Wednesday, 22 October 2008

UK Recession

Economy Declines

The head of the Bank of England has said for the first time that the U.K. economy appears to be entering a recession, sending the pound to its lowest point in almost five years against the dollar Tuesday evening.

Underlining how the financial crisis is giving way to prevailing economic concerns, Bank of England Gov. Mervyn King also discussed how the government could more quickly reduce the stakes in some of the banks it will acquire as part of its £400 billion ($686.5 billion) bailout package. Such a move could pave the way for banks to resume dividend payments to shareholders, something the U.K. blocked as part of its bailout.

Mr. King, in a speech Tuesday evening, said "it now seems likely that the U.K. economy is entering a recession" and it will take a "long, slow haul" to bring economic growth back to more normal conditions. His comments sent sterling down 2.5% to $1.6697.

Mr. King said that after Lehman Brothers Holdings Inc. filed for bankruptcy in mid-September, just before the U.K. came up with its bank-bailout plan, "Not since the beginning of the first World War has our banking system been so close to collapse."

His comments came as the International Monetary Fund said all major European economies will enter recession in the coming months, though recent moves to ease the financial crisis will probably prevent a sharper downturn. For the euro zone, the U.K., Sweden and Denmark, the IMF stuck to its recent forecast for average economic growth of 1.3% this year and 0.2% next year.

The central-bank head said the government could reduce the stakes it buys in U.K. banks reasonably quickly by selling units in a fund containing the banks' shares.

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