Treasury hammers out rescue scheme

As more bad news hit the housing market yesterday, banking industry sources said the government is expected to announce details of a rescue plan to ease tight conditions in the beleaguered mortgage sector next week.

Pressure has been growing on the Treasury and the Bank of England to do more to ease a lending squeeze that is threatening to push the country into an economic slowdown.

Mortgage lenders have already warned lending could halve this year and, with elections due by May 2010, the government is desperate to avoid another Northern Rock fiasco. The Newcastle-based mortgage lender was nationalised after the collapse of the US sub-prime mortgage market lifted the cost of credit around the globe and led to a run on the bank - the first since Victorian times.

A Treasury source said the government could announce details of the plan as early as next week. City financial industry sources said details of the scheme were hammered out earlier this week when Prime Minister Gordon Brown met top executives of the big banks and Chancellor Alistair Darling is scheduled to meet mortgage lenders next week on his return from a visit to China.

The sources said the government is hoping that the move to release the tight credit markets would allow banks to pass on recent interest rate cuts to consumers.

The Bank's Monetary Policy Committee shaved a quarter-point off the cost of credit on April 10. However, banks have been reluctant to pass on the full value of rate cuts while exposed to substantial losses created by the sub-prime debacle.

The pound rose on the news that the Treasury plan will allow banks temporarily to swap mortgage-backed securities for government bonds to help free up their balance sheets and allow them to lend more to consumers.

However, that could mean that the Bank may not have to cut base rates as boldly as the markets want it to. This would help the pound because rate cuts undermine its value against other currencies.

The UK scheme to ease conditions in the mortgage market appears to be similar to a plan announced by the US Federal Reserve last month to stem the sub-prime mortgage crisis.

"It should mean that some of those (banking) names become counterparties again rather than just names banks don't want to lend to," said Jason Simpson, a strategist at Dutch banking group ABN.

"Libor (London interbank lending rate) is a couple of basis points lower, so it's clearly already having a beneficial impact," Simpson said. Three-month sterling Libor eased to 5.90625% from 5.92438%.

However, City financial market analysts remain sceptical that the plan will fix the credit crisis. "It clearly alleviates the pressure but, if you look at what has happened in the United States and Europe, you can see that there is still a lot of tension in money markets. It doesn't solve everything," said UBS credit strategist Geraud Charpin.

News of the UK plan lifted sterling and boosted banking shares that have been battered by the credit squeeze. The euro fell to around 80.40p, well down on Wednesday's high of about 80.88p. Against the greenback, the pound climbed to $1.9771 from $1.9708.

The euro hit an all-time high for the second day running against the ailing dollar, then fell back after a top European official said the single currency was heading in an "undesirable" direction. The euro hit $1.5982 in European trading, sending it past its previous high of $1.5978, set on Wednesday.

In the London share market, Barclays, Royal Bank of Scotland and Lloyds TSB advanced by more than 2%.

As talk of the scheme circulated around the City, the UK's biggest housebuilder warned of worsening market conditions as buyers are squeezed out by dearer mortgage deals.

Taylor Wimpey said orders since January were 26% below last year, with trading falling off since March's full-year results as investors and first-time buyers face particular difficulties.

The group, which sells homes under brands including George Wimpey and Bryant Homes, said: "We anticipate that the current subdued conditions will continue, with interest rates and mortgage availability being key determinants of customer confidence."