Vol. 72/No. 12      March 24, 2008

In September, the Bank of England bailed out Northern Rock as it was poised to crash. The private bank had loaned more money than it took in from customers and made up the shortfall by borrowing from other banks. This proved profitable so long as the housing market expanded and loans were easily available from other banks. When the “subprime” mortgage crisis hit in the United States, lending between banks came to a virtual halt. Thousands of Northern Rock customers lined up to withdraw their money.

The Northern Rock crisis had an impact on other banks. Shares in the Alliance and Leicester bank fell 31 percent on September 17 alone. “Unless immediate action was taken, there was every possibility, not just of a continuing run on Northern Rock, but queues forming outside other banks too,” wrote Bill Jamieson in a February 19 opinion piece in the Scotsman.

London spent £25 billion (1£=US$2) on the bailout. With the nationalization, the government has now taken responsibility for £91 billion of liabilities. Chancellor Alistair Darling called the move “business as usual,” reflecting the government’s denial of the financial crisis unfolding here.

The United Kingdom’s budget deficit is more than 3 percent of its GDP, “the worst of any major country in Europe or North America,” according to the Daily Telegraph. Albert Edwards, global strategist for French bank Société Générale, speculates that the deficit may soar to 10 percent if the economy slides into recession. In addition, the decline of the pound sterling’s value relative to the euro is leading to a shift of foreign investment away from the United Kingdom.

Richard Lambert, director of the employers’ organization Confederation of British Industry, told the London Times January 1 that the global credit crisis could have a tougher impact here than in other countries because of the United Kingdom’s dependence on the financial sector, which accounts for nearly 10 percent of the GDP.

On March 2 HSBC, Britain’s largest bank, reported total losses of £13.3 billion and bad debts of £8.7 billion. Most of this was related to subprime mortgages in the United States that people could not pay back after interests rates jumped.

The Royal Bank of Scotland (RBS), the world’s fifth largest, lost £1.6 billion through the subprime crisis and nearly half a billion pounds through recent bond insurers troubles. In addition, RBS has £2.5 billion worth of “risky” assets.

On March 1, mortgage hedge fund Peloton Partners was forced into a fire sale of $2 billion of its assets. Peloton made its money through bets on subprime securities in the United States. It had been seen as one of the major success stories of hedge funds in the United Kingdom. With the mounting credit crisis, the banks were no longer willing to risk loans to Peloton and demanded their money back.

The financial crisis has an impact on working people, as well. According to the January 19 London Times, the prices of household staples such as milk, cheese, and eggs are up 15 percent year-on-year, while meat is 7.5 percent more expensive and bread nearly 6 percent. Government inflation figures are just 2.2 percent.

In early January major household gas and electricity suppliers raised their prices by up to 15 percent. Even before this, 3 million in the UK were considered “fuel poor,” spending more than 10 percent of their income on these utilities.

The most dramatic recent price rise has been on car fuel. According to the Automobile Association, petrol prices were 103.62 pence a liter ($7.83 a U.S. gallon) January 9, up from 88.25 pence a liter a year ago.
 
 
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