Page last updated at 12:03 GMT, Friday, 13 February 2009


Your Questions

The governor of the Bank of England, Mervyn King, has warned that the UK is "in a deep recession" in 2009 and said rate cuts may no longer work.

As the downturn continues, the BBC's Business and Economics team will be answering some of your questions.

Here the BBC's economics editor Stephanie Flanders, Katie Hunt business reporter for BBC News online and personal finance reporters Ian Pollock and Simon Atkinson tackle a selection of your questions about interest rates, house prices and investment abroad.

Send us your questions



Is it possible that the UK could go bankrupt looking at the state of our banks, businesses and public debts? Would you agree that it is now better to invest abroad in places like China at the moment who has a bigger population so growth would be more sustained? Mr Stacey, Cardiff, UK

Stephanie Flanders

Stephanie Flanders:

I'd be wary of making any hard and fast predictions about the UK. But it's worth saying that, technically, the UK government can't go bankrupt. That's because, unlike any company, it will ALWAYS have the capacity to raise money to pay off its debts, through higher taxes. It's certainly possible for a government to default on its debt - as many developing countries have done over the years. But we do have a big advantage over those countries because all of our public debt is denominated in pounds - so the more the pound goes down, the less it is worth. When countries have a lot of foreign currency debt, their debt position gets worse, the lower their currency goes. That isn't the case with us. At least when it comes to public debt.

As you suggest, we do have a lot of private, foreign currency debt. But we also have a lot of foreign currency assets - ie the rest of the world owes us money as well. On paper, the foreign assets are actually worth more than the debts, although the foreign assets have probably gone down in value as a result of the credit crunch. Some believe we will have a problem paying off all our debts if the economy goes into a prolonged slump. But right now the majority of economists do not expect any serious "run" on the UK.

As for investing in China - obviously I can't give investment advice. But I would note that, although China clearly has a higher potential growth rate than the UK, that won't necessarily translate into higher investment returns in a country which still has a lot of state control over foreign investments. Also, China has been heavily dependent on growing export markets, and has already been hit by the slowdown in the US and Europe.

If interest rates reach zero what options remain? Chris Gallon, UK

Stephanie Flanders

Stephanie Flanders:

If interest rates reach zero, the central bank has to turn to what is known as "quantitative easing", also known as printing money. It's an ugly expression, but what it means is that the authorities try to increase the money supply directly. (Usually they only try to influence it indirectly, via the interest rate.) The most common form of quantitative easing, tried by Japan in the 1990s, is for the central bank to buy government bonds from the commercial banks, using money the central bank has effectively created out of thin air. That raises the amount of money in the commercial banks' accounts with the central bank, which increases the narrowest measure of the money supply. But to have an effect on the real economy, the commercial banks then have to go on to lend that new money to real-life people and businesses. When Japan tried it, a lot of banks just hoarded the extra cash, which made the policy less effective.

That's one reason why the Bank of England is interested in other "unconventional" ways to boost the economy, such as buying up company debt in the secondary markets. In theory, that could raise the price of that debt and lower the interest rate that companies have to pay to borrow more. That might encourage more borrowing by companies without the commercial banks needing to play along. But as your question suggests, this is all very uncharted territory. We don't know whether or when any of it will work.

Is there any evidence that the measures put in place to date are working? If yes, what positive signs are there? Stuart, Tonbridge

Katie Hunt

Katie Hunt:

The £37bn bail-out undertaken by the government in October was primarily aimed at staving off what could have been a devastating collapse of the banking system and by this measure, it has had some success.

The system looks to have stabilised and no further UK banks have sought government support. However, additional measures, such as loan guarantees, taken by the Bank of England and the Treasury to get banks lending again - both to companies and to consumers - have so far been less successful.

The number of mortgages lent to house buyers fell last year to its lowest level since 1974 and many small business complain that it's hard to get credit.

So why aren't these measures working? Banks are still writing off bad debts and other assets that have fallen sharply in value during the credit crunch.

If some of the new capital injected by the government just matches write-downs it cannot be used to lend.

As the economic downturn causes more companies to go under and jobs to be lost, fears of more defaults make banks reluctant to extend loans. Regulators are also requiring banks to keep more capital to cushion themselves against further losses, further reducing the amount of money available.

Although the interest rate has been slashed to 1%, why does the same not apply to credit card companies? Denise Rodel, London

Pound Coin

Ian Pollock:

There has never been a direct link between the interest on credit cards and the Bank of England's bank rate.

The margin between the two varies greatly between different card issuers and is often huge. A crucial feature of credit card users is that they suffer a much higher rate of default than, say, mortgage borrowers.

Credit card spending is unsecured - which means that unlike a mortgage your card company has no right to sell your home to get its money back if you do not settle your bills. Thus credit card APRs are high - and can go up when the bank rate is going down. So you are paying a higher rate of interest partly to cover the cost of other card users who have defaulted on what they owe your card company.

What is going to happen to students, are their loans and grants going to be more difficult to get? Sean Collins, Manchester

Simon Atkinson

Simon Atkinson:

The recession should have no direct impact on student loans or grants - both of which are given by the Student Loans Company to anyone who meets the criteria, and these criteria have not changed.

Holders of students loans issued from 1998 onwards may be better off - because the interest rate you pay has fallen. Repayments stay the same, but the lower rate means the debt will be paid quicker. If you lose your job, or are forced to take a pay cut and you are earning less than £15,000pa your repayments will stop automatically.

Those on student loans from before 1998 are not in such a good position. The rate is fixed at 3.8% for now - well above the base rate.

The National Union of Students says it has no evidence that student bank accounts or overdrafts are getting harder to come by.

But it seems likely that students - in common with other borrowers - will find it more difficult to take out credit cards or bank loans. The NUS warns that this could particularly affect postgraduate students who cannot access the undergraduate student loans.

What are the predictions for house prices bearing in mind the UK still has a shortage of houses? Will they rocket when the banks start lending again? Tom McDaniel, Sutton

Pound Coin

Ian Pollock:

Most experts, for what it is worth, firmly expect house prices to keep on falling in 2009, possibly by as much as another 15 - 20%.

As the lack of mortgage funds has been the main reason for the recent slump in property sales and prices, it is logical to assume the prices might start to go up again, once mortgage lending is restored to more normal levels.

But that could take years and other factors may intrude. The recession could see many immigrant workers returning home, taking some of the pressure off the general demand for accommodation.

The buy-to-let phenomenon, which has also been partly responsible for the boom in house prices in the past decade, has been dealt a huge blow.

Banks may never again be free to lend so easily as they have in the past few years, even assuming they are ever in a position to do so again.

So, prices may well go up again at some point; but by how much is, literally, unpredictable.

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