Tony Curzon Price (London, oD): The Bank of England’ swap is a clever device. If banks are not lending to each other because they are hoarding cash, the swap will be popular and will solve the problem. If they are not lending to each other because they are worried that the borrower might go bust, then the swap will not restart bank lending. The FT’s editorial on this is admirably clear.

The detailed terms of the mechanism state that the BoE will not accept US mortgages or attendant securities in the swap. Presumably, those are considered to be at too high a risk of default. So the big question is whether the financial sector expects a non-US housing sector meltdown. If it does, even the best pieces of the mortgage backed securities will start to look risky. The credit crunch will turn out to have been an insolvency crisis, not a liquidity crisis. That’s something the BoE can’t do much about.

My hunch is that the swap will not be popular. The loans are bad. We’ll have to get over it.


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