By David Thomas

LONDON (MNI) – The financial markets are now – in some important
respects – facing a more dangerous predicament than in 2008-09, Bank of
England Executive Director Markets Paul Fisher warns.

“Most people in financial markets have not lived through an episode
like this before,” Fisher told Market News in an interview.

While the situation is in “some ways not as bad” in terms of sheer
market stress, it is at the same time potentially “more dangerous”.

Back then governments had the leeway and a war chest available to
provide their economies with much-needed stimulus as well as to bailout
systemically key financial institutions – today that “sovereign backstop
is less clear”, he says.

As a member of the Bank of England’s new Financial Policy
Committee, Fisher warns of pain aplenty ahead –

“The policy out is going to be more difficult than it was in 2009,”
given the current position of the sovereigns.

The BOE has described the current financial market situation as
“exceptionally threatening”. Fisher says this phrase is simply straight
talking from the UK’s central bank, which will be well understood by
market participants.

He warns against over-egging the present modish pessimism.

“We have not seen the social deprivation associated with the Great
Depression”.

“We shouldn’t assume that this is Armageddon,” he adds.

That said, there is potential for things to “get a lot worse” and
the FPC would be in dereliction of its duty of it did not get that
important message out to the financial system, the markets and to
the wider public.

While recent public communications from the BOE about the dangers
emanating from the Eurozone have alarmed many people the central
bank’s message should be seen as an “objective, straight reading of what
the situation is” and not “scaremongering”.

But, responding to reports of feverish ‘contingency’ planning for a
possible Eurozone breakup by banks, Fisher says this is one area where
the FPC would not, and did not even need, to get involved, as the
Financial Services Authority was in the lead.

“I have been talking to market contacts over this last week and
they tell me they have had their lawyers looking at this for months.”

“They didn’t need us to tell them that they needed to do
contingency planning”.

The FPC has no easy or even straightforward choices in the current
situation. The committee would normally respond to the current
straitened economic and financial situation by telling banks they could
ease up on observing capital and liquidity rules, Fisher says.

“If the banks had been in a stronger capital and liquidity
position, this is what we would naturally want to do.”

The problem is, they aren’t.

Sure, UK banks are more robust than they were 12-18 months ago and
in relation to some banks in the euro area but “they are still not
where we would have liked them to be,” Fisher adds.

And because things could still get worse, the FPC is advising the
banks to continue to focus on capital building – but in a “responsible”
way. “Responsible” in this context means not stopping new lending. Asset
sales aren’t so bad if there are ready buyers in the wings.

UK lending is dominated by just six banks, he points out, and they
have to realise that there will be a serious macro-level impact to any
decisions they take in the present poor economic conjuncture.

Fisher dismisses talk of “evil speculators” doing their wicked best
to financially undermine the governments of the Eurozone’s periphery.

The simple lesson is – governments need investors to hold their
debt and investors won’t do that if they don’t think they will get their
money back.

The BOE has said repeatedly that the Eurozone crisis is the biggest
economic and financial risk the UK faces. As for the latest efforts to
shore up the situation at the December 9 EU summit in Brussels, he notes
that the markets seem to have taken the outcome in their stride.

“The market view is we have been here before”.

Unlike recent summits, there was no “relief rally” on the fact that
there had at least been an agreement and, by the same token, “we didn’t
get the fall back after”.

But, the markets did get some of what they wanted from EU leaders,
he says.

They wanted a long-term solution in terms of a fiscal union –
markets got some of that – but the agreement on that has yet to be
drafted and “nobody knows the details”.

–London newsroom 0044 20 7862 7492; email: dthomas@marketnews.com

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