2012.06.11 19:05:06 Fitch Downgrades Two Spanish Banks

--Posen reprises call for BOE to buy small business loans to spur lending

--Says latest round of QE has been less effective than hoped in
improving credit conditions


(Adds quotes and detail from 2nd paragraph.)


By Jason Douglas


LONDON--The Bank of England should buy bundles of small-business loans
from commercial lenders to boost the supply of credit and end an
"investors' strike" that is holding back the economy, BOE rate-setter
Adam Posen said Monday.

In a reprise of an earlier appeal to policy makers to do more to shore
up global growth, Posen said major central banks throughout the world
should engage in a fresh round of stimulus targeted at parts of their
economies most in need of public-sector help.

In the U.S., that is the residential mortgage market, while in the
U.K., small businesses most need access to credit, Mr. Posen said,
according to a text of his speech, delivered at a conference.

"The critical gap to be addressed is in lending to small and medium
enterprises, and new businesses," he said.

His proposal is aimed at spurring greater bank lending to companies
who complain they are starved of credit by effectively guaranteeing
lenders that the central bank will buy their small business loans. The
idea was first floated in September, but met resistance from BOE
Governor Mervyn King, who said central bankers shouldn't put public
money at risk by buying loans, some of which could turn sour. Such a
mission should only be undertaken by elected officials, King said.

The BOE has bought and sold small amounts of corporate bonds and other
assets in the past few years but only to ensure specific markets are
functioning smoothly. The vast bulk of its GBP325 billion stimulus
program has been spent acquiring U.K. government bonds, known as
gilts.

A different form of stimulus, or quantitative easing, is now needed,
as the BOE's latest round of gilt purchases have been less effective
than hoped in lowering the costs of borrowing and boosting the supply
of credit to firms, Mr. Posen said.

"We are trying to give away free money and no one if doing much of
anything with it," he said. Mr. Posen said investors are too
risk-averse, hurting business investment in the U.K. and thereby
hindering recovery.

"We are at risk of the reluctance to invest becoming a self-fulfilling
prophecy, as opposed to investment leading us into recovery as in
normal situations. Additional expansionary monetary policy should be
effective in breaking this cycle," Mr. Posen said.

Mr. Posen, who steps down from the Monetary Policy Committee at the
end of August to head the Petersen Institute for International
Economics in Washington, has been a consistent advocate of further
central bank stimulus over the past few years but surprised many by
dropping his call for more asset purchases in April and May.

Rate-setters agreed last week at their June policy meeting to leave
unchanged both the central bank's key interest rate, at a record low
of 0.5%, and the GBP325 billion stock of assets purchased under the
bank's stimulus program.


Write to Jason Douglas at jason.douglas@dowjones.com


(END) Dow Jones Newswires

June 11, 2012 13:08 ET (17:08 GMT)