Britain 'might not cope with another bank emergency'

Britain's mountain of debt could leave the country powerless to launch another rescue bid in the wake of a fresh financial crisis, the world's central bankers warned yesterday. Their "club" - the Bank of International Settlements - presented in its annual report a frightening picture of the impact of a second banking emergency on heavily indebted nations such as Britain.

The Bank of England's Governor, Mervyn King, has estimated that the Government has pumped as much as £1trillion of taxpayers' money into the banking system. Billions of pounds were spent part-nationalising the Royal Bank of Scotland and Lloyds Banking Group, as well as fully nationalising Northern Rock, in an attempt to stave off collapse. Measures such as the "special liquidity" scheme propped up other lenders and prevented the system from freezing up.

But a BIS report warned yesterday that repeating these measures could be impossible. It said: "Events coming out of Greece highlight the possibility that highly indebted governments may not be able to act as a buyer of last resort to save banks in a crisis. That is, in late 2008 and early 2009, governments provided the backstop when banks began to fail. But if the debts of the government itself become unmarketable, any future bailout of the banking systemwould have to rely on external help." Central bankers fear Europe is running out of "external backstops" that could step in, other than the US and the International Monetary Fund. This has unnerved capital markets in the EU, prompting some sharp swings in the value of shares and other financial instruments in recent days.

The BIS has previously said that the ultimate calamity - payments systems freezing and cash machines running out of money - was only narrowly avoided when the US investment bank Lehman Brothers collapsed in 2008. A deeper economic slump was averted by nationalising other banks and making loans amounting to $10trn (£6,620bn).

But the BIS report implies that governments may not be able to repeat such a bailout in the event of a second crisis, which some commentators fear could be triggered by another economic shock.

Despite the warnings, the G20 nations significantly eased the pressure on banks this week by delaying the introduction of tougher rules on the amount of capital they must hold to deal with potential crises. The new regulations were planned for the end of this year but are not now due until 2012. Countries will also be given far more leeway inhow the rules must be applied. Critics say this amounts to a watering down of the reforms needed to stave off the sort of disaster the BIS fears.

The BIS alsowarned that the "fragility" of public and private balance sheets in the UK,France, Germany, Spain and the US "severely limits the scope for fiscal policy intervention if another bailout is needed". It added: "The side effects of the financial and macro-economic supportmeasures, combined with the unresolved vulnerabilities of the financial sector,threaten to short-circuit the recovery; the reforms necessary to improve the resilience of the financial system [have] yet to be completed."

In remarks that in effect back the German and UK governments' success at the G20 over deficit reduction, the BIS argued for "immediate, front-loaded fiscal consolidation", noting that "the time has come to ask when and how these powerful measures can be phased out".

The BIS also dropped the broadest hint yet from an international body that a Greek sovereign debt default was now an accepted fact. It said: "As the long history of sovereign debt crises has shown, when investors lose their confidence in a country's ability to service its debt and become unwilling to hold it, rescue packages, bailouts and even debt restructuring remain the only options."

The BIS added that the official projections for public debt, including Britain's, underestimated the extent of the additional pressure that ageing populations will place on welfare and health spending. The BIS suggested that, if corrective actionwere not taken, the ratio of the UK's debt to gross domestic product (GDP) would rise from 70 per cent of GDP to 450 per cent by 2040 - a burden that would become "unsustainable" long before that was reached.

The 56 members of theBIS also suggested that interest rates ought to rise sooner rather than later as they were "discouraging needed reductions in leverage [debt levels], thereby adding to the distortions in the financial system and creating problems elsewhere". "Direct support" to banks, via recapitalisation and loans, was "delaying vital post-crisis adjustment", the BIS added, saying: "despite the improvement to balance sheets, several factors raise doubts about the sustainability of bank profits".

In an overwhelmingly gloomy assessment of the state of the world, the BIS also points to the risks of emerging economies overheating, and the continuing weakness of the commercial real-estate market, also highlighted recently by the Bank of England.

But dismissing fears of a "double dip" recession, the BIS argued that any initial costs of fiscal tightening would be "outweighed by the persistent benefits of lower real interest rates, greater stability of the financial system and better prospects for economic growth".

News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
Sport
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
PROMOTED VIDEO
Sport
Fans hold up a scarf at West Ham vs Liverpool
footballAfter Arsenal's clear victory, focus turns to West Ham vs Liverpool
New Articles
i100... she's just started school
News
news
News
ebooksAn unforgettable anthology of contemporary reportage
New Articles
i100
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
Sport
football
New Articles
i100... despite rising prices
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam