Shares plunge as pound buckles

Sterling plunged again against the dollar this morning, having fallen through $1.60 for the first time in five years on Friday. The pound lost a further 3 cents to $1.542 amid mounting fears of a prolonged UK recession. 

The same fears forced down the FTSE 100, which plunged 185 points, or 4.7 per cent, after the opening with banks and insurance companies leading the way. European stock markets were also down around 5 per cent, following big falls in Asia with Hong Kong's Hang Seng down more than 10 per cent and the Nikkei in Tokyo losing 6 per cent. 

Friday's GDP figures showed that the British economy shrank by 0.5 per cent in the three months to the end of September, the first time quarterly GDP has fallen in more than 16 years. 

Sterling has fallen 12 per cent from $1.72 in a week and was put under pressure when Mervyn King, Governor of the Bank of England, admitted it was likely that the country was heading for a prolonged and painful recession.  

Gordon Brown piled further pressure on sterling by reiterating Mr King's comments. 

The Bank of England is being pressured to cut interest rates further and the Government is attempting to stem fears about the falling currency. On Friday Stephen Timms, Financial Secretary, said the fall in the pound was not a condemnation of the country’s economic policy. 

“I don’t think it’s a vote of no confidence,” Mr Timms said. “We don’t have a target for exchange rates. Exchange rates are volatile and go up and down. And, of course, there are exporting companies in the UK that will benefit from what has happened. And I don’t know what will happen in the future.”  continues here

Economy shrinks as Britain enters recession

Britain’s economy is shrinking for the first time in 16 years, official figures showed yesterday, confirming that the country is in recession.

The toll from the credit crisis and housing crash has ended Britain’s longest unbroken run of growth since quarterly records began in 1955. City analysts gave a warning that the economy could shrink at an even faster pace in coming months.

Figures for gross domestic product revealed a worse-than-expected fall of 0.5 per cent over the past three months. A recession is defined as two consecutive quarters of negative growth, but a further contraction is inevitable.

The response on the financial markets was swift and brutal. The pound plummeted against the dollar and nearly £49 billion was wiped off the value of Britain’s leading companies. Alistair Darling, the Chancellor, sought to shore up confidence among fearful families and businesses. “It’s obvious now that our economy, other economies across the world, are moving into recession,” he said. “Yes, it’s going to be difficult, yes it’s going to be tough, but we can get through it.”

Charlie Bean, the deputy governor of the Bank of England, said that Britain was only “in the early days” of the fallout from unprecedented global financial convulsions. “This is a once-in-a-lifetime crisis, and possibly the largest crisis of its kind in human history,” Professor Bean said.

Shares in London slumped in response. The FTSE 100 closed down a further 204.5 points, or 5 per cent.The pound suffered one of its worst batterings since it was floated in 1971. At one point it was down by 8 cents against the dollar, before closing a little over 3.5 cents down on the day at $1.5837. In Europe, leading shares also fell by 5 per cent, while US blue-chips fell almost 4 per cent in a day of wild swings in financial markets. continues here

Worst financial crisis in human history': Bank boss's warning as pound suffers biggest fall for 37 years

• Economy outstrips forecasts to shrink by 0.5%

• Pound suffers worst fall against dollar for 37 years

• FTSE plunges 9% before rallying to close down 5%

• Asian markets tumble for a third day amid global fears
  
  Consumers face higher shop prices, dearer fuel and more expensive holidays after the pound slumped yesterday.
  
  Sterling took a hammering as economic figures showed the UK approaching full-blown recession.
  
  Bank of England deputy governor Charlie Bean warned that the pain is just beginning, calling the situation the 'largest financial crisis of its kind in human history'.
  
  
  
  On the 79th anniversary of the Great Crash of 1929:
  
  • Britain's economic output slid 0.5 per cent - more than twice the decline expected by the City;
  
  • Markets tumbled around the world, with leading UK shares losing almost £50billion;
  
  • Sterling had its worst-ever week against the dollar since 1971 and hit a record low against the euro;
  
  • The oil cartel Opec cut production, a move likely to increase petrol prices up to 5p a litre;
  
  • Experts warned that hedge funds are facing disaster, with billions likely to be wiped off savings and pension funds;
  
  • Hundreds of jobs were axed in the insurance, cosmetics, haulage and textile industries.
  
  The plunge was prompted by the worst set of UK growth figures for 18 years, recording the first time that the economy has officially contracted since 1992.
  
  The Office for National Statistics reported UK output dropping 0.5 per cent between July and September.
  
  Another fall in the final three months of the year would propel Britain into the first official recession since the days of John Major.
  
  Tory leader David Cameron declared: 'This is the day the recession became real.
  
  'We have had ten years of a Government saying no more boom and bust. We have had ten years of a Government not putting aside money for a rainy day. Well, that rainy day has now come.'
  
  At one stage, the pound was worth as little as $1.52, prompting speculation that the UK was on the brink of a currency crisis.
  
  Although it later rallied, it has lost a quarter of its value against the dollar over the past year.
  
  Foreign investors are less willing to finance the UK because of its record debt burden and slumping economic output. The rush to sell sterling means prices of imports like clothing and electronic goods will rise, holidays will cost more and overall living standards will suffer.
  
  The Tories said sterling's decline proves Mr Brown has left Britain ill-equipped to face the banking crisis.
  
  Shadow Chancellor George Osborne said: 'Once again, under Labour, the pound in your pocket is worth less. Indeed Gordon Brown has set a new record for Labour Governments, but it's not one he's likely to boast about.
  
  'The 25 per cent fall in the value of the pound over the last year is even greater than the devaluations under Jim Callaghan and Harold Wilson. It's a sign that international investors think Britain is badly prepared as boom turns to bust.'
  
  Analysts warned that the nation faces an extended period of austerity, as unemployment soars and families are forced to save on even basic essentials.
  
  Professor Andrew Clare, of Cass Business School, said Britain has amassed a record debt burden that must now be paid off.
  
  The economist added: 'We are going to have to wear a hair shirt as a nation. If this turns out to be recession lasting five or six quarters, which looks possible, we are not going to see the slightest upturn until 2010. And even then we can expect at least five years of muted growth.' continues here
  

Taxpayers' £37billion 'might not be enough' to stabilise banking system

The public money being injected into Britain's three weakest banks may not be enough to stabilise the banking system

The £37billion of public money being injected into Britain's three weakest banks may not be enough to stabilise the banking system, according to the Treasury Select Committee chairman. 

John McFall called on the rescued banks to provide much more detail of their exposure to derivatives and other complex assets, many of which have been plunging in value. He said: “It's a minefield we are tiptoeing through. That £37billion might not be enough.” 

Yesterday the committee announced an inquiry into the banking crisis and invited Alistair Darling, Mervyn King, the Governor of the Bank of England, and Lord Turner of Ecchinswell, chairman of the Financial Services Authority, to give evidence. 

“Taxpayers are very concerned about the scale of this investment,” Mr McFall said, and he invited members of the public to send in questions to be put to the witnesses. 

While welcoming the rescue package, Mr McFall pointed to the huge exposure of the banks to credit default swaps, describing it as a big concern. He said: “We are seeing a process of de-leveraging. We don't know what problems that might throw up.” 

Royal Bank of Scotland, which is receiving up to £20 billion of government funds in return for a stake of up to 60per cent, has outstanding derivative trades of about £480 billion on each side of its balance sheet. 

These include positions taken in the equity and commodity derivatives markets and in credit default swaps - in effect insurance policies promising to protect bondholders against default. 

In addition to the investment risk, these derivatives pose counter-party risk, the danger that the bank or investor on the other side of the trade may not be in a position to pay. 

RBS has played down the risk posed by derivatives, arguing that many of the positions cancel each other out and that it hedges positions and requires collateral to minimise the danger. 

RBS shares slipped 1per cent to 65p yesterday, just below the 65.5p at which the bank is planning to raise £15billion in ordinary equity. 

That suggests the Government as underwriter will be left with much or all of the stock. RBS is also raising £5 billion through a preference share issue. 

Lloyds TSB and HBOS, its takeover target, both sank sharply, down 7 per cent and 5 per cent respectively to 151.3p and 85.3p - both well below their planned issue prices of 173.3p and 113.6p. 

If these levels persist, the Government looks certain to be landed with all the new shares, giving it 40per cent of the combined group. 

Lloyds was understood to be lobbying to be allowed to pay dividends to ordinary shareholders before it has fully redeemed the preference shares sold to the Government. 

Lloyds and HBOS originally agreed at the weekend to the dividend ban but the Lloyds share price has been badly hit as investors who have come to rely on the Lloyds dividend started to bale out. 

Under the current terms of the bail-out and takeover, HBOS will have to repay £3billion and Lloyds £1billion of preference shares before ordinary shareholders, who include more than two million small investors, will receive any dividend. 

Some traders are still betting the takeover will fall apart or will have to be renegotiated a third time. The HBOS share price is trading at a 7per cent discount to the revised Lloyds offer. 

Together the two banks are raising £17 billion. Shareholders from both can vote down the deal. 

Barclays, which is hoping that it can raise £6.5 billion of capital without tapping the Treasury, leapt 30.75p to 246p as it was seen as being less diluted and able to resume dividends sooner than its peers. 

Barclays is also expected to go from half-yearly to quarterly dividends. The bank has agreement in principal from one of its existing shareholders, thought to be the Qatar Investment Authority, to invest £1billion in ordinary and preference shares. 

Barclays is being sued in New York over allegations that it shifted loss-making investments on its own books into accounts held by outside investors. 

A French client accuses the bank of putting toxic mortgage-backed assets into two investment vehicles, Golden Key and Mainsale, which were promoted to outside investors. Barclays said the action had no merit and denied any wrongdoing. 

Share traders started to turn their attention to non-financial stocks after the US confirmed its plan to invest $250billion (£143billion) to boost bank balance sheets. Wall Street dived last night, the Dow Jones industrial average falling by 76.62 points to 9.310.99. continues here

FTSE falls by 200pts despite Darling's desperate £250bn semi-nationalisation of Britain's banks

Darling announces £250billion rescue deal

FTSE tumbles 200 points on openingAsian markets tumble overnightRoyal Bank of Scotland shares plunge a massive 40%British savers frozen out by Icelandic internet bank

Shares slumped today after the Government announced a £250billion state rescue of Britain's crumbling High Street banks in the biggest nationalisation of modern times.

The FTSE-100 opened down more than 200 points shortly after Alistair Darling confirmed the drastic rescue plan that heralds a new era for the banking system.

He and Gordon Brown were forced to act amid fears that without the injection of taxpayers' money, household names in banking could vanish in days, if not hours.

The Treasury will buy stakes in the Royal Bank of Scotland, Barclays, Lloyds TSB and Halifax Bank of Scotland, it confirmed today.

This recapitalisation will cost £50billion. A further £200billion will be offered to banks in short-term loans in a bid to try and improve liquidity and kick start the market.

Mr Darling said this morning that the measures were 'absolutely critical' to helping Britain through these 'extraordinary times'.

'It is a process that inevitably will take time. It is not an instant change but it is a restructuring, it is stabilising the system, and that is very important,' he said.

The banks involved are: Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.

The bail-out will cost each taxpayer up to £2,000 but the Chancellor insisted their interest was being protected.

'I'm very clear that in return for all this, the taxpayer has got to see some upside. In relation to lending to small businesses, in relation to mortgages... that's important too,' he said.

The rescue plan was confirmed shortly before the markets opened. Investors were expecting yet another bloodbath over the day after Asian stocks tumbled overnight

Japan's Nikkei fell nearly 10 per cent at one stage, Hong Kong's Hang Seng was down 5.5 per cent. In Australia, the key index lost five per cent.

The slump followed a huge sell-off on Wall Street which saw the Dow Jones index close down more than 500 points.

Analysts were not optimistic the Government bail-out would ease the turmoil. CMC Markets dealer Matt Buckland: 'For the time being, it looks as if the impact is going to be minimal.

'As we've seen in the US, government intervention isn't freeing up credit markets and that is the key point - if it's difficult for companies and individuals to get hold of credit, it's going to be difficult to stimulate growth and break out of this recessionary mindset.'

Though the Chancellor and Prime Minister were desperate not to present the rescue as a crisis measure, it was clear that another day of panic and chaos on the stock market yesterday had left them with no other option.

The alternative was to allow the Royal Bank of Scotland - one of the world's ten largest banks with a £1,900billion balance sheet - to collapse, dragging down large sections of the economy with it. continues here

Banks threaten to end free banking as £8bn 'stealth charges' are curbed

Banks yesterday threatened an end to free current accounts after they were accused of dirty tricks, ripping off customers and imposing stealth charges.

The warning of the death of free banking came after the Office of Fair Trading criticised practices that earn them £8.3billion a year from the accounts.

The Government watchdog said customers were actually paying an average of £152 a year for banking services in the form of excessive overdraft and penalty charges.

It has warned banks to change how they charge for services.

But they have hit back by threatening monthly charges for basic services if they have to cut fees.

It is feared they will retaliate by introducing fees of between £5 and £20 for a current account.

Industry leaders hint that customers may also face extra charges to use a cash machine, write a cheque or pay a direct debit.

Angela Knight, chief executive of the British Bankers Association, said: 'It is important that this model, which is what customers have asked for - free for their normal banking, does remain.

'We are worried that the OFT seems to be challenging that.

'Do you really want to pay for ATM use, pay for statements, pay for direct debits in this country?'

The OFT yesterday launched what consumer groups called a 'devastating critique' of how banks charge for current accounts.

The biggest earner relates to the fact that banks pay very low or no interest on current account balances. But they invest the money in customers' accounts at much higher rates of interest to make a profit of £4.1billion a year.

The OFT wants banks to give each customer an annual statement showing the value of this lost interest. Separately, they make £2.6billion a year from excessive overdraft charges, which have risen by 17 per cent above inflation in four years.

Four million people are paying more than £200 a year in overdraft charges, with 1.4 million of them handing over more than £500.

The watchdog made it clear that profit margins on overdraft penalty fees, which can be £38 for bouncing a payment, are excessive.

It said the nation was overdrawn by an average of £680million a day in 2006. However, bank fees and interest on this sum amounted to £1.5billion, a return of 220 per cent.

The OFT identified dirty tricks where banks have secretly pushed up penalty charges to subsidise other products brought in to attract new customers.

It said finance industry claims that they look after customers by providing 'free banking' were bogus. continues here

Banks 'cancel good payers' cards'

Banks may be taking cards from reliable customers and giving them instead to riskier ones in order to boost their profits, a senior MP has suggested.

The chairman of the treasury select committee, John McFall, says companies may be withdrawing cards from people who pay their bills on time.

The suggestion is they are being given instead to people who pay interest because they cannot clear their debts.

Such practices "have to be called into question", says Mr McFall.

He has previously complained that credit card companies were not being transparent. Now he says they may not be being fair to their customers......Article conts (-)

'Greedy' banks push up mortgage rates
Edmund Conway and Harry Wallop

Banks and building societies have been accused of profiteering after official figures showed that they had raised millions of their customers' mortgage bills before an expected cut in interest rates by the Bank of England.

While a cut today should bring some respite for struggling home owners, analysis by The Daily Telegraph shows how banks have not only failed to pass on the previous cut, they have actually raised the average mortgage rate.

Moreover, financial experts warned that even if rates continued to fall this year, the majority of the 11.8 million mortgage holders in Britain were unlikely to see much benefit.

In the past few weeks 10 mortgage lenders, including the Royal Bank of Scotland, Alliance & Leicester and the country's biggest building society, the Nationwide, have increased some of their rates, despite the Bank cutting rates from 5.75 per cent to 5.5 in December.

Bank of England data shows that the average mortgage rate has been inflated. When interest rates were previously 5.5 per cent - in May last year - the average mortgage rate was 5.66 per cent but when rates moved back down to that level in December the average was 5.93.

For someone on a typical interest-only home loan of £150,000, this meant an increase of £33.75 on their monthly bill to £741.25.

Eddie Weatherill, the chairman of the campaign group Independent Banking Advisory Service, said: "Over the last decade the banks have used interest rate changes to massage their own rates......Article conts (-)