BackBrown’s reputation on economy shaken by Northern Rock chaos
Brown’s reputation on economy shaken by Northern Rock chaos
PremiumLosing trust: After managing the longest period of growth in two centuries, Brown’s Labour government now faces criticism from economists and rival parties who say the administration and the Bank of E
(After managing the longest period of growth in two centuries, Brown’s Labour government now faces criticism from economists and rival parties who say the administration and the Bank of E)
For Prime Minister Gordon Brown, getting past the immediate crisis overNorthern Rock Plc. may have been the easy part; the tough part is dealing with persistent doubts about the health of the British economy.
For three days, Northern Rock customers lined up to withdraw their savings
“Everybody’s blathering on about fundamentals being sound, but they’re whistling in the dark," Derek Scott, an economic adviser to former prime minister Tony Blair, said in an interview. “It’s a real problem when you’ve got people queuing around the bank and nobody believing the government. It will hit more than confidence. It will hit the economy."
For Brown, 56, the bank run threatens a main pillar of his reputation: his record for crisis-free economic stability.
After managing the longest period of growth in two centuries, Brown’s Labour government now faces criticism from economists and rival parties who say the administration and the Bank of England could have prevented the UK’s biggest bank crisis since 1973.
“We’ve seen, in the previous few days, a dithering," saidPhilip Hammond, a member of parliament for the opposition Conservative Party, who speaks on finance. “If the government had acted earlier, it might not have had to go as far as it did. It has hugely shaken confidence."
Three tense days
Chancellor of the exchequer Alistair Darling, 53, waited until 17 September to extend a government guarantee to Northern Rock bank deposits, after customers lined up on three consecutive business days to withdraw cash.
Northern Rock, whose roots date to 1850, is the UK’s third biggest lender by gross mortgages, with loans worth £17.4 billion (Rs1.3 trillion) as of 30 June. The treasury and central bank also face criticism for waiting until Wednesday to join other central banks in offering cash to push down short-term borrowing costs.
Part of Brown’s economic legacy is his decision, as chancellor of the exchequer, to make the Bank of England independent days after he and Blair came to power in 1997.
In 2003, Brown promoted Mervyn King to governor from deputy governor. King, 59, was scheduled to defend the bank’s actions to a parliamentary committee in London on Thursday.
Fulfilling obligations
While only Northern Rock has so far appealed to the authorities for money to meet obligations, every UK bank faces overnight borrowing costs near the highest in seven years.
That will feed through to consumers in higher mortgage costs. Units of lenders including Merrill Lynch & Co. Inc. and Deutsche Bank AG already have raised the cost of loans and rescinded some offers to people with poor credit.
“The UK mortgage market is likely to see a reduced supply of credit, higher mortgage rates and tighter lending standards," said Michael Saunders, chief Western European economist at Citigroup Inc. “All this is likely to exacerbate the sharp housing slowdown that already is underway."
Brown, who addresses Labour’s annual conference for the first time as prime minister on 24 September, is still in a relatively strong position, having weathered crises including terror attacks and the worst floods in 60 years.
Popularity takes a hit
The Conservatives’ popularity is the lowest since David Cameron, 40, took over as leader in December 2005, with support from 32% of voters compared with 40% for Labour, according to an ICM Ltd. survey of 1,005 adults completed on 16 September.
Brown is also more popular than his rival, with a 32% rating in the same poll compared with -8 for Cameron. The ratings reflect respondents who said they approve of the politician minus those who said they don’t.
Darling will receive a letter from Vince Cable, Liberal Democrat finance spokesman, calling for a full disclosure on the Labour government’s guarantee for Northern Rock’s savers, the Daily Telegraph reported.
The letter will ask whether the government is extending protection for all deposits at all banks and whether insurers are also protected, the newspaper said, citing Cable.
It’s on the economic front—Brown’s strongest suit —where he’s now vulnerable.
Even before Northern Rock’s trouble emerged, the Bank of England predicted that interest rates, now at a six-year high, would slow growth to about 2% in the second half of this year from 3% or more in each of the past four quarters— the slowest since 2005.
Housing, which represents 60% of consumer assets, has had prices triple in the past decade to an average £199,770 ($401,000), according to HBOS Plc., the nation’s biggest mortgage lender.
Consumers took advantage of those gains to borrow and spend during Brown’s decade as finance minister, keeping Britain from following the US, Germany and Japan into a slump in 2001.
British households are shouldering a record £1.3 trillion in debt. The Bank of England’s benchmark rate of 5.75% is the highest among the Group of Seven nations, and house prices fell the most in three years in September, according to Rightmove Plc., a property website that tracks asking prices. “At the moment, people flock to Brown as a safe pair of hands on the economy," said Anthony Wells, an analyst at the pollster YouGov Plc. If house prices fall much, “people are going to feel really poor, and his reputation on the economy will go to pot."
With reporting by Brian Swint in London and Kitty Donaldson in Brighton, England.
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