The chancellor, George Osborne, has expressed confidence in the viability of the country's banks after a leading credit rating agency cut its ratings on 12 British financial institutions.
Moody's cut its ratings on RBS, which is mostly owned by the taxpayer, by two notches from A2 to Aa3, and it downgraded Lloyds TSB by one notch to A1 from Aa3.
It also cut its ratings on Santander UK, Co-operative Bank, Nationwide and seven other smaller British building societies.
In an interview with Radio 4's Today programme, Osborne said the move reflected the fact that the government was trying to make the banks more independent and less reliant on a taxpayer bailout in the event of a crisis.
But he insisted the British banking sector was sound and was not facing the problems of some banks in the eurozone.
The chancellor said he had been aware that the news was coming, and that the reasoning for the Moody's decision should be considered in detail.
"One of the reasons they are doing this is because they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain," Osborne said.
"In other words, trying to deal with the 'too big to fail' problem through the report we've commissioned from John Vickers and the ideas around ring-fencing and so on, protecting high street banks from investment banking activities.
"People ask me: 'How are you going to avoid Britain and the British taxpayer bailing out banks in the future?' This government is taking steps to do that. And therefore credit rating agencies and others will say these banks have got to show that they can pay their way in the world."
Osborne went on: "I'm confident that British banks are well capitalised, they are liquid, they are not experiencing the kind of problems that some of the banks in the eurozone are experiencing at the moment."
Explaining its decision, Moody's said in a statement: "Moody's believes that the government is likely to continue to provide some level of support to systemically important financial institutions, which continue to incorporate up to three notches of uplift.
"However, it is more likely now to allow smaller institutions to fail if they become financially troubled. The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government."
In his interview Osborne said he agreed with Sir Mervyn King, the governor of the Bank of England, who said on Thursday that the world was facing its biggest ever financial crisis. "I certainly think it is as serious as anything since the 1930s," Osborne said.
He said that the revised GDP figures, announced earlier this week, showed that the 2009 recession was even deeper than previously realised. The only country in the world which experienced a deeper recession was Japan, he said.
"In other words all that talk of Britain being better prepared and Britain doing better than some other countries turned out to be nonsense," Osborne said. "Not only have we faced the biggest banking crisis of my lifetime and your lifetime, the deepest recession since the second world war, but also Britain was at the epicentre of it."
Osborne said that by the end of November the government would be able to publish full details of its plans to lend money directly to businesses through "credit easing", the scheme announced by Osborne at the Conservative conference on Monday. He also defended the Bank's decision to inject £75bn into the economy through quantitative easing (QE).
When it was put to him that in 2009 he had described quantitative easing as the "last resort of a desperate government", he replied: "We inherited as a government a desperate fiscal position and we have to take action. I think the crucial difference this time is that you have got a credible government plan to deal with our debt.
"What I have always maintained is that in order to undertake radical monetary action, in order to undertake policies like QE, you have to anchor it in credible fiscal policy so the world believes you are not trying to inflate your way out of debts, you are actually prepared to pay off your debts with a credible fiscal plan.
"That is why having both the credible fiscal plan, plus the radical monetary action, shows that the British authorities at the moment, unlike other authorities around the world, are able to use all the tools available to deal with the worsening global debt storm, ensuring that Britain can ride out that storm."
Osborne said the main problem facing the economy during his lifetime had been there was too much money in it, leading to inflation. But the problem now was that there was too little money in the economy, he said.
by Andrew Sparrow taken from http://www.guardian.co.uk/politics/2011/oct/07/moodys-downgrade-osborne-british-banks
Moody's cut its ratings on RBS, which is mostly owned by the taxpayer, by two notches from A2 to Aa3, and it downgraded Lloyds TSB by one notch to A1 from Aa3.
It also cut its ratings on Santander UK, Co-operative Bank, Nationwide and seven other smaller British building societies.
In an interview with Radio 4's Today programme, Osborne said the move reflected the fact that the government was trying to make the banks more independent and less reliant on a taxpayer bailout in the event of a crisis.
But he insisted the British banking sector was sound and was not facing the problems of some banks in the eurozone.
The chancellor said he had been aware that the news was coming, and that the reasoning for the Moody's decision should be considered in detail.
"One of the reasons they are doing this is because they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain," Osborne said.
"In other words, trying to deal with the 'too big to fail' problem through the report we've commissioned from John Vickers and the ideas around ring-fencing and so on, protecting high street banks from investment banking activities.
"People ask me: 'How are you going to avoid Britain and the British taxpayer bailing out banks in the future?' This government is taking steps to do that. And therefore credit rating agencies and others will say these banks have got to show that they can pay their way in the world."
Osborne went on: "I'm confident that British banks are well capitalised, they are liquid, they are not experiencing the kind of problems that some of the banks in the eurozone are experiencing at the moment."
Explaining its decision, Moody's said in a statement: "Moody's believes that the government is likely to continue to provide some level of support to systemically important financial institutions, which continue to incorporate up to three notches of uplift.
"However, it is more likely now to allow smaller institutions to fail if they become financially troubled. The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government."
In his interview Osborne said he agreed with Sir Mervyn King, the governor of the Bank of England, who said on Thursday that the world was facing its biggest ever financial crisis. "I certainly think it is as serious as anything since the 1930s," Osborne said.
He said that the revised GDP figures, announced earlier this week, showed that the 2009 recession was even deeper than previously realised. The only country in the world which experienced a deeper recession was Japan, he said.
"In other words all that talk of Britain being better prepared and Britain doing better than some other countries turned out to be nonsense," Osborne said. "Not only have we faced the biggest banking crisis of my lifetime and your lifetime, the deepest recession since the second world war, but also Britain was at the epicentre of it."
Osborne said that by the end of November the government would be able to publish full details of its plans to lend money directly to businesses through "credit easing", the scheme announced by Osborne at the Conservative conference on Monday. He also defended the Bank's decision to inject £75bn into the economy through quantitative easing (QE).
When it was put to him that in 2009 he had described quantitative easing as the "last resort of a desperate government", he replied: "We inherited as a government a desperate fiscal position and we have to take action. I think the crucial difference this time is that you have got a credible government plan to deal with our debt.
"What I have always maintained is that in order to undertake radical monetary action, in order to undertake policies like QE, you have to anchor it in credible fiscal policy so the world believes you are not trying to inflate your way out of debts, you are actually prepared to pay off your debts with a credible fiscal plan.
"That is why having both the credible fiscal plan, plus the radical monetary action, shows that the British authorities at the moment, unlike other authorities around the world, are able to use all the tools available to deal with the worsening global debt storm, ensuring that Britain can ride out that storm."
Osborne said the main problem facing the economy during his lifetime had been there was too much money in it, leading to inflation. But the problem now was that there was too little money in the economy, he said.
by Andrew Sparrow taken from http://www.guardian.co.uk/politics/2011/oct/07/moodys-downgrade-osborne-british-banks
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