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IMF survey warns of deleveraging risk

Banks hold too few assets, while credit remains scarce.

In a new report, the IMF has warned that the pressure on European banks to deleverage could jeopardise wider stability in the continent, and forestall a recovery before it has even begun.

The April 2012 Global Financial Stability report highlights the competing pressures on individual banks and the system as a whole. For banks, the fund warns that "weak growth and high debt repayments" are forcing banks to "strengthen their balance sheets by reducing assets and increasing their capital" – deleveraging – to regain the confidence of investors. The total effect of this will be to cut $2.6bn from the balance sheets of European banks, unless policy change is enacted to prevent it.

The pressure on each individual bank is to make as much from their shrinking balance sheets as possible, but the more this happens, the greater the risk that one bank falling over will take out others in a domino effect. In addition, around a quarter of the deleveraging would be achieved through shrinking the banks' supply of credit. The report estimates credit availability could fall by as much as 1.7 per cent.

José Viñals, the head of the IMF's Monetary and Capital Markets Department, said:

So far, current policies have prevented a ‘credit crunch’, but if financial stress intensifies a large scale and synchronized deleveraging by European banks could do a serious damage to asset prices, credit supply and economic activity in Europe and beyond.

The fund recommended a number of policies to Euro-area governments, including yet more easing from the European Central Bank, efforts to restructure and resolve weak banks, and a reinforced firewall (the European Financial Stability Facility and its successor, the European Stability Mechanism). With these policies in place the total balance sheet reduction will be "only" $2.2bn, or 6 rather than 7 per cent of total bank assets.

The motivation to act will be reinforced by international pressure, since the IMF identifies multiple risks that fall outside the Eurozone. Since much American banking actually flows through Europe, for instance, a credit crunch on the continent will hurt availability in the States. The US has its own house to keep in order, however, since the fund warns that the high deficits the country is running risk instability unless it adopts a fiscal plan which protects growth while still reassuring the market that debt will be brought down in the medium to long term.

Finally, the report provides a potential explanation for the continually low bond yields being experienced by both Britain and the US, writing that:

The number of sovereigns whose debt is considered safe is declining – taking potentially $9tn in safe assets out of the market by 2016, which is roughly 16 per cent of the projected total.

With trillions of dollars of safe assets unavailable, investors are forced to buy into the few remaining sovereigns still considered safe, which includes us and the US, despite the unfeasibly low yields (below inflation, in many cases) being offered on them.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
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How can Britain become a nation of homeowners?

David Cameron must unlock the spirit of his postwar predecessors to get the housing market back on track. 

In the 1955 election, Anthony Eden described turning Britain into a “property-owning democracy” as his – and by extension, the Conservative Party’s – overarching mission.

60 years later, what’s changed? Then, as now, an Old Etonian sits in Downing Street. Then, as now, Labour are badly riven between left and right, with their last stay in government widely believed – by their activists at least – to have been a disappointment. Then as now, few commentators seriously believe the Tories will be out of power any time soon.

But as for a property-owning democracy? That’s going less well.

When Eden won in 1955, around a third of people owned their own homes. By the time the Conservative government gave way to Harold Wilson in 1964, 42 per cent of households were owner-occupiers.

That kicked off a long period – from the mid-50s right until the fall of the Berlin Wall – in which home ownership increased, before staying roughly flat at 70 per cent of the population from 1991 to 2001.

But over the course of the next decade, for the first time in over a hundred years, the proportion of owner-occupiers went to into reverse. Just 64 percent of households were owner-occupier in 2011. No-one seriously believes that number will have gone anywhere other than down by the time of the next census in 2021. Most troublingly, in London – which, for the most part, gives us a fairly accurate idea of what the demographics of Britain as a whole will be in 30 years’ time – more than half of households are now renters.

What’s gone wrong?

In short, property prices have shot out of reach of increasing numbers of people. The British housing market increasingly gets a failing grade at “Social Contract 101”: could someone, without a backstop of parental or family capital, entering the workforce today, working full-time, seriously hope to retire in 50 years in their own home with their mortgage paid off?

It’s useful to compare and contrast the policy levers of those two Old Etonians, Eden and Cameron. Cameron, so far, has favoured demand-side solutions: Help to Buy and the new Help to Buy ISA.

To take the second, newer of those two policy innovations first: the Help to Buy ISA. Does it work?

Well, if you are a pre-existing saver – you can’t use the Help to Buy ISA for another tax year. And you have to stop putting money into any existing ISAs. So anyone putting a little aside at the moment – not going to feel the benefit of a Help to Buy ISA.

And anyone solely reliant on a Help to Buy ISA – the most you can benefit from, if you are single, it is an extra three grand from the government. This is not going to shift any houses any time soon.

What it is is a bung for the only working-age demographic to have done well out of the Coalition: dual-earner couples with no children earning above average income.

What about Help to Buy itself? At the margins, Help to Buy is helping some people achieve completions – while driving up the big disincentive to home ownership in the shape of prices – and creating sub-prime style risks for the taxpayer in future.

Eden, in contrast, preferred supply-side policies: his government, like every peacetime government from Baldwin until Thatcher’s it was a housebuilding government.

Why are house prices so high? Because there aren’t enough of them. The sector is over-regulated, underprovided, there isn’t enough housing either for social lets or for buyers. And until today’s Conservatives rediscover the spirit of Eden, that is unlikely to change.

I was at a Conservative party fringe (I was on the far left, both in terms of seating and politics).This is what I said, minus the ums, the ahs, and the moment my screensaver kicked in.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.