Moody Councillors Set To Withdraw Funds

(Reuters) – COUNCILS STILL SMARTING FROM THE ICELANDIC BANK FIASCO are set to withdraw their funds from several British Building Societies.

The Daily Telegraph reports that, following the downgrading of some building societies by Moody’s last month, a number of local authorities are set to withdraw their funds when fixed term deposits mature.

The news comes just as the Centre for Economics and Business Research revised its previous forecast of a 40% drop in house prices, which the Moody’s downgrade was based upon, to just 28%.

The Council plans will undermine central Government policy to encourage lenders to increase the supply of credit — and contribute to a reduction in mortgage lending.

The Nationwide and Britannia will be unaffected.

EditorialFor all our sophistication and technology, Mankind has not progressed very far from needing to consult his gods to determine a best course of action. The temples are smaller these days, of course, with colourful screens and holy incantations emanating from standing stones of grey plastic connected by ley lines of electronic cables. Very little else has changed. We no longer consult the High Priestess: we interpret mathematical models; but these models do no more than analyze patterns in statistical data. It is rather like lying on your back and staring at the clouds. Pretty soon you will begin to see unicorns, lions, and bunny rabbits — but you are unlikely to mistake them for real creatures.

The danger is that we blindly believe any ‘Think Tank’ report to be fact; when the truth is that, whatever its content, it is all based on assumption. We should only place confidence in such reports if we agree with the assumptions it makes.

The latest industry figures, from the Nationwide, show a 20% fall in house prices from their peak in 2007, and current indications are that the slide is easing. Logic therefore suggests that the assumption of a 28% fall, from peak to trough, could well be right. But the slow-down in falling prices could be reversed if local councils start withdrawing their funds from Building Societies and create another mortgage famine.

Was Moody’s right to downgrade Building Societies based purely on assumption? The answer has to be ‘No.’ Particularly since none were exposed to the American sub-prime market. One also has to ask why Moodys did not downgrade other businesses, which would have been equally exposed to a crash in house prices of 40%. Why did they not further downgrade the banks; building firms and building suppliers? (To say nothing of firming-up the insurance industry whom would have benefitted from such a fall.)

Moody’s response was nothing more than a knee-jerk reaction to having maintained their A rating of the Icelandic Banks until their failure was imminent. But all it has done is to bring into question the criteria they apply when giving their ratings.

We could hope that councils would see sense and discard their withdrawal plans; but, given the Icelandic debacle, it is more likely that they will need instruction by government.

Let us hope that such advice is given quickly so we can return to commonsense…

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