Teresa Hunter: Banks turn chicken but is the sky really falling in?

Published on Saturday 8 August 2009 14:09

AT LAST we have it officially: the sky really is falling in. The week had begun so well when Governor of the Bank of England Mervyn King set off to meet his fellow members of the Monetary Policy Committee for their monthly session.

Sundry house price indicators, not least the Royal Institute of Chartered Surveyors and Halifax, all joined the already more positive Nationwide in concluding that house prices may have turned a corner, with RICS predicting history will record house prices grew in 2009.

Elsewhere the stock market continued its joyous upwards journey. What more was there to wish for?

All was going well for Chicken Little, sorry Mervyn, until Cocky Locky, otherwise known as Barclays' John Varley, lobbed an acorn in his direction, with 3 billion profits darkened by a 4.5bn bad debt charge. The sky must be falling in, Chicken Little thought, when he felt the blow to the head on hearing that the number of Barclaycard customers failing to settle their debts had increased by nearly 7 per cent.

Shortly after, they were joined by the Henny Pennys at HSBC. While they had managed a $5bn profit, this was half last year's figure and followed heavy losses in US mortgages and the Far East. Oh woe is us.

As they continued down the road towards the Bank, Turkey Lurkeys from Northern Rock came charging towards them with the news that 724 million had flown from its nest, and four out of ten of its flock could soon be kicked out of theirs because they were now in negative equity.

So they all hopped on the Tube to rush to tell the members of the MPC, where they bumped into Ducky Lucky from Lloyds who gabbled how he'd lost 4bn because of 13bn worth of bad eggs hatched by the cuckoos at HBOS. Indeed, the sky is falling in, they all cheeped, even though Lloyds' share price kept rising.

Outside the Bank, Goosey Loosey from Royal Bank of Scotland was waiting for them with a 7.5bn basket of more bad eggs, and the news that he would be hatching more like this for years, because… wait for it… the sky had fallen in on his institution and the UK economy. Yes, it had really, even though RBS was in profit.

So Chicken Little, sorry Mervyn, ran up those stairs to provide the best shelter for them all he could, and with his fellow MPC members agreed to hit the button again on the magic money press and print a further 50bn, just like Cocky Locky, Henny Penny, Turkey Lurkey, Ducky Lucky and Goosey Loosey had all wanted.

Readers familiar with the children's bedtime story will know that one of the morals of Chicken Little is the dangers of mob hysteria and believing everything you are told, though certainly few deny that the next few years will prove anything but testing for the UK and world economy, and potentially heartbreaking for families who lose their jobs or homes.

But the picture painted by the banks of all UK consumers drowning in debt, unable to repay their mortgages or spend anything in the shops, is very wide of the mark. Scratch beneath the surface and Barclays and RBS saw no significant increase in homeowners unable to meet their repayments. Even amid the HBOS book, bad debt provisions related to mortgages climbed to a less than bone-shaking 0.34 per cent. Indeed, repossessions actually fell 7 per cent and those entering the arrears process were down by a startling fifth.

Later this week the Council of Mortgage Lenders will provide more reliable information about the state of most families' finances when it releases the next set of arrears and repossession figures, but indications are these won't be alarming enough to scare the goosiest chicken.

There may be some slight deterioration in the 12,800 repossessed in the first quarter, or in the 2.39 per cent of borrowers who were three months in arrears, which is hardly surprising given the surge in job losses. But the underlying trends will highlight the extent to which low interest rates are supporting most borrowers.

All of which points to the housing market indicators, in tandem with the rising stock market, which closed on Friday over 4,710, correctly predicting that the economy is through the worst.

I certainly wouldn't suggest the banks were piling on the grief simply to force the Governor's hand into agreeing to more quantitative easing… or at least I wouldn't if we didn't know where the last 125bn of funny money went: straight into the banks' coffers to help them rebuild their businesses. Borrowers, particularly small businesses, saw precious little of it.

More worrying as we look ahead, many see the Foxy Loxy of inflation and higher interest rates lurking. That's when the pain for consumers will begin in earnest. Higher mortgage repayments are likely to bite just as taxes start rising to pay off the national debt, although few will grumble if property prices rise on the back of a climbing Retail Prices Index.

Meanwhile, it will pay you to remember the other moral of the Chicken Little story. Smart people don't follow the crowd. If you do, you have only yourself to blame when you end up eaten by some sharp operator for his supper.

So I'm guessing the next time he meets with the banks Mervyn will be taking his umbrella.