Analysts led by Carla Antunes da Silva suggest that the UK’s “relatively safe haven status” could prompt the government to fire up the Bank of England’s special liquidity scheme (SLS) and credit guarantee scheme (CGS) to avert a credit crunch.
Money supply figures out yesterday show that “broad money” or “M3” – most money in the economy – also contracted €59bn to €9.78 trillion in October, which economists say is a signal that a credit crunch has begun.
“The UK is uniquely positioned in this context given Eurozone sovereign concerns,” da Silva writes.
Doing so could jumpstart the market for bank debt, which has seized up in recent months due to the debt crisis and regulatory uncertainty.
Da Silva estimates that restarting the CGS alone could bring down the cost of insuring bank debt by 135-245 basis points, with most of the benefit going to Lloyds and RBS.
RBS will see the largest share of debt, £31bn, mature and still benefits from £14.3bn in CGS support, according to Credit Suisse estimates, while Lloyds will see £27bn of debt mature and still gets £10.9bn of support. As a result, each of the state-owned banks will need to refinance more than £20bn next year.
And the debt cliff comes against a backdrop of regulatory change that is stoking nerves among banks, prompting a huge lobbying operation. As revealed by City A.M. last week, banks are fighting Vickers Commission plans for the UK to force bondholders to take losses when a bank fails.