question is prompted by a sly little move by Lloyds Banking Group, announced at the end of last week with little fanfare. Since Lloyds, where the taxpayer owns 41 per cent of the shares, still has to answer to UK Financial Investments, the body that co-ordinates the taxpayers' stakes in the banks, one wonders why the Government didn't choose to put up at least a token fight.
Specifically, Lloyds has dropped the guarantee it has offered until now about what rates mortgage borrowers will pay once their initial special offer – a cheap fixed or tracker rate, say – has come to an end. The cost to which borrowers revert at this stage is known as the standard variable rate and until now Lloyds had been promising its SVR would never be more than 2 percentage points above the Bank of England's base rate. So, right now, Lloyds' SVR is 2.5 per cent.
However, from today, Lloyds will move to an SVR that it has complete discretion over, starting with a rate of 3.99 per cent – getting on for double the current bill.
Now, Lloyds is breaking no rules with this move and other lenders, notably Nationwide, have made similar changes in recent times. Moreover, no borrower will be affected for two years, because all the bank's initial special mortgage offers last for at least that long.
Still, this is a retrograde step for the mortgage market, which may encourage other major lenders to drop promises they make on home loan pricing. Lloyds is withdrawing a valuable commitment it has offered until now, one which provides first-time buyers, in particular, with considerable reassurance about the cost of servicing their mortgages in future.
It isn't difficult to understand the lender's motivation – the cost of mortgage funding in the current low interest rate environment continues to squeeze all the life out of margins in this business and Lloyds is trying to find a bit of room to breathe. Still, Messrs Osborne and Cable might want to have a word – far from making it easier for borrowers in the housing market, this state-owned bank is, in its own small way, adding to their difficulties.
Are the stars aligned for manufacturing?
Look out today for the latest snapshot of the health of Britain's manufacturing sector. Having seen GDP growth for the UK economy in the first quarter of the year upgraded due to a better-than-expected performance from the industrial sector, more recent indicators have also been positive and today's manufacturing purchasing managers' survey is expected to continue that trend.
After playing second fiddle to financial services for the best part of three decades, it must be gratifying for manufacturing to be enjoying its day in the sun. There is a political consensus post credit crunch that the country's economy needs to be rebalanced, that we need to reverse the trend which has seen the number of people employed by manufacturing businesses in the UK fall by two-thirds since Margaret Thatcher came to power in 1979.
Moreover, for once, the stars seem to be aligned. The previous government was interventionist, promoting growth in some industries – witness the loan to Sheffield Forgemasters – and protecting others with schemes such as scrappage. The new administration appears to already be backtracking on its intention to dump capital allowances in order to pay for across-the-board corporation tax cuts, though we need more detail on that. Then there are the more benign trading conditions – the low value of sterling, for example, boosting exports, and the uptick in demand from both domestic and overseas customers.
For all this, however, manufacturing remains in a parlous position and will need very careful nurturing for many years to come. For one thing, those benign trading conditions may prove transient. Cheap sterling is only of benefit if our trading partners are in the market to buy – and with the eurozone's ongoing difficulties with sovereign debt, that looks far from clear. Scrappage, meanwhile, has gone, and the fiscal stimulus is being gradually unwound.
More fundamentally, some in manufacturing believe the sector has simply declined too far for there to be any short-term hope of reviving it. Skills in many areas have disappeared and there is simply no longer the critical mass to support the sort of extended supply chains that are needed for industrial production on a mass market scale.
Rebalancing our economy is a worthy ambition indeed, but the work has barely started – however impressive today's data appears.
Daring to doubt the Sage of Omaha
It is not the done thing to voice doubts about Warren Buffett – the "Sage of Omaha" is almost never criticised – but tomorrow's Financial Crisis Inquiry Commission hearing in Washington might just see that rule broken. Mr Buffett will appear before the commission only because he has to – it subpoenaed him after he turned down an invite to attend – and he is there to talk about credit ratings agencies.
Mr Buffett's views are relevant because his Berkshire Hathaway investment vehicle has a large and longstanding stake in Moody's, one of the big three agencies. It's difficult to think of a part of the financial services sector that has emerged from the credit crunch with less credit than the ratings agencies, so it will be fascinating to hear why Mr Buffett has been so heavily invested in one of them.
Either Moody's has pulled the wool over Mr Buffett's eyes concerning its competence, or he's been happy to invest in a company that has performed poorly because it has nonetheless been so profitable. Neither is a comfortable conclusion.
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