Much fuss surrounds the loss of the UK economy's 'AAA' status, writes Paul Coleman.
In late February, ratings agency Moody's downgraded the UK to 'Aa1'. Meanwhile, the Bank of England's continued its search for new ways to lubricate the UK's banking and financial services sector.
Outgoing Bank of England governor, Mervyn King, sought to 'Quantitatively Ease' (QE) another £25 billion into the sector. But King's colleagues voted him down.
The BoE had already created £375bn of 'new money' to buy government bonds and other assets from banks. Trouble is, the banks have stashed this new income, helping to recapitalise themselves, stabilise their own balance sheets and keep bankers' bonuses flowing.
Unwittingly - perhaps - QE has starved the 'real economy', especially businesses in need of loans to bridge cashflow gaps and start-ups needing investment.
So, the UK central bank revealed its next ploy to prod the financial sector towards more generous lending - 'swap lines'.
Buy Renminbi
King visited People's Bank of China governor Zhou Xiaochuan in Beijing to cement a proposed three-year 'swap line' agreement that would allow the PBoC to print UK pounds. UK importers using China's renminbi currency to pay Chinese suppliers could enjoy discounts; and, UK banks could offer investors renminbi.
But the main thrust of the deal means the City of London's financial sector could earn extra revenue - and personal bonuses, no doubt - as a renminbi 'offshore trading hub'.
Way to go though; renminbi trades account for only one per cent of the world's $4 trillion daily currency transactions.
But King and the Bank of England calculate, if that percentage increases, the City of London ought to benefit as it enjoys over 35% of the world's daily currency trade flows.
Big question though: if renminbi trades do boost the City, will the 'real economy' benefit too?
Paul Coleman, London Intelligence, February 2013
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