BOE's Gieve Says Markets Still `Under Acute Strain'

By Svenja O'Donnell and Jennifer Ryan

Oct. 28 (Bloomberg) -- Bank of England Deputy Governor John Gieve said investors are still facing ``acute'' stress as market declines force hedge funds to sell assets.

``The financial system remains under acute strain,'' Gieve said in a speech in London today. ``The falls in equity markets, corporate bond prices and the prices for leveraged loans is hitting both long-term institutional investors and leveraged investors, including hedge funds.''

The Bank of England said in a semi-annual report that $2.8 trillion in banking losses and the threat of a global recession are increasing risks to financial stability. Meanwhile, Prime Minister Gordon Brown yesterday suggested he may scrap decade- old fiscal rules to prop up the banking system as the nation faces its first recession since 1991.


Investment losses at hedge funds and insurers pose further risks to the system, the central bank's report said, as insurers may fall short of capital requirements and face credit rating downgrades, while hedge funds may be forced to sell assets.

``Some are being forced to sell into a falling market in response to margin calls and redemptions,'' Gieve said. ``And there are growing signs of stress in many emerging market economies.''

The International Monetary Fund predicts the world's advanced economies will next year grow at the slowest pace since 1982. Investors stung by losses from developed nations have sold riskier emerging-market assets, jeopardizing the position of those nations. The IMF has agreed to emergency loans for Ukraine and Hungary, while Belarus and Pakistan are seeking help.

Repossessions

In the U.K., the economy recorded its first quarterly contraction in 16 years in the three months through June, while the central bank said a 15 percent drop in house prices may push 10 percent of mortgage-holders into negative equity. That happens when the value of a home falls below the amount owed on the mortgage.

Repossessions of British homes jumped by 71 percent in the second quarter, the U.K. financial regulator said today.

Brown this month unveiled a 50 billion-pound rescue plan, which included the government buying stakes of Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group Plc after money-market tensions undermined investors' confidence in banks around the world.

``The package of measures introduced in the U.K. and elsewhere has improved the prospects significantly, especially for banks, but it is too soon to declare the crisis over, Gieve said. ``We need to establish stronger restraints on the build up of risks in the financial system over the cycle with the dangers they bring to the wider economy.''

The Spanish system, which requires banks to build up loss reserves when the economy is booming, may serve as a lesson for others to follow, as it diminishes the need to raise capital in a downturn, Gieve said.

To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.netSvenja O'Donnell in London at sodonnell@bloomberg.net