The next financial storm isn't coming – it's already upon us

The Bank of England will almost certainly cut interests rates on Thursday, from a rock bottom 0.5 per cent to a substratum 0.25 per cent (and possibly even zero) as Britain heads not just for Brexit but for recession. It won’t do a lot for the looming and self-inflicted economic crisis, but it could send the pound, already hovering around a 31-year-low, even lower and confirm the growing degree of concern inside the central bank at the speed at which economic activity is declining.

It will also deal bank shares, already tottering, another nasty blow.

“This looks like a very sharp slowdown,” said Brian Hilliard, the chief UK economist at the French bank Société Générale, at the weekend. “At least the Bank of England thinks so. Given the gravity of the situation, they would be silly not to deliver as soon as possible.’


Signs of slowdown are everywhere. Last week, Marks & Spencer, still the bellwether of the health of Britain’s high streets, disclosed that clothing sales were down by 8.3 per cent in the three months to July, its worst performance in a decade. Primark, one of the big retail success stories of the past decade, is heading for its first drop in revenue for 15 years and since the referendum vote, the shares of most other retailers have tumbled – Gap, which says it will gain from a lower pound, is the exception.

More worryingly, the British commercial property sector, which has traditionally been a secure store of value for investors ranging from Canadian pension funds to Russian oligarchs, is in trouble. Since the vote on 23 June, the share prices of UK real estate companies have fallen by 15 per cent and a number of large, open-ended property funds have been forced to suspend redemptions.

So far, eight companies – including Standard Life, Henderson and M&G – have barred investors from selling out of their property funds amid fears about falling commercial real estate values. And that may not be all: there is a real risk of contagion – not all that different to the impact of the freeze on withdrawals on August 7, 2007 by the French investment bank BNP Paribas on three of its funds that had substantial mortgage-backed (which meant, of course, sub-prime) securities. That triggered the biggest financial crisis in 80 years, one from which the world economies have not yet recovered.

Certainly the banks have not recovered and, after the battering they have taken in the past three weeks, it will be a very long time indeed before they do. Banks hate low interest rates and the British banks already have the lowest interest rates in the 321-year history of the Bank of England. Nowhere is that more visible than in the performance of Royal Bank of Scotland (RBS), of which the British government owns 73 per cent and which, less than a year ago, it was hoping to sell off at something approaching break-even.

The government injected £45.8 billion (Dh216.4bn) into RBS at the height of the crisis in 2008 at an average price of 508 pence a share. The shares were trading on Monday below 170 pence, down about 40 per cent since June 23, which means the taxpayer is now sitting on a loss of about £29bn, or £1,100 for every household.

Bank analysts reckon that RBS has got £25.2bn of loans to the commercial property sector and its bread-and-butter retail banking, which is basically lending money to businesses and consumers, is now barely profitable.

Ross McEwan, RBS’s chief executive, recently described the Brexit vote as a bit of a “setback to be honest”, adding that the bank was being “knocked around by interest rates being lower for longer, therefore investors are saying, well your returns aren’t going to be so good”.

Last week, the big banks invited George Osborne, the chancellor (for few more weeks, at least), to a private meeting in the City, where they warned him of the pressure on their margins and the dire profit outlook they face. The chancellor has already had to abandon his “Tell Sid”-style sale of another £2bn of Lloyds shares as the shares have dropped well below the 72 pence level at which the government will get all the £20bn it invested back (it has already recouped most of it through earlier sales). He is said to have come away shaken by what he heard.

The Financial Times, citing “senior bankers”, yesterday reported that Lloyds was accelerating its plans to take £1bn a year from its cost base by axing 9,000 jobs and shutting 200 branches and was now targeting another 20 per cent on top of that. No one doubts there will be more to follow.

All one can say is that this is not the calm before the storm – this is the storm. Italian banks are looking for an emergency EU bailout, Deutsche Bank has severe problems, Credit Suisse’s share price has collapsed and even the American banks are looking wobbly.

The storm probably had to come anyway, and now that we’re in it, all any of us can do is weather it as best we can and wait for it to blow over. Fortunately, the financial system is a lot more seaworthy than it was when we headed into the last one.

Ivan Fallon is a former business editor of The Sunday Times

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