(China Daily)
Updated: 2008-04-22 06:35

LONDON: The Bank of England is offering to swap government bonds worth 50 billion pounds ($100 billion) for banks' riskier mortgage debt to try to ease the effects of a credit crunch on Britain's banking system.

Bank of England Governor Mervyn King said the ultimate size of the scheme would depend on how much was needed.

"There is no arbitrary limit on it," King told reporters.

Although the move should help to give some much-needed support to the banking system, economists cautioned the swap scheme alone would not be enough to revive a flagging economy.

"It will have a positive impact on the money market but it's unlikely that it will have any meaningful impact on unlocking mortgage markets," said Lena Komileva, market economist at Tullet Prebon.

The BoE's plan is its latest move to deal with the impact of the credit crisis on the economy. Since December it has cut interest rates three times to 5.0 percent and provided emergency, mainly three month, liquidity to banks.

The BoE is offering to exchange government securities for a range of high quality bank assets, including mortgages, which should free up banks to lend more to consumers and each other.

"With markets for many securities currently closed, banks have on their balance sheets an 'overhang' of these assets, which they cannot sell or pledge as security to raise funds," the BoE said in a statement detailing its Special Liquidity Scheme.

"The scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets."

It is being guaranteed by the British Treasury but has been designed to avoid the public sector taking on the risk of potential losses, the BoE added.

Analysts said the plan could boost sentiment but would not reverse the impact of the credit squeeze.

"This is not going to undo the harm that's already been done to the economy," said Alan Clarke, an economist at BNP Paribas. "It might just stop things getting any worse."

The pound fell after the plan was unveiled.

The BoE plan is designed to tackle an overhang of debt in the 1.2 trillion pound UK mortgage market that banks would have repackaged and sold on had the credit crisis not hit.

Lehman Brothers estimates that overhang at around 35 billion pounds.

"It remains to be seen how effective the plan is," said Geraldine Concagh, of AIB Group Treasury. "I don't know if it's going to be sufficient as the credit squeeze (in the UK) is quite pronounced and it's only a matter of time before it feeds through to the rest of the economy."

The government is expecting banks to take more action to shore up their own balance sheets in tandem with the BoE action.