By Gordon Rayner, Chief Reporter
The financial crisis engulfing the British economy has lurched to a new low as £51 billion was wiped off the value of the country’s top companies.
On a chaotic day in the City, the pound suffered its worst one-day fall since Black Wednesday in 1992 amidst fears of a growing global recession.
As the stock market was hit by the shockwaves from America’s latest corporate meltdown, experts have warned that Britain is heading for its worst financial crisis in decades.
Their bleak prediction came as:
• Britain’s biggest mortgage lender, Halifax Bank of Scotland, lost 13 per cent of its value amid fears that its profits will be severely affected by the global credit crunch.
• Both Barclays and Royal Bank of Scotland had nine per cent wiped off their share price as the FTSE 100 index plunged by almost four per cent to a two year low.
• Fears grew that another major investment bank could be in serious trouble following the near collapse of Bear Stearns
The Bank of England pumped £5 billion into the money markets in an attempt to restore confidence in the banking system.
However, it’s intervention was not enough to prevent alarm spreading through the economy, with predictions that the worst is still to come.
As well as devaluing the share holdings of millions of ordinary investors, the 3.9 per cent plunge in the FTSE-100 index has serious implications for pension funds.
The slump was triggered by the fire sale of the US investment bank Bear Stearns over the weekend, which was snapped up by its rival JP Morgan Chase for just £116 million on Sunday – less than one per cent of what it was worth a year ago.
Bear Stearns, the ninth-biggest investment bank in the world, had been on the brink of collapse because of massive losses as a result of the sub-prime mortgage crisis, and there are now fears that other banking giants could also be in serious trouble.
The Prime Minister, Gordon Brown, promised to take “whatever action is necessary” to maintain economic stability.
But many City veterans said the UK is heading for its worst financial crisis in ‘living memory’.
Terry Smith, chief executive of Tullett Prebon, a specialist broker in the City, said: “I have been working in finance in the City and worldwide for 34 years and I have never seen anything like this.
“I don’t think anybody alive has seen events of this seriousness and magnitude affecting the financial markets.”
David Buick of the spread betting firm Cantor Index said: “No one in living memory has ever seen a banking crisis like this. I have worked in the Square Mile for 46 years and the outlook has never looked as bleak.”
The turmoil in the Square Mile had immediate knock-on effects for homeowners, with Halifax, the country’s largest mortgage lender, increasing the rates on some of its tracker-rate mortgages by as much as 0.3 percentage points, with some fixed-rate deals also going up.
Meanwhile, Scottish Widows pulled all of its two and three-year fixed-rate mortgages and all of its buy-to-let range in response to the uncertainty in the markets.
It also emerged that three million homeowners face an increase of up to £300 a month in their mortgage bill as they have to take out new home loans at a much higher interest rate than when they were first arranged.
Families across Britain are already suffering from the effects of the credit crunch, which has seen household bills steadily increase since last summer.
The Bank of England’s £5 billion intervention, the first such cash injection since the credit crunch first began to bite six months ago, was aimed at easing a sudden freeze in overnight lending between banks brought on by the Bear Stearns sell-off.
But the move had limited impact, as banks had asked for five times as much money to be pumped into the system.
Sterling dropped almost two per cent against a group of other leading currencies – its worst fall since being ejected from the Exchange Rate Mechanism on Black Wednesday in 1992, and its lowest level since January 1997.
The credit crunch has now seen the value of Britain’s top 100 companies fall by nearly 20 per cent since June last year.
In addition the stock market slump wiped £8 billion off the value of the country’s 200 biggest defined benefit pension funds, which include final salary schemes.
The collective funds fell from a surplus of £15 billion at the end of Friday to a surplus of £7 billion at the close of trading.
Defined benefit schemes guarantee the size of an employee’s pension when they retire, meaning the holders of such pensions will not be directly affected, but there were warnings that other pension holders could be badly hit.
Anyone with a pension which requires them to use their pension pot to buy an annuity could see the size of their pension fund severely depleted by the stock market losses, experts predicted, and some may end up having to postpone their retirement as a result.
Oil prices also hit a new record $112 per barrel as fears over the state of the US economy grew and the dollar weakened to a record low of $1.59 against the Euro.
The US Federal Reserve had tried to stave off the worst of the crisis by cutting the rate at which it lends to other banks by 0.25 per cent, and set up a new lending facility to give banks short-term cash, which was praised by President Bush as “strong, decisive action”.
But the rate cut only appeared to have fuelled fears that other banks are in trouble. Sandy Chen, a banking analyst at Panmure Gordon, said: “We interpret this as a clear indicator that other firms may be vulnerable.”
David Jones, chief markets strategist at IG Index, said: “This just demonstrates the nerves which are still out there and I don’t think we’ve seen the worst of it yet. Every time we think we have, we get another bolt from the blue.”
The slump in the value of bank shares was fuelled by fears that Bear Stearns may not be the last bank teetering on the brink of collapse.
Edmund Shing, a strategist for BNP Paribas, said: “Everyone is asking: Who’s next? Is there a Bear Stearns in Europe?”