Sat, Oct 08, 2011 - Page 1 News List

King loses faith in EU’s abilities to resolve debt crisis

Bloomberg

Bank of England Governor Mervyn King has lost faith in European governments’ ability to resolve the region’s debt crisis.

The UK central bank on Thursday announced its biggest stimulus since the depths of the recession, citing “vulnerabilities” related to the eurozone turmoil. King said the move, the first loosening of UK monetary policy since 2009, was a response to what could be the worst financial crisis ever.

“It’s pretty much a vote of no confidence in European officials,” said Richard Barwell, an economist at Royal Bank of Scotland Group PLC and a former Bank of England official. “Either the virus is already in the UK so they had to respond, or they don’t believe the problem will be sorted out. I lean toward the second because of how much they’ve done.”

King’s refusal to wait for European governments signals determination to shield the UK from a crisis that threatens to tip Britain’s biggest trading partner into recession.

It also shows concern that failure to protect bank funding markets risks recreating conditions that led to the collapse of Lehman Brothers Holdings Inc three years ago.

The UK central bank, which left its benchmark interest rate at a record-low 0.5 percent, raised the ceiling for so-called quantitative easing to £275 billion (US$421 billion) from £200 billion. That is the biggest expansion since the first round of stimulus in March 2009. Only 11 of 32 economists in a Bloomberg News survey predicted the increase.

“The external environment has definitely darkened,” said Steven Bell, chief economist at hedge fund GLC Ltd in London. “Why do we need to wait for them to get their act together? The Bank of England is correct. It’s a bold move, but a good one.”

Bank shares have plunged this year on concern that they will suffer if Greece defaults and as European officials clashed over how to resolve the turmoil. The Bloomberg Europe Banks Index has fallen 30 percent this year.

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