Eurozone fears cast doubts on bank cash scheme

The coordinated action by the Bank of England and Treasury will see an estimated £80bn offered to banks on condition they pass it on to businesses and households in the form of cheaper loans and mortgages.

However, there were warnings the scheme will not address the core problem of companies’ reluctance to borrow, particularly in the face of a eurozone crisis that could deepen this weekend following elections in Greece.

Graeme Leach, chief economist at the Institute of Directors, said: “The funding for lending scheme helps the supply of money and the demand for it, by lowering the cost of borrowing. But the core problem remains. Companies alarmed by the euro crisis will not be eager to borrow, regardless of the cost.”

Economists cautioned that banks may not want to lend more, even with the carrot of cheaper funding. Vicky Redwood of Capital Economics said: “High bank funding costs are just one challenge facing the UK economy. Indeed, these moves on their own will do little to reduce the effect of the eurozone crisis on UK exports or reduce the uncertainty facing UK companies.”

In his annual Mansion House speech, Bank governor Sir Mervyn King also activated facilities for an emergency scheme that offers six-month liquidity to banks in tranches of at least £5bn a month.

The two measures are estimated to be worth about £100bn in funding to banks.

The banking industry has been hit by higher funding costs as the eurozone troubles have escalated and have been hoarding money for fear of another worrying phase in the crisis.

The British Bankers’ Association (BBA) said it was “ready and willing” to get behind the moves.

Its chief executive Angela Knight said the BBA welcomed the news the Bank and Government were “ready to stand with the financial sector in making more money available to fuel the recovery”.

Experts also hailed signs that the Bank stood ready to further expand its quantitative easing programme, which stands at £325bn.

Shadow Chancellor Ed Balls was critical of the proposals saying they “do not go far enough”.