Bank shares in meltdown as bosses' heads roll
Heather Stewart, economics editor
Sunday November 4, 2007
The Observer
Businesses are calling on the Bank of England to shield them from the credit crunch with an interest rate cut this Thursday, after a tumultuous week on the financial markets exacerbated fears that the sub-prime mortgage crisis will wreak serious economic damage.
'We urge the Bank to announce a small cut in interest rates next Thursday as further delays could cause serious problems in 2008,' said David Kern, economic advisor to the British Chambers of Commerce. 'Global risks are again worsening, and there are new concerns over the strength of many international banks.'
With oil prices close to $100 a barrel, the dollar sliding, and almost daily revelations about the damage sustained by blue-chip financial institutions with exposure to risky sub-prime loans, investors on both sides of the Atlantic went on a selling spree at the end of last week. Chuck Prince, the controversial boss of Citigroup, is expected to offer to resign today, as the bank scrambles to calculate its losses.
As recently as July, Prince brushed off fears that Citigroup could be hit by a liquidity squeeze, saying, 'as long as the music is playing, you've got to get up and dance. We're still dancing'.
In London, City investors ended Friday in feverish mood, as rumours that high street giant Barclays was facing funding difficulties swirled around trading floors. The bank's shares were down 6 per cent in a single day; and RBS lost 5 per cent. On Wall Street, the Dow Jones finally closed up 27 points, at 13,595, after losing 120 points earlier in the day.
In an early signal that the credit crunch is squashing the feelgood factor in British households, the British Retail Consortium will reveal this week that October was a challenging month on the high street.
Consumer spending has so far held up well; but the BRC is expected to say like-for-like sales expanded by significantly less than 2 per cent last month, down on the healthy 3 per cent rate in September.
Kevin Hawkins, the BRC's director-general, said his members were bracing themselves for thin pickings in the Christmas season, and called for a confidence-boosting rate cut. 'The psychological effect would be helpful,' he said.
According to the Observer-New Star interest rate predictor, just two doves on the Bank of England's monetary policy committee will vote for an immediate reduction in borrowing costs. Rates will remain unchanged, at 5.75 per cent.
Despite the turmoil in the markets, most analysts expect the MPC to wait for firmer evidence that the sub-prime crisis is feeding through before taking action. But David Brown, chief European economist at Bear Stearns, said the MPC could move this week, to avoid the risk of a sharp downturn in 2008.
'There's a need to be pre-emptive. The last thing the Bank of England wants to be accused of is being behind the curve, when growth could be going down the plughole next year,' he said. 'If we don't get a cut this week, we'll definitely get one in December,' he said.
Analyst Roger Bootle, in his quarterly review for consultants Deloitte and Touche published today, argues it will take months for the effects of the credit crunch to work through the global economy; but the UK, with its debt-burdened consumers and frothy property markets, is especially vulnerable. 'My instinct is that the housing market's on the turn,' he said, adding a downturn was under way in the commercial property sector, with damaging implications for lenders.
'We urge the Bank to announce a small cut in interest rates next Thursday as further delays could cause serious problems in 2008,' said David Kern, economic advisor to the British Chambers of Commerce. 'Global risks are again worsening, and there are new concerns over the strength of many international banks.'
With oil prices close to $100 a barrel, the dollar sliding, and almost daily revelations about the damage sustained by blue-chip financial institutions with exposure to risky sub-prime loans, investors on both sides of the Atlantic went on a selling spree at the end of last week. Chuck Prince, the controversial boss of Citigroup, is expected to offer to resign today, as the bank scrambles to calculate its losses.
As recently as July, Prince brushed off fears that Citigroup could be hit by a liquidity squeeze, saying, 'as long as the music is playing, you've got to get up and dance. We're still dancing'.
In London, City investors ended Friday in feverish mood, as rumours that high street giant Barclays was facing funding difficulties swirled around trading floors. The bank's shares were down 6 per cent in a single day; and RBS lost 5 per cent. On Wall Street, the Dow Jones finally closed up 27 points, at 13,595, after losing 120 points earlier in the day.
In an early signal that the credit crunch is squashing the feelgood factor in British households, the British Retail Consortium will reveal this week that October was a challenging month on the high street.
Consumer spending has so far held up well; but the BRC is expected to say like-for-like sales expanded by significantly less than 2 per cent last month, down on the healthy 3 per cent rate in September.
Kevin Hawkins, the BRC's director-general, said his members were bracing themselves for thin pickings in the Christmas season, and called for a confidence-boosting rate cut. 'The psychological effect would be helpful,' he said.
According to the Observer-New Star interest rate predictor, just two doves on the Bank of England's monetary policy committee will vote for an immediate reduction in borrowing costs. Rates will remain unchanged, at 5.75 per cent.
Despite the turmoil in the markets, most analysts expect the MPC to wait for firmer evidence that the sub-prime crisis is feeding through before taking action. But David Brown, chief European economist at Bear Stearns, said the MPC could move this week, to avoid the risk of a sharp downturn in 2008.
'There's a need to be pre-emptive. The last thing the Bank of England wants to be accused of is being behind the curve, when growth could be going down the plughole next year,' he said. 'If we don't get a cut this week, we'll definitely get one in December,' he said.
Analyst Roger Bootle, in his quarterly review for consultants Deloitte and Touche published today, argues it will take months for the effects of the credit crunch to work through the global economy; but the UK, with its debt-burdened consumers and frothy property markets, is especially vulnerable. 'My instinct is that the housing market's on the turn,' he said, adding a downturn was under way in the commercial property sector, with damaging implications for lenders.
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