BoE - £50 Billion Banks Bale Out 'Plan'

[TheBramble]

The BoE will be providing details tomorrow (Monday) of the £50 Billion government ‘bond’ swap for mortgage-backed securities. Late Friday, the treasury were responding to this ‘initiative’ as ‘speculation’ (which in treasury-speak means it’s already a done deal).

Interesting. As potential impact on GBP is considered, there are a number of angles. It’s already been factored in, in which case, there isn’t a lot to show? It’s not yet factored in, in which case, how will it be interpreted? Or it isn’t going to be factored in, which is unlikely.

The numpty interpretation of this, and therefore the most likely (LOL), is that it will be seen as a reduction in pressure for the BoE to reduce interest rates further at the moment as the banks will now start to lend to each other again at existing rates after unloading their mortgage-backed exposure into government bonds. Therefore, Sterling will strengthen. Hmmmmm…

Another view, is that it will be seen precisely for what it is, smoke and mirrors. Even with fractional reserve, there still needs to be deposits being made for the banks to lend against – however notionally. Chump’s recent post on their being money sloshing about still (a heavily subscribed Bond issue he mentioned) is important to take on board, and the big question is, will any of this ‘free money’ currently looking for a good home actually find its way into the banks as vanilla deposit at the current time? My view is, unlikely. It could also be considered, as it was pretty much in the US recently with a similar bale-out, as a last ditch and largely pointless exercise which will only go to further weaken confidence in Sterling.

I know there are a lot of news FX traders on this site (and some pros too – LOL) and I’d welcome their take on this.

 

[potshot]

Bramble we got off on the foot, lets start from scratch, I don't hold grudges.

It will make no difference at all. I wouldn't mind the bank of england bailing me out after a bad day trading. It maybe smoke and mirrors but the govenment and the BOE know if the housing market collapses so does the economy. Our whole economic success is base on credit and people remortgaging their homes to fund their life style, something had to give in the end. Getting into huge debt was encouraged by government and banks because it didn't matter while house prices kept on rising. Nothing can rise forever and in the end the huge housing price bubble had to burst.

The government and BOE might try and fix the housing market but markets are on greed and fear, like the pound and ERM they will get egg on their faces.

 

[chump]

My bond post indicates to me that the man in the street is in a 'pay down debt' and 'increase savings' frame of mind. Not much different to the lending institutions.

They've all had a bad scare and won't be coming out of their shell until the memory fades sufficiently and of course until they have built themselves a bit of a 'rainy day cushion' ,or for the institutions repaired their balance sheets. I don't see the BOE move changing that substantially with any immediate effect for mortgages and consumption ,but it will make it a bit more comfortable buying the necessary time for everyone to make their adjustments to a slower year ahead.

My view would be this put's a bit of a kink in the flight to hard assets. Lot of fear in that move and also it does imply interest rate moves ahead are more likely to be slower ,smaller and probably tied to a drop off in the inflation inspired from hard assets/comm's.

This makes me believe we have reached a bit of a tipping point for moneyflow based upon fear and erosion of purchasing power via currencies and my concern for comm's etc is when the mom goes will it be 'slooooow' ,or will it be 'ruuuusssh'.
Also given the weight for mining,energy etc in the FTSE if my view were to hold it would be rather negative.

Bear in mind when taking these views into thought I often can't match the colour of my socks up

 

[grantx]

Bramble,

But the LIBOR rates, at least for the dollar, are still near record highs since the crisis began. Therefore, borrowing/lending is still expensive.

I reckon the banks will hold on to the money until there is good evidence of improvements.

Grant.

Grant.

 

[TheBramble]

also it does imply interest rate moves ahead are more likely to be slower ,smaller and probably tied to a drop off in the inflation inspired from hard assets/comm's.

So bullish for GBP?

This makes me believe we have reached a bit of a tipping point for moneyflow based upon fear and erosion of purchasing power via currencies and my concern for comm's etc is when the mom goes will it be 'slooooow' ,or will it be 'ruuuusssh'.
Also given the weight for mining,energy etc in the FTSE if my view were to hold it would be rather negative.

So bearish for GBP?

Bear in mind when taking these views into thought I often can't match the colour of my socks up

Shouldn't worry about that. I thought I had an odd pair on the other day. Got home, and found I had another pair exactly the same.

 

[TheBramble]

But the LIBOR rates, at least for the dollar, are still near record highs since the crisis began. Therefore, borrowing/lending is still expensive.

And by the same token, also bullish for GBP?

 

[grantx]

Bloomberg, 19 Apr:

"The cost of borrowing in dollars for three months rose yesterday to the highest since March 7. The London interbank offered rate for dollars climbed 9 basis points to 2.91 percent, the BBA said. The two-day climb of 17 basis points was the biggest since August".

More reports here:

Search Results: LIBOR

Grant.

 

[grantx]

I suppose it depends on which rate GBP fx refers to: Official rate or LIBOR. Maybe GammerJammer can enlighten us.

Grant.

 

[TheBramble]

I guess what I was very specifically asking was if, in your immediate view, GBP as a tradable commodity within the FX markets will be positively/negatively/not at all impacted by this plan.

Given the relatively tight 100 pip range for the 2 days up to the close, it doesn’t appear the big money has either had wind of it (very unlikely) or if they have, have factored it in as neutral. Or they are split on interpretation. Or split on interpretation of the numpties’ interpretation. Or they think the numpties will be split on interpretation.

 

[grantx]

The Fed's benchmanrk (overnight) rate is 2.25% vs dollar LIBOR 2.91% - that's seems a big gap. As to the effects of fx, no idea.

Grant.

 

[fibonelli]

The lending process is in two parts

The ability and willingness of banks to lend; and
The ability and willingness of borrowers to assume (more) debt.

This "bailout" attempts to address the former only.

 

[TheBramble]

The ability and willingness of banks to lend;
[...]
This "bailout" attempts to address the former only.

I think that's my central point Fibo, is does not address the abilty and willingness to lend, just the willingness.

Their ability to lend (more real cash on deposit) is not addressed. That doesn't change. Smoke and Mirrors.

Interestingly, your post corrects me in that the title of this thread should have been Bail Out not Bale Out. But depending on your viewpoint on the intended/expected plan, I sense either is quite valid. LOL

 

[grantx]

Bramble,

"Bail Out not Bale Out." That's very clever - did your wife tell you that one? Strictly speaking, it's the tax-payer who's on bail - if the banks don't show up, we suffer.

Grant.