Whither Project Merlin? - Osborne's Maxed Out Plan A

Kudos to Mervyn King and George Osborne for gamely trying to shore up the British economy, against the oncoming Eurozone tsunami, with a £100BN support programme.

The FT reports that:

"the chancellor told a City audience on Thursday night that he was working with Sir Mervyn King, the Bank of England governor, to “deploy new firepower” amid fears that turmoil in the Eurozone could lead to a severe credit crunch and higher interest rates in Britain.

Mr Osborne’s aides spoke of a “maxing out of Plan A” – taking advantage of the country’s record of fiscal discipline and credibility with the markets to unleash an aggressive monetary policy offering cheaper loans to businesses and households."

The markets have reacted favourably (as they always do) to "hopeful" news.

This is all very well, if one could trust the banks to lend the money on to companies and individuals. However, all that the banks will do it use the £100BN to shore up their own balance sheets.

Not one penny of this will reach the business or individuals who need it, and would be the engines of growth for the British economy.

It would be better of Osborne took the £100BN and simply dropped it from a helicopter over the UK, that way he could be sure that it will have some positive effect on the economy.

Am I being too cynical?

I don't think so, have you all forgotten the hopes and hype wrt Project Merlin?

Whatever happened to that then?

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Wonga To Offer Business Loans

Wonga, which specialises in short-term personal loans, is launching a new product aimed at businesses.

It will, subject to checks, offer businesses loans of between £3,000 and £10,000 for up to a year with APR's rising from between 16.6% to 180%.

Whatever happened to Project Merlin (that was meant to make £190BN available to SME's) then?

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Project Merlin - Epilogue

Now that Project Merlin (the agreement between the government and the banks that, in theory, will regulate their behaviour) has been finally agreed and formally announced, the theory spun by the government is that we can move on from bank bashing.

Fair enough, maybe, if the banks actually make good on their promises.

However, the reality is that lending and the terms and conditions attached to that lending is unlikely to improve much (from the perspective of the corporate/individual borrower).

Even though interest rates remain fixed (no change today by the MPC) at historically rock bottom levels, the banks are making a nice "turn" on the difference between base rate and the rate that they charge borrowers and the spread between lending and savings rates.

The question that Osborne has not answered is, if the banks do not honour the agreement both in terms of substance and form what will he do then?

Don't tell me the answer to that though, tell him because I don't think that he knows the answer.

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Project Merlin

George Osborne will in the next hour announce details of the agreement reached between him and the banks wrt bonuses, lending, behaviour etc (aka Project Merlin).

It is predicted that the top five banks will increase available loans to businesses by around £190BN.

The banks will also pay lower bonuses in 2010, and disclose the pay of their respective top five executives.

Doubtless the bonuses will be lower, but will there be compensation for lower bonuses in the shape of other incentives eg options?

Reality and politicians promises are often far apart.

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Osborne Increases Bank Levy

George Osborne has increased the levy on banks by £800M to £2.5BN.

He claims that he wants to make sure that "banks make a fair contribution to closing the deficit".

The reality is that he wants banks to increase lending.

Project Merlin, the ongoing talks between the government and banks over their behaviour and lending policies, is still dragging on. Osborne, by upping the ante over the bank levy, is showing the banks that he wants to see progress from their side in the discussions.

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Let The Good Times Role!

As David Cameron sheds tears today for the average British householder, who will face a "difficult and tough" year ahead, it is reassuring to know that the banking sector is booming again.

The Telegraph reports that four HSBC, Barclays, Lloyds and Standard Chartered will announce combined profits of £24.2BN (a rise of over 10% compared with the £21.5BN they reported last year).

To some extent these profits (and associated bonuses) will be recouped by taxes. However, the key to the banks' "reassimilation" into "polite" society will be whether they show that they are willing to lend more to businesses and homebuyers than they have been doing of late.

Seemingly, as discussions between George Osborne and the banks over lending levels (aka project "Merlin") have become deadlocked, it may be a while before banks (by their actions) are "reassimilated".

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