Concern over public sector debt reduces

Julian Harris
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WORRIES over the effect of government debts on the financial sector have plummeted since May, according to a survey conducted by the Bank of England.

In May 69 per cent of respondents listed public debt and sovereign risk as “key risks to the UK financial system,” it was revealed today.

But by October the number had almost halved, as only 36 per cent consider debts to be a key risk.

The findings come as a boon for the coalition government, which has engaged in a programme of austerity measures since coming to power in May.

Yet 45 per cent of respondents consider regulation and bank taxes a key risk to the sector. This is up from 41 per cent in May.

And 83 per cent fear the effects of the economic downturn on the City.

The results appeared in the Bank’s financial stability report, published today to identify risks to the banking system.

Further house price falls contain particular risks to banks, the report said. Excluding loans in the financial industry, household lending accounts for around half of worldwide private sector loans by UK banks, and three quarters of domestic lending.

And UK banks have “significant overseas exposures to the US, Ireland and Spain,” the report said.

House prices are expected to fall in the UK next year, according to the government’s fiscal watchdog. The Office for Budget Responsibility (OBR) forecasts that house prices will fall by 2.7 per cent next year.

Yet there was some positive news for the housing sector. Mortgage arrears have fallen since the second quarter of 2009, the report says, as have the number of repossessions.

Flexibility in the market has helped. “Since early 2009, around a third of mortgagors in arrears have been in some kind of arrangement with their lender,” the Bank noted.