Global markets shrinking as UK government and banks have problems from abroad

February 5th, 2009 by admin | Filed under Daily News, Recession, Retail, The Markets, UK Banks.

The European Union warned the US yesterday against plunging the world into depression by adopting a planned “Buy American” policy, intensifying fears of a trade war.

The EU threatened to retaliate if the US Congress went ahead with sweeping measures in its $800 billion (£554 billion) stimulus plan to restrict spending to American goods and services.

The EU Ambassador to Washington was reported as saying, that “history has shown us” where the closing of markets leads. This was regarded as a clear reference to the Great Depression, largely regarded as having been triggered by US protectionist laws.

Meanwhile a spokesman for the Prime Minister refused to condemn the “Buy American” clause. He would not say, however, whether Britain was lobbying the new Administration to drop the clause. In the meantime, on the only comment available, suspicions are that Mr. Brown does not want to join criticism of President Obama’s stimulus proposals, which he sees as vindicating his own, remaining, at least in public, in favour of President Obama’s decision to inject cash into the economy

The EU warnings came in letters to US political leaders in Congress, urging them to respect the decision taken by the G20, the world’s leading economic nations, in Washington last November to resist protectionism as a defence against the crisis. They are expected to meet again in London in April.

On the banking front, reports of increasing nervousness around depositing with Irish banks are gaining momentum. The Irish banks are currently offering some of the highest interest rates currently available online. However there are strong fears regarding the stability of country’s banking system, heightened by the news that deposits are no longer protected by the Financial Services Compensation Scheme (FSCS). Instead, all deposits are guaranteed by the Irish government.

Up until September 2008 , deposits held in Irish banks operating in the UK such as Allied Irish and Bank of Ireland, were protected under the umbrella of the FSCS, meaning that any compensation provided by the bank’s local protection scheme up to £50,000 was covered, with the UK government providing “top up ” security for any balances over that sum.

However when the Irish government decided to provide total protection for all of the moneys held in savings accounts by Irish banks, this top up” passport ” was no longer binding, leaving UK deposit account holders vulnerable, FSCS protection.

As a result, and despite the 3.4 percent interest rates available from the Irish banks under their fixed-rate bond paying 3.4 per cent, investor confidence in Irish banks is now falling. Financial analysts are unable to guarantee that the Irish government has the capacity to provide compensation in the event of an Irish bank failing.

All of the UK high street banks are covered by the FSCS, as well as foreign-based banks operating outside the European Economic Area (EEA) that do business in the UK, such as Indian-owned ICICI and Turkish Bank.