A whole new world? - Financial indicator
Over the past few weeks the crisis in the financial sector has increased in intensity and become broader in its impact. As confidence has fallen away, so the willingness of banks to lend to each other has faded and as a result the liquidity essential to oil the financial system simply stopped.
The outcome has been a period which saw a level of change in the financial landscape that would have been unimaginable a few months before. Forced mergers, government rescues and bankruptcies have convinced the authorities in the US and UK that piecemeal support was failing and that a comprehensive approach was required.
In the UK this has taken the form of a three-tier support programme for the major banks. There is a massive expansion of the amount available for short-term borrowings, an offer to provide additional capital and a scheme to guarantee debts. Interest rates have been cut, more falls are expected shortly.
These measures should stabilise the banking system but they will not prevent a necessary and substantial reduction in the amount of credit available in the economy. As credit is withdrawn, it will exacerbate the cyclical downturn in the economy and push the UK into recession.
These events will have a profound effect on the charity sector. On one level we should expect to see an increased focus on governance – we are entering a period when prudence will be associated with rewards rather than costs. The recession will reduce income flows; because consumer discretionary income will fall and because legacies, of property and investments, will be worth less. This is an environment in which interest rates will fall, reducing substantially the returns on cash investments. Even now it is too early to say that the situation is stable, trustees should review critically their reserves policy and their long term investment strategy.
Author: John Kelly
John Kelly is head of client investment at CCLA.
There are no comments on this article. Be the first to comment.