Brown, King, Face Pressure to Redouble Rescue Efforts

By Brian Swint and Jennifer Ryan

Sept. 26 (Bloomberg) -- Prime Minister Gordon Brown and Bank of England Governor Mervyn King face mounting pressure to step up their rescue efforts as the financial crisis threatens Britain's banking system.

``The time has come now for the central banks basically to offer something a little bit different other than liquidity in deference to the fact that the economic downturn is gathering momementum,'' George Magnus, senior economic adviser to UBS AG in London, told Bloomberg Television today. ``The mortgage industry is pretty much dead. The government does have to do something.''

Magnus joined Goldman Sachs Group Inc. Chief Economist Jim O'Neill and former U.K. policy maker Willem Buiter in calling on Brown to follow the U.S. with a government-backed rescue of the mortgage market. Buiter also says the central bank should set aside inflation concerns and cut interest rates immediately.

``The one thing that separates the U.K. from the rest is that they haven't made full use of all the tools in their box now such as interest-rate cuts,'' said Paul Dales, an economist at Capital Economics in London. ``If these problems in markets continue to get worse, I wouldn't rule out something like the U.S. plan.''

U.S. Treasury Secretary Hank Paulson has proposed a $700 billion rescue to help banks get troubled assets off their books. Negotiations on the plan faltered in Congress yesterday.

The British government should ``take a leaf out of what the Americans are doing,'' UBS's Magnus said.

King's View

King told lawmakers on Sept. 11 he opposes using the central bank to provide long-term assistance to banks to unfreeze lending and warned the government would take on credit risk on its own balance sheet if it chose to do so.

The Bank of England still joined a renewed global coordinated effort to increase availability of dollars and ease money-market strains today, auctioning dollars for one-day and one-week maturities. The U.K. sale, totaling $40 billion, followed six emergency auctions of the same amount for overnight money.

The bank will also offer emergency sterling sales of three- month money, against collateral including mortgage securities.

Buiter, writing yesterday on his Mavrecon blog, called for more. The bank's Special Liquidity Scheme, which allows lenders to swap distressed assets for government debt, should be transferred to the Treasury, its January deadline scrapped and its terms modified to allow assets created this year to be swapped, he said.

Former policy maker Charles Goodhart last week criticized the bank for extending the program's deadline on Sept. 17 instead of scrapping it altogether.

Borrowing Costs

Bradford & Bingley Plc, the U.K.'s biggest lender to landlords, fell the most since June as the cost of borrowing money in credit markets soared. The cost of borrowing in dollars for three months stayed near the highest since January as institutions hoarded cash. The three-month Libor rate for pounds was 6.26 percent today, close to the highest this year.

``People are nervous about the capital position of the banks faced with the crisis in the securitization markets and falling house prices,'' Howard Davies, a former chairman of the Financial Services Authority and deputy governor of the Bank of England, told Bloomberg Television. ``That needs to be watched.''

Britain entered a recession in July, forecasts by the European Commission and the Confederation of British Industry, the country's biggest business lobby, show. King said in August that economic output will be ``broadly flat'' for a few quarters.

Inflation Risk

Policy makers Andrew Sentance and Kate Barker both indicated in speeches this week that, while the turmoil may intensify the economic slowdown, there is still a risk that the fastest inflation in a decade will become embedded in the economy.

``It is important that monetary policy does not overreact to developments on financial markets,'' Sentance said Sept. 24.

David Blanchflower, another of the nine members of the Monetary Policy Committee, called for a half-point cut at the September meeting and said this week that reductions need to come ``decisively and soon'' to slow gains in unemployment.

The CBI, Britain's biggest business lobby, today stopped short of calling for immediate interest-rate cuts, saying that the bank should deliver a reduction by the end of the year.

``We are beginning to see signs that inflation may have peaked, and that slowing activity means there is scope for interest-rate cuts,'' John Cridland, the CBI's deputy director general, told reporters in London.

Policy makers will resume rate cuts in October, BNP Paribas SA Economist Alan Clarke said today, changing an earlier forecast for a reduction in November. They are scheduled to make their next decision on Oct. 9.

``There is growing pressure for the bank to start lowering interest rates again,'' Capital Economics's Dale said. ``There will be a growing bandwagon in favor of sharp cuts.''

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net.