Mansion House speeches shed light on financial 'squeaky bum time'

http://www.guardian.co.uk/business/blog/2012/jun/14/mansion-house-speeches-financial-crisis

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It is what Sir Alex Ferguson calls "squeaky bum time". Judging by the speeches given by the chancellor of the exchequer and the governor of the Bank of England to the City's top brass at the Mansion House, the government thinks the sky may be about to fall in.

Sir Mervyn King's speech was peppered with doom-laden phrases as he outlined the threat to the UK from what he clearly sees as a potential implosion of the euro. The crisis in the single currency had "cast a long shadow" over Britain's recovery. There was "a black cloud overhead" that had caused "extreme risk aversion". King didn't really need to say it was "an ugly picture": his audience would have got that message loud and clear.

Now look at the two announcements made. Within weeks, the Bank and the Treasury will have a "funding for lending" scheme up and running. This will provide cheap finance for banks at below market rates for a period of several years, provided they sustain or increase lending to UK businesses. So much for allowing market forces to operate. The government is intervening directly to ensure that credit does not dry up. Project Merlin, the scheme that was supposed to ensure commercial banks lent to businesses has now officially been branded a failure, and the descent of the economy into a double-dip recession has forced George Osborne to adopt more robust measures to get the economy moving. Better late than never.

Perhaps even more worrying was lthe other initiative. This was King's announcement that the Bank will flood the banking system with unlimited amounts of cheap funding to see UK institutions through the "turbulence ahead". Threadneedle Street will start holding auctions of sterling liquidity with a maturity of six months, under which a commercial bank will able to park assets at the Bank of England and get short-term cash in return.

What does all this mean? It means that the government fears that the crisis in the eurozone is coming to a head. It means that the government is worried about an event on a par, perhaps even more serious, than the bankruptcy of Lehman Brothers. And it means that it is convinced that immediate emergency action is needed to spare an already battered UK economy from a second deep slump within four years.