How the Bank of England sees the sovereign debt crisis


               Yesterday we saw the first Financial Policy Committee Report from the Bank of England, as the new regulator of banks awaiting full hand over from the FSA.

              Their first instruction to the FSA is:

“The Committee advises the FSA¬† to ensure that ¬†improved disclosure of sovereign and banking sector exposures by major UK banks becomes a permanent part of their reporting framework”

             The explanation for this requirement is

“Sovereign and banking strains are the most material and immediate threat. Market concerns remain over fiscal positions in a number of Euro area countries and the potential for contagion to banking systems. Any associated disruption to bank funding markets could spill over the UK banks”

              If you read on into the Report one of their charts tells us the horror story. It shows that markets think there is an 80% probability of  Greek government  debt default within the next five years, a 50% chance of a Portuguese government debt default, and a 45% probability of an Irish default. The Bank rightly points out that the amount of dangerous government debt owned by the main UK banks is under good control. Their implied conclusion is UK banks will be fine even if there is a default of one or two of the smaller Euro governments. The only danger is a third round effect, if  there is  a drying up of wholesale finance to continental  banks who lose more on dodgy sovereigns, which in turn could start to disrupt wholesale funding to banks in general.  

¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† However, they also say that “since 2008 major UK banks have increased their holdings¬†of global government debt securities from 5.9% to 9.6% of total assets. ” They rightly warn that government ¬†bond yields, currently very low in advanced country markets, “ susceptible to a reversion towards more typical levels”. This means that there is a risk of¬† capital losses on government bonds even where those bonds are in no danger of ¬†default. It is true they can be held to repayment in which ¬†case the bank gets all its money back.

          The bottom line is the UK is not badly exposed to the Euro crisis. The biggest risk would come if the UK government  lent lots of money to troubled countries which it subsequently lost.It  is reassuring that Mr Cameron has kept us out of the second as well as the first Greek rescue package, as the UK state cannot afford losses on Euro bail outs. Now the Uk government needs to tell the IMF to be careful with our money as well.


  1. lifelogic
    June 25, 2011

    I am not reassured by Cameron. I get the impression he will do whatever he is told to by the EU while spinning it to his UK audience as being tough on Europe. Just as he pretends to be business friendly while doing the reverse.

    He generally clearly does not act in the UK interests.

  2. Mike Stallard
    June 25, 2011

    When things got really hairy under the Scottish Genius, a number of people on this blog asked that the Bank of England be put in charge of regulation instead of the FSA. Now that has happened and, surely, things can only get better.
    If only the Prime Minister keeps his head and flatly refuses to be drawn into Europe. If only there is no swindle like paying for Greek bail outs through other funding.
    The Eurocrats have a lot to lose and they have their backs to the wall. They are surprisingly blatant too about using their unaccountable and unelected power.

    1. Martyn
      June 25, 2011

      “The Eurocrats have a lot to lose and they have their backs to the wall. They are surprisingly blatant too about using their unaccountable and unelected power”. Of course they are – there is nothing and no one to stop them from doing so!
      MEPs are an expensive joke and our Parliament rendered toothless, having supinely abrogated its authority to the unelected masters of the EU.

      1. lifelogic
        June 26, 2011

        Indeed they seem so keen on extinguishing democracy in the EU while pretending to encourage it everywhere else.

  3. alan jutson
    June 25, 2011

    Seems like sound advice.

    Do not lend money to someone who may not be able to pay you back.

    Can I add some others:

    You cannot lend what you have not got.

    Do not lend money to family and friends on any more special terms than you would to someone else, unless you want to put that money, and friendshp at risk, or accept that you may not get repayment.

    Age old sayings, which it would seem we need to learn again, and again, and again.

    Gordon Brown forgot these basics, Cameron at last seems to be remembering them, but only after prompting.

    1. lifelogic
      June 25, 2011

      My sound advice is do not lend money for a bank note, a piece of paper, or a promise from anyone especially not a government or a bank – only lend on suitable and tangible security. If this happened there would not be such an incentive to create pieces of paper certify them as A1 then to dump on the unsuspecting and gullible.

  4. Brian Tomkinson
    June 25, 2011

    We must hope that the BoE will be more competent in this role than it has been with the MPC, or, to quote Private Frazer (from Dad’s Army), “We’re doomed!”

  5. Simon
    June 25, 2011

    John ,

    You seem to have ommitted the elephant in the room ; credit default swaps .

    If our banks have written synthetic CDS then as Javelin has pointed out then in a default event counter parties can make claims greater than their actual exposure (if they are even exposed at all) and the original loss can be multiplied many , many times .

    Since we the taxpayer are underwriting our banks we have a right to know what their CDS exposure is to the PIGS , £100billion , £1 trillion , more ?

    Could you find out the answer to this question please ?

    reply: Probably not! I think we should assume that the Bank has checked out all exposures by the main banks, and is satisfied it is modest and under control.

    1. Simon
      June 25, 2011

      Thanks for the honest answer John .

      If the Bank has not published CDS exposure then I do think it is conspicuous by it’s absence !

      Banks which want to engage in synthetic and therefore geared products like this should forfeit the taxpayers guarantee .

    2. zorro
      June 26, 2011

      hmmm……the triumph of hope over experience?


  6. Acorn
    June 25, 2011

    JR. What happened to the ¬£9.4 billion “Bailing out the IMF”?

    [JR posted] “This week the government announced its intention to put through a Statutory Instrument approving ¬£9.4 billion pounds of new capital for the IMF. The draft SI is a very short document, pledging 9.416 billion SDRs. The document does not explain to MPs that one SDR is about the same value as one pound sterling. We are awaiting news of how and when this matter will be considered.”

    Reply: We are awaiting a government decision on when and how to debate and vote on this.

    1. Denis Cooper
      June 25, 2011

      In the words of Christine Lagarde, the EU treaties are “very straightforward. No bailing out”, and looking at the treaties I don’t find any “except through the IMF” qualification of that very straightforward prohibition.

      As the EU treaties including that prohibition have been incorporated into UK law through primary legislation, Acts of Parliament, how then can secondary legislation, an Order, be used to authorise additional payments to the IMF when that money is clearly destined for the prohibited bailing out of other EU member states?

      1. Tim
        June 25, 2011

        …………because they break the rules to suit themselves and the EU/Euro project. The bailouts are prohibited under the Maastrict Treaty, but that is ignored by all politicians including our own and the executive is NOT being held to account or challenged by our own Parliament. Outrageous manipulation by undemacratic means once again. It really is time we were “allowed” our referendum on the In/Out of this monstrous organisation.

        1. zorro
          June 26, 2011

          So true…..It was clear when Cameron authorised this vast increase in funding to the IMF that it was contrived in order to circumvent his inability (politically) to sell another Greek bailout to the public. The extra funds are clearly Athens bound.

          There is no way the European elite will let their project fail. They will do anything with the emphasis on anything to get their way.


          1. Denis Cooper
            June 26, 2011

            It may seem to be legalistic nit-picking, but if MPs have any concern to uphold the rights of Parliament vis-a-vis an overweening executive then they should refuse to approve the proposed increase in the IMF subscription through a mere Order, secondary legislation, and insist that the government must proceed through an Act, primary legislation.

            The Order is based on powers which Parliament granted to ministers through its International Monetary Fund Act 1979, but the exercise of those powers must be restricted by the later European Communities (Amendment) Act 1993 which approved the Maastricht Treaty.

            It is not the fault of Parliament that when the Maastricht Treaty prohibited intra-EU bailouts those who drafted it did not think to make an exception for bailouts mediated through the IMF, and of course it was not open to Parliament to modify any of the terms of the treaty as agreed and signed.

  7. waramess
    June 25, 2011

    UK banks not at risk? I wonder how you might come to that conclusion given the scant information on their asset base that is in the public domain. I think we should not doze off on the assumption that our money is safe and that retail banks will indeed be protected from stuffability by their investment division brothers.

    I believe the view that this is not a Greek problem is a view that is now widely held and it will be of great interest to see wheether the UK banks will be able to withstand the meltdown in Europe as their own dodgy assets cease to perform.

    Betting against King has been a pretty good bet in the past and I cannot see why that might have now changed.

    1. zorro
      June 26, 2011

      Mr King and his financial crew have been uniquely unsuccessful in their ability to achieve their stated aim, and are almost 100% wrong in their inflation forecasting….


      1. zorro
        June 26, 2011

        They never seem that embarrassed by it though, I wonder why not…?…


  8. waramess
    June 25, 2011

    “It is true they can be held to repayment in which case the bank gets all its money back”

    Just as the Japanese tried to do? This would require not only a very compliant regulator but a complete disregard of economic consequences. If this were the only risk to UK banks it would at best mean sub market yields for the duration of each bond and the removal of equivalent lending capacity for the duration and would represent yet another nail in the Keynesian coffin and in the UK economy.

  9. Bob
    June 25, 2011

    “Now the Uk government needs to tell the IMF to be careful with our money as well.” Yes we do.

    Anyway, who is running the IMF now that DSK is in clink?

  10. StevenL
    June 25, 2011

    The the bailout-loving talking heads are out in full force, holding up their vision of financial armageddon in one hand and a begging bowl marked ‘bondholders’
    with the other.

    I thought the ECB had been buying up loads of PIGS debt anyway? If th EU want to ‘bail out’ Greece can’t they just forgive the debt held at the ECB? Or am I missing something here?

  11. Bernard Otway
    June 25, 2011

    I totally agree with Alan Jutson,at the age of 66 IF I could be repaid just what I have lent to family I would have another £150,000 [over 40 years of lending] I don,t even bother to think of interest,this has caused a rending of the family totally (lots of detail and allegations about family left out-ed),communication for this time at all,and from my side I will go to my death bed not communicating. BUT BUT BUT when this happens with Nations there is always BIG TROUBLE which is inevitable in the EU.

    1. alan jutson
      June 25, 2011


      Some simple age old rules on speculation as well:

      Do not gamble what you cannot afford.
      Only gamble what you can afford to lose.

      Shame some of our speculators (and Government officials) did not heed such advice.

      1. Simon
        June 26, 2011

        an odd horse race where all the punters got paid a proportion of the winnings before the race had even finished .

  12. stred
    June 25, 2011

    At the outset of the Greek crisis we were told that they were paying large pensioms to the children of retired government officials as well aas other euro subsidised rip offs. Does anyone know whether the new PM has had any luck tackling this sort of thing?

  13. Gary
    June 25, 2011

    The BOE has got nothing right in at least 10 years, and maybe never. The inflation debacle is its fault, the mis-pricing of rates for years , spawning the housing bubble,is its fault, the moral hazard created by buying up unmarketable junk from the banks and making the taxpayer pay, is its fault.

    So now we officially put these incompetent bureaucrats in charge of the whole mess, the mess they were prime agents in creating. I am quite sure that the politicians who made this decision don’t understand the problem.

  14. Norman Dee
    June 25, 2011

    Oh BRITAIN , where did we go wrong?

    We’re “broke” and can’t help our own Seniors, Veterans, Orphans,
    Homeless etc.?

    Are you aware of the following?

    The British Government provides the following financial assistance: –

    BRITISH OLD AGED PENSIONER (bearing in mind they worked hard and
    paid their Income Tax and National Insurance contributions to the

    British government all their working life) Weekly allowance:

    Insurance contribution whatsoever) Weekly allowance: £250.00

    BRITISH OLD AGED PENSIONER Weekly Spouse allowance: £25.00

    allowance: £225.00

    BRITISH OLD AGED PENSIONER Additional weekly hardship allowance

    hardship allowance £100.00

    A British old age pensioner is no less hard up than an illegal
    immigrant/refugee yet receives nothing


    BENEFIT: £29,900

    Please read all and then forward to all your contacts so that we can
    lobby for a decent state pension.

    After all, the average pensioner has paid taxes and contributed to the
    growth of this country for the last 40 to 60 years.

    Sad isn’t it? Its about time we put our own people first.

    Reply: These figures misrepresent the averages.

  15. Kenneth
    June 25, 2011

    Yes, the IMF has our money and needs to be careful with it.

    The eu quango also holds our money and is planning to use much of it on various projects to prop up the Greek economy and give it better access to eu subsidies.

    There has been well documented (and undocumented) mis-use of funds at the eu and I do worry that somehow we will be asked to effectively grant substantial funds to Greece by the back door, thus getting around the ‚Äėno bail-out‚Äô clause.

    It is good that Mr Cameron is standing firm but I hope this resolve is maintained when and if the eu ask us to put substantially more into the rotten and leaky eu pot.

  16. Bernard Otway
    June 26, 2011

    Dear John what I wrote has been EMASCULATED in my opinion CENSORED I mentioned NO NAMES all I did was tell the true FACTS,as I am 66 as I said, I VOW to leave behind me all the details that were not shown,please tell me and everyone WHAT was wrong about my TRUE facts ,they are verifiable via the deeds offices in other words a matter of PUBLIC
    RECORD,I have written to my daughter in the USA a Professor of law and she will NOW persue what I have said via the channels over there using this censorship as evidence of what is wrong with this country,one of her tutors was Newt Gingrich he and his similar cohorts will be very interested,I just used those personal FACTS to agree with Alan Jutson’s post
    and what about Norman Dee’s later post re immigrants allowances compared to those to my GENERATION.I give you a forecast BAD things are going to happen in this UK because of these and other things.I make sure I spend at least 10 minutes EVERY day talking to at
    least 5 Different people giving this information.WHY are politicians SCARED WITLESS
    in this day and age,the only way you can keep me quiet is to put me 6 feet under,while I still live and breathe I will continue to talk,I see it as my duty to those that will follow me.
    To be honest I never believed that ideas and opinions were to be denied to people I AM EXTREMELY DISSAPPOINTED,tomorrow /today I will go out just to my local ASDA and tell this to I promise at least 10 DIFFERENT people.I am so angry I am amazed I have not had a Stroke.

    Reply: This site is not the way to pursue private disputes with others

  17. Bernard Otway
    June 26, 2011

    I was not pursuing a private dispute through this comment I was using my case to agree with the example quoted about Not lending to family,this dispute if you want to call it that happened in 1999 when my mother passed away,I have had no contact with my siblings since then and have pursued NOTHING, it is over FINISHED, the two siblings are dealing with MY children breaking off relations with them and they themselves have No children of their own.
    Even I did nothing to encourage my children in this, it is a natural reaction on their part they know injustice and unfairness when they see it,plus they loved their Grandma very much.

  18. Electro-Kevin
    June 26, 2011

    Regardless of the risks of default on British bank holdings, real austerity is going to impact on the PIGS. This will result in an unprecedented wave of economic migration to Britain with full EU entitlements. There is nothing our Government can do about it and I believe that the Tories may well be out at the next general election.

    What was it Mr Cameron said ? “We’ve offered them ham and eggs and they didn’t go for it. So what’s the point in offering double ham and eggs ?”

    Aside the fact that he’s supposed to be operating on innate beliefs and not reacting to populism, Mr Cameron didn’t offer us ham and eggs. He offered us a rather bland nut cutlet.

    Blair MK II – but without the talent.

    1. Electro-Kevin
      June 26, 2011

      Further to that: He offered us a rather bland nut cutlet – and when we voted for it he took the nuts out !

      When will it all end ?

      I’d rather a catastrophic ending than this unending catastrophe. At least in an undeniably bankrupt Britain socialists (half the Tory party it seems) simply couldn’t afford to remain socialists.

  19. Andrew Smith
    June 26, 2011

    I have two matters to repoirt:

    Just as the Euro was being delivered into being I attended a discussion by NatWest economists in what is now called Tower 42. Good lunch. Nice guests.

    I asked if it was seriously thought that the markets would treat Greek debt the same as German. There were embarrassed grins and some evasive remarks along the lines of “above our pay grade” and “don’t be stupid”.

    About 1994 I was similarly entertained by a mid sized accounting firm and the guest speaker was the East of England BoE “agent”. I asked if war games scenarios havd been played out to see if the regulatory system could handle financial conditions which were not as benign as they then were. The answer was a surprised NO.

    Why is the Governor still in his job and why is Lord Turner still walking the streets?

  20. Conrad Jones (Cheam)
    June 28, 2011

    Mr Redwood,

    If we implement austerity cuts in an attempt to cut sovereign debt, who will be expected to increase their debt in order to sustain – and grow; the money supply?

    By implication – a reduction of Government Debt forces an increase of Private and Commercial debt – thereby increasing costs to industry which will lead to much higher inflation as companies pursue higher prices for their goods an services in order to pay their debt burden.

    Government debt is partly debt free money as it relies upon issuance of Treasury Bonds which are effectively rolled over on maturity, thereby taking the pressure off Private and Commercial debt creation improving purchasin power.

    What the Government should not be doing is funding an International Loan Shark (ILS) like the International Monetary Fund (IMF).

    Austerity measures will lead to higher unemployment, lower purchasing power and spiralling debt as companies are forced to reduce prices in the hope that they will be able to rasie them again at a later date. While they wait – they have to offset the reduction of income by borrowing from Banks. In the current monetary system, this is financial suicide and cannot possibly lead to a recovery without substantial Government fiancial input at a later date.

  21. Conrad Jones (Cheam)
    June 28, 2011

    “Now the Uk government needs to tell the IMF to be careful with our money as well.”

    From the IMF website:

    “Set up as a voluntary and cooperative institution, the IMF attracts to its membership nations that are prepared, in a spirit of enlightened self-interest, to relinquish some measure of national sovereignty by abjuring practices injurious to the economic well-being of their fellow member nations.”

    If you want to know what “relinquishing some measure of national sovereignty” looks like – just look at the News Reports eminating from Athens.

    1. Conrad Jones (Cheam)
      June 28, 2011

      This is what losing sovereingty looks like in Greece:

      I do not predict this will occur in the UK as the UK has a habit of changing unpopular policies very quickly – such as the Poll Tax (which was actually a fair tax in some ways). The UK – unlike some EURO Countries, does retain some sovereignty.

      Nigel Farage (UKIP) is saying what a growing number of the UK population is thinking. (directs to a site urging exit of Greece from Euro etc)

  22. Conrad Jones (Cheam)
    June 28, 2011

    Tony Blair would know this as he works for J P Morgan:

    “Credit Default Swaps in Markets
    The first credit default swap was introduced in 1995 by JP Morgan. By 2007, their total value has increased to an estimated $45 trillion to $62 trillion. Although since only 0.2% of investment companies default, the cash flow is much lower than this actual amount.

    The size of the credit default market dwarfs that of the stock market and the bond market they represent. Therefore, this shows that credit default swaps are being used for speculation and not insuring against actual bonds.

    Credit Default Swaps are unregulated and because they get traded so frequently there is uncertainty of who owns them and whether the holders can actually pay in the event of a negative credit event.”


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