50-billion pound mortgage plan to be unveiled

Business Materials 21 April 2008 05:20 (UTC +04:00)

(Reuters) - UK government will try to ease the effects of a credit crunch on borrowers by unveiling plans on Monday to swap government bonds worth 50 billion pounds for banks' riskier mortgage debt.

Although the move could give the economy a much-needed lift, it may not be enough to arrest a slump in popularity for Prime Minister Gordon Brown, whose bickering Labour party faces the prospect of losses in local elections on May 1.

Brown faces a growing rebellion by Labour politicians over the abolition of a 10 percent income tax rate -- a move critics say will hurt the poorest households. The issue is likely to dominate parliament when members return to work after a two-week break on Monday.

Chancellor Alistair Darling said on Sunday that the Bank of England (BoE) would announce a scheme on Monday to loan banks money in order to restart stalled mortgage lending.

"They'll be lending them money -- so it's got to be repaid -- and they'll be taking security in return for it," he said in a BBC interview.

The global credit crunch that has followed a slump in the U.S. subprime mortgage market has left British banks wary of lending to each other or offering new home loans despite three interest rate cuts by the BoE since December.

It also led to the forced nationalisation of mortgage lender Northern Rock this year in a further blow to Brown.

Brown served as finance minister for a decade under Tony Blair before Blair stepped down last June. However, his poll ratings have slumped as the financial turmoil erodes his reputation for sound economic management.


Monday's BoE move is aimed at freeing up bank balance sheets so companies can lend more to consumers who face declining house values, fewer mortgage options, and soaring oil and food prices.

"The Bank will be making money available to the British banking system ... the idea behind it is it will open up the market and it will begin the process of opening up the mortgage market, " Darling said on Sunday.

The BoE is expected to announce the plan at 0800 GMT, with Darling set to make a statement in parliament in the afternoon.

The Treasury and Bank of England have declined to comment on details of the plan but a source familiar with the package said it involved swapping 50 billion pounds of gilt-edged government bonds for mortgage-backed securities.

In the United States, the Federal Reserve last month took similar action with a $200 billion (100 billion pound) programme to boost liquidity in financial markets.

The British scheme is intended to run for just over a year and will involve valuing the less liquid mortgage securities the BoE takes on to its books at a discount, the source said.

In return, the government is expecting banks to take more action to shore up their own balance sheets.

"...if you look at what's been happening in the last few days, the pressure on banks to declare the extent of any losses they've made ... and how they are going to deal with it and how they are going to raise money from their shareholders -- I think you'll see much, much more of that," Darling said.

Royal Bank of Scotland, Britain's second largest bank, is expected to announce a share issue this week in a move which analysts believe could raise over $20 billion and others in the sector are expected to follow.