The Bank of England has today announced the launch of a new contingency lending facility to help the banks through any potential inter-bank lending crisis (credit crunch).

The new route for short term borrowing by banks is called the ‘Extended Collateral Term Repo Facility’ or ‘ECTR’ for short.

Although the BoE says there is no current lack of short term sterling liquidity, the new ECTR will give it the ‘…additional flexibility to offer sterling liquidity in an auction format against the widest range of collateral.’

The facility would allow qualifying banks and building societies to borrow money for 30 days against their assets should the current ‘exceptional stresses’ across the global markets spread and affect UK banks’ ability to borrow.

A thirty day loan when you can’t get credit elsewhere and it has to be secured on assets, sounds something akin to a pawnshop or a payday loan set-up to me. In fact there was probably no need to establish this, after all they could just use someone like Borro.com. Except that the new facility will be operated on an auction basis when the BoE decide to hold one whilst reserving the right to reject bids as they see fit.

Pawnbroker-Thomas Nugent

Pawnbroker-Thomas Nugent

This coming so soon on the heels of the recent dollar liquidity push by central banks and the Standard & Poor’s decision to put all the countries in the Eurozone as well as the European Financial Stability Facility (EFSF) on negative watch must be a clear message that a large amount of brown stuff is about to hit a large air circulating device.

The S&P decision tells us that there is a 50% chance that countries will be downgraded within 90 days. That threatens both Germany and France’s AAA rating amongst others.

Then of course all those funds and banks that have to hold a minimum amount of AAA rated bonds will have to sell those and buy others. Up will go the yield on Eurozone debt and just exacerbate the problems all round.

That is if investors don’t decide to start off-loading them as soon as.

Despite the Eurozone politicians’ dislike of setting up a Eurozone bond, it looks like the markets are treating Eurozone debt more and more as one entity as time goes on. Something I said might happen.

Thomas Nugent [CC-BY-SA-2.0 (www.creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

Comment Here!

comments