In an interview given to the Daily Telegraph, Mervyn King has hit out at banks again warning that Britain is in danger of experiencing another financial crisis unless there is commitment to fundamental reform of the banking sector.

King said that “imbalances” in the banking system hadn’t been resolved & were “beginning to grow again”.

During the interview he once again criticised the culture of short-term profits and bonuses in the banking system, suggesting that traditional manufacturing industries had a more “moral” way of operating.

“They care deeply about their workforce, about their customers and, above all, are proud of their products,” he said.

“[With the banks] there isn’t that sense of longer-term relationships relationships [hence the demise of the local bank manager]. There’s a different attitude towards customers. Small and medium firms really notice this: they miss the people they know.

“If it’s possible [for financial services firms] to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable [to the banks].”

The governor argued that good businesses “keep a clear vision of who their customers are and are run by people who don’t think they should simply maximise profits next week”.

King’s comments have been seen as a warning to the chancellor - George Osborne. The government is currently looking at whether to make high street banks sell off their investment banking arms – a plan which Osborne is thought to oppose.

Angela Knight, chief executive of the British Bankers’ Association, disagreed with King’s comments.

“The banking industry recognises that some of its number got it badly wrong during the crisis. Since then the industry has reformed radically,” she said.

“We work closely with our customers and in doing so have created one of the largest financial centres in the world and a great contributor to the British economy. We achieved this together by doing our business well – not by doing it badly.

“This is a responsible industry which believes in working with its customers of all shapes and types.”

At the Scottish Liberal Democrat spring conference in Perth Nick Clegg - the deputy prime minister - seemed to resonate with King’s comments “I understand why people are angry when they hear about the super-sized salaries and bumper bonuses awarded to top bankers,” Clegg said.

“I am too. I agree with Mervyn King today that the job of making our banks safe and responsible is not yet complete.”

Mervyn King – the governor of the Bank of England – has always expressed his opinion regarding the Bankers’ role in the recent financial crisis.

Giving evidence to the House of Commons Treasury committee, King once again risked the wrath of the financial services sector as he blamed them for the necessity of the government’s planned spending cuts. He said that people who had lost their jobs & businesses as a result of the crisis had every reason to be angry & he was surprised that there wasn’t more anger being expressed by the public.

“The price of this financial crisis is being borne by people who absolutely did not cause it,” he said. “Now is the period when the cost is being paid, I’m surprised that the degree of public anger has not been greater than it has.”

Questioned regarding lending by the banks to the economy he responded: “The figures are clear — the banks are delivering a negative volume of net lending. Credit conditions have improved for big companies, but there’s little sign that the situation has improved for small and medium-sized firms. I understand why the people running those companies still feel under great pressure.”

During the hearing it was evident that it is the opinion of the members of the monetary policy committee of the Bank of England – the body responsible for setting interest rates - that the crisis will have a long lasting impact for the UK economy.

Asked by one MP when living standards would recover King responded by saying: “The research makes it clear that the impact of these crises lasts for many years. It is not like an ordinary recession, where you lose output and get it back quickly. We may not get the lost output back for very many years, if ever.”

King also said that while a “squeeze on living standards is inevitable, that the distribution of the pain is a political choice”.

When questioned on inflation he King once again stated that raising interest rates as a gesture of the Bank of England’s anti-inflation resolve would be self-defeating.

As the session came to an end King announced that it was the 20th anniversary of his joining the Bank of England & that he could never have imagined the events that have occurred in Britain over the last few years. He concluded by saying, “I don’t intend to leave until we have persuaded this committee that we have a framework in place to ensure that such a crisis cannot happen again.”

In a sharper than expected fall its been announced that the UK economy shrank by 0.6% in the final quarter of 2010

The revision was said to be due to worse than expected performances from industry & service sector firms which fell by 0.7%. Consumer spending also fell & it was only the higher levels of government spending that balanced the shrinking economy by contributing growth at a rate of 0.7%. The Office for National Statistics has continued to maintain that 0.5%of the decline was due to the harsh weather conditions in December – the coldest on record.

The figures are particularly concerning given the huge cuts in government spending which are about to be implemented.

The shadow chancellor - Ed Balls – criticized the government’s plans to cut the deficit: “2011 should be the year when the British economy grows strongly and the recovery is secured. Yet the early signs are that the Tory-led government’s reckless decision to abandon Labour’s plan to halve the deficit over four years has seen the economy take a turn for the worse.

“We now face the worst of all worlds – unemployment and inflation both rising, growth stalled and consumer confidence collapsed. And this is before the government’s extreme fiscal tightening really starts to bite.”

Brendan Barber – general secretary of the TUC - said: “The government’s hope of an upwards revision of growth has been dashed. It’s time to wake up and smell an economy in big trouble. We need a plan B that doesn’t send it over the edge with deep rapid spending cuts.”

Despite the many concerns expressed, the treasury reiterated its determination to tackle the budget deficit, a spokesman for the Treasury saying: “The chancellor said that the fourth-quarter growth figures were disappointing and today’s revision doesn’t change that fact. It also doesn’t change the need to deal with the nation’s credit card – the country is borrowing more this year than is spent on the entire NHS.”

The new figures once again draw attention to the duality of issues facing the monetary policy committee of the Bank of England over interest rates. It is now clear from the minutes that three members voted for higher rates at February’s meeting, with one member calling for more quantative easing.

Vicky Redwood - senior UK economist at Capital Economics – said, “The slight downward revision to UK GDP might give the more hawkishly inclined members of the MPC reason to pause for thought,”

The projected rate increase discussed last week moved closer today with the governor of the Bank of England - Mervyn King - hinting that an early rise could be in the offing.

The latest inflation figures confirm that inflation rose to 4% in January – twice the Bank of England’s target rate & the highest annual rate for two years & it is under increasing pressure to raise borrowing costs thereby maintaining its credibility to fight inflation, despite the faltering recovery of the economy.

Mervyn King has confirmed in his mandatory letter to the chancellor – George Osborne – that at the meeting of the monetary policy committee last week to determine interest rates, its members were deeply divided as to whether or not there should be an increase saying, “there are real differences of view within the committee”. He accounted for the excessive rise in inflation by citing the increase in VAT rates to 20% in January, combined with the significant increase in the price of commodities – particularly fuel which rose by 4.4% between December & January – as well as the weak pound. King also wrote, “The MPC judges that attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term,”

King’s comments have prompted economists to revise their predictions of when interest rates would start to increase, with those who had previously forecast August & November as starting points suggesting this as more likely to be in May in line with recent market predictions. Ross Walker, UK economist at Royal Bank of Scotland said, “I don’t think anybody believes the economy has returned to rude health, but [policymakers] recognize that inflation is higher than they forecast and that people are increasingly questioning their anti-inflation credibility.

“It’s a very complicated outlook but it’s possible they will raise [rates] in March. If it’s a precautionary move they could follow it up with one or two quarter-point hikes later in the year.”

Not long ago King cautioned that families were in danger of being challenged by the biggest financial pressures since the 1920s, with inflation-adjusted wages having fallen over the past six years.

In his response to King’s letter the chancellor acknowledged King’s comments saying: ‘I recognize that commodity price rises have been a key driver of recent UK inflation. High and volatile commodity prices are also a global concern. That is why we are taking steps, including in the G20, to make commodity markets work better, ensure we have robust analysis of the drivers of prices, and tackle the longer term drivers of increased demand for energy and supply constraints in food markets.’

The Bank of England has kept its base rate at 0.5% for the 23rd month amid fears that a rise was imminent.

Many had thought interest rates might rise because of the continuing escalation in the rate of inflation, with economists estimating the likelihood of a rise at 20%. Charles Bean – deputy governor of the Bank of England said last week that the MPC may have no choice but to raise the cost of borrowing if food & commodity prices continued to rise at their current rate.

The Monetary Policy Committee (MPC) has an inflation target of 2% & it is expected that figures due out next week will confirm that inflation went above 4% in January with the possibility of it approaching 5% before the summer. For some time now one of the members of the MPC – Andrew Sentence – has been urging the committee to raise rates to pre-empt businesses from raising prices & workers from making increased wage demands which could lead to inflation becoming entrenched. The newest recruit to the committee – Martin Weale – last month supported Sentence in urging the committee to a rise in interest rates to 1%. It is thought likely that other members may have joined them when voting on this recent decision took place.

The counter argument to raising interest rates, & one strongly put forward by Mervyn King – Governor of the Bank of England – is that to do so would weaken the already faltering economic recovery from the recent recession. He feels that even a small rise in interest rates would be detrimental to economic recovery at a time when both businesses & homeowners require cheap borrowing & is bent on keeping interest rates low. He points out that it is anticipated that the rapid rise in food & commodity prices will ease off by next year & states that much of the current inflation is due to the VAT hike to 20%

Shortly after the decision to maintain current interest rates, the latest estimates for growth in January confirmed that the UK economy is still very weak. Its recovery is also in jeopardy due to the announced government spending cuts.

It continues to remain unclear when interest rates will eventually begin to rise. Some analysts predict this may be as early as May with the MPC having no choice but to attempt to combat inflation regardless of their concerns for the economy. Many economists such as Stephen Boyle, head of RBS group economics suggest August as the starting point & others  even later in the year.

One economist – Roger Bootle – adviser to the accounting firm Deloitte put an even longer time scale on the move: ‘Given the huge amount of uncertainty about the underlying strength of both economic growth and inflation, the committee would be foolish to rush into a premature tightening of policy. Indeed, as the fog clears, it should become clear that interest rates need to remain at an ultra-low level indefinitely,”

The days when world banks would pump their money into the thriving Irish economy seem long gone.

Growing so rapidly on the back of low business taxes between 1995 and 2007, overseas banks saw money to be made and seized at the opportunity.

Such was the national success, a property boom erupted just after of this period of massive growth which crumbled soon after it began.

The Irish government has already bailed out the banks for approximately £39bn to accommodate the debt left by the failed property market, resulting in near-nationalisation of the lenders.

With such a massive bailout already hitting the country hard, analysts fear that the Republic is far from safe waters.

Eurozone finance ministers revealed that  ”further reforms and stabilisation measures may be appropriate [for the Republic of Ireland's banks].”

The overseas banks that offered such high levels of finance, and in turn, helped to worsen the boom and bust situation in Ireland, may have to bear some of the brunt of the losses.

Figures collated by the Bank for International Settlements reveal that approximately £107bn is still tied up in Irish banks, with German and British banks owed the most; between £25bn and £28bn each.

The budget deficit in Ireland is predicted to be at 32% of GDP and experts are concerned that propping up the banking sector may be a step too far.

Some have suggested that Ireland’s government may be better off if it passes some of the debt back to the European banks.

Prime Minister of the Republic of Ireland, Brian Cowen, has already rejected this option, due to the Irish reliance on outside investment.

If Ireland passes the debt back to the European banks, it could cause greater trouble in years to come, as investment may not be so forthcoming.

David Bulk, analyst at BGC Partners, believes that Irelands government may need to pursue option 3, an emergency bail-out by the EU.

Such a move would come at a price, however, as economic decisions would have to be handed over to Brussels.

“Irish banks are already having huge problems raising funds [from overseas],” Mr Bulk explained.

“Default on their overseas loans and no-one will give them even two bob again. And when the Irish government instead looks at raising taxes, it has very little room in which to manoeuvre.

“For example, they can’t touch their famed 12.5% corporation tax. Otherwise all the overseas firms will simply say ‘thanks very much, Ireland today, Poland tomorrow’.

“I’m hearing they’ll introduce Ireland’s first [household] property tax, but that isn’t going to raise enough for the government.”

Bank of Ireland Global Markets’ chief economist, Daniel McLaughlin, has a somewhat more positive outlook on the situation.

“The interesting thing about all this is that Ireland produced a five-year fiscal plan in 2009, which was accepted by the EU, and we haven’t deviated from that,” Mr McLaughlin revealed.

“So it is not as if Ireland has done something at variance with what the EU required. That may be puzzling a lot of people.

“The difference [between the Irish Republic and the UK] is that we are a tiny, and as a result 85% of the government deficit is funded from abroad.

“So taxpayers will have to pick up the bill for everything, it is hard to disagree with that.”

Mr Bulk is concerned that Irish taxpayers will find it near-impossible to burden both debts.

“The Irish government is chancing its arm, thinking that things will improve and they won’t need the EU bail-out.

“I say to them, Rumpelstiltskin, in your dreams.”

Millions of UK households face financial peril if interest rates rise as expected.

Danny Gabay, the leading economist of Fathom Consulting, believes that if the country expects to fully recover from the recession, then the Bank of England needs to find a way of helping those who took out mortgages beyond their means.

The warning that, so called ‘zombie households’ may find their ‘fool’s paradise’ fall into financial disaster when the interest rates rise, is a fear that is mirrored by many of the leading UK economists.

Mr Gabay couldn’t put a figure on the amount at risk, but according to data collected by the Council of Mortgage Lenders, approximately three million homes will be in serious danger of repossession if interest rates increase by two per cent.

With rates currently at low levels, 1.3 million households are still struggling to cope with mortgage repayments, which eat into over 35% of their post tax income; a figure specified by the Financial Services Authority (FSA) at which a loan has become ‘unaffordable.’

“It is an extraordinary position to be in,” Mr Gabay revealed.

“Fixing government finances is important but is only part of the problem. The other, larger part, is fixing household finances, where in fact the crisis began.

“It is very politically convenient to believe that the crisis was caused by greedy bankers but nobody made people take out mortgages of five times their income. Lots and lots of people borrowed too much.”

This leaves a economists in a difficult position, as interest rates cannot be sustained at their lowest level in 300 years, but with so many borrowers unable to afford an increase, the Bank of England may need to postpone any adjustments for at least a year.

According to Mr Gabay, banks will be reluctant to see the interest rates rise, as they’ll be lumbered with crippling, bad loans.

If the government create a ‘bad bank’ to house all the bad loans, Mr Gabay believes this measure will relieve the difficult situation, as potentially writing-off big debts is causing a reluctance to lend.

“The solution we are suggesting will be very painful in the short term but if we face up to our debts we can move on,” Mr Gabay added.

“We are in a situation that I am very worried about.

“Too much money has been lent against assets which have fallen in value but those losses have not yet been fully recognised.

“We are being kept alive on a near-zero interest rate drip and we can’t move forward.”

David Blanchflower, formally of the monetary policy committee is fully behind Mr Gabay’s review of the current situation.

Mr Blanchflower said: “Anyone who thinks that rates should be raised now or in the next year or two is living on another planet.”

The threat to people living on the edge with their mortgage repayments is very real, according to Sukdhev Johal, reader in business policy at Royal Holloway, University of London.

“There are many people living in a fool’s paradise because of low interest rates,” Mr Johal stated.

“Everything is against people who have over-borrowed, including the threat of negative equity and rising unemployment. The only lifeline is low interest rates and if you take that away you could have properties coming on to the market in a fire sale.”

Work and Pensions Secretary, Iain Duncan-Smith has been condemned for his criticism of Merthyr Tydfil’s current state of employment.

His description of the Welsh town’s people as “static” has been lambasted by local MP for Merthyr and Rhymney, Dai Havard.

Mr Havard was deeply unimpressed that the Work and Pensions Secretary felt it necessary to suggest the towns-folk should get on a bus to find work, and rose to its defence, revealing that the people of Merthyr Tydfil worked in “all sorts” of places.

Whilst interviewed by BBC’s Newsnight, Mr Duncan-Smith revealed that the people of Merthyr Tydfil were unaware that they could take a one hour bus ride into Cardiff and find work there.

His comments are being likened to those of former Conservative, Norman Tebbitt’s famous “on his bike” speech; a similarity not missed by Mr Havard.

“The mask has slipped - Iain Duncan Smith represents Chingford as Norman Tebbitt did. They have a view of the world that doesn’t match reality,” Mr Havard pointed out.

“The issues don’t just include access to that work, it’s also about the quality of that work and its distribution.

“It’s not a case that the majority of the people of Merthyr Tydfil and Rhymney and the rest of the valleys are in some way feckless and not working.

“The people of Merthyr work in all sorts of different places. They commute to Bristol and all over the place. The whole of the population is denigrated and traduced by these sorts of statements. The difficultly of providing work is much more difficult than a slogan.”

Duncan-Smith is gaining support for his comments by some, even if they are fellow Conservatives.

Nick Ramsay, Conservative MP for Monmouth believes that Mr Duncan-Smith was right in the premise of his statement.

“What he was trying to say was that in a difficult economic situation, sometimes you might have to travel a bit further to find work than otherwise, I think that was right,” Mr Ramsay stated.

He continued: “Sadly, for many people the (travel) infrastructure isn’t there at the moment. That’s not a problem caused by the people of Merthyr, that’s a problem caused by previous administrations that have not allowed people the means to do what Iain Duncan Smith has suggested.”

Former Labour Treasury minister, Denzil Davies, is in favour of many of the Work and Pensions Secretary’s changes and decisions in the past, but felt he had over-stepped the mark on this occasion.

“I thought Iain Duncan Smith had once described himself as the quiet man of politics. I think he should stay quiet on this one.

“You can get on a bus and go from Llanelli to Swansea but the unemployment rate in Swansea is certainly as high - if not higher - than that in Llanelli. This is no way of trying to create jobs in Wales or across Britain.”

Encouraging the creation of more private sector jobs would be one of the hardest jobs for the coalition government, according to Conservative MP for Montgomeryshire, Glyn Davies.

“We have to make a concentrated effort if the government wants to replace public sector jobs with those in the private sector,” he declared.

“We’ve got to make a concentrated effort to help those areas which are most affected (across the UK).”

George Osborne has promised to see the spending cuts plan through, as it will “get us out of this stronger”.

He went on to confirm that the cabinet has reached an agreement in anticipation of the spending review on Wednesday, but failed to confirm or deny whether child benefits would be abolished for 16 to 19 year olds.

Mr Osborne clearly has support, however, as 35 of the UK’s leading business owners signed a letter to the Telegraph declaring their support for the spending cuts.

Bosses at BT, Asda, Microsoft UK, Next and several other national companies felt that delaying or watering down the debt reduction plans would be a “mistake”.

The letter states: ”The private sector should be more than capable of generating additional jobs to replace those lost in the public sector.”

The government intends to reduce the deficit by £85bn from £155bn over the next four years.

An 8% cut to the Ministry of Defence’s budget is also believed to have been tentatively agreed.

“We have to see this through,” Mr Osborne revealed.

“The priority has been to target waste and welfare, to invest in our healthcare, to have real increases in our school budgets and to invest in the things that are going to make our economy strong…

“We have got to make some tough decisions but the priority is healthcare, children’s education, early years provision - particularly for some of our poorest.”

He continued: ”Those things are actually going to get us out of this stronger and able to pay our way in the world.”

“Our plan is the plan that will restore credibility to the public finances.

“It is what the IMF, the OECD, international observers say is necessary. It is what British business says is necessary.

“So we have to see this through, and the course which I set in the Budget is the one that we have to stick to.

“People in this country know we were on the brink of bankruptcy, and if we are going to have growth and jobs in the future we have got to move this country into a place where people can invest with confidence.”

Liberal Democrat and Deputy Prime Minister Nick Clegg has spoken in defence of the coalition’s budget analysis.

The Institute of Fiscal Studies (IFS) criticised the budget for hitting poorer families harder and being “regressive,” but Clegg refused to accept the opinion which he deemed to be “by definition partial”.

The IFS has already questioned how ”progressive” the government really is.

In his visit to the Disasters Emergency Committee HQ in London, Mr Clegg revealed ”it does not include the things we want to do to get people off benefits and into work.”

Due to the recent restructuring of the benefit system, government cuts to will hit low-income families with children the hardest; losing out by approximately 5%.

The End Child Poverty campaign commissioned and helped to fund the think tank’s report, and fail to see the restructuring as a step forward.

“This government really needs to start matching what it’s saying about fairness and what it’s actually putting into practise with Budget decisions,” explained Fiona Weir, on behalf of the campaign group.

According to figures calculated by the IFS, those deepest affected will also be the poorest, who could lose out by up to £422 between the budget and April 2014.

The report reveals how richer groups will lose out more financially, however, those at the poorer end of the scale will feel the cuts the hardest.

“If you just look at who is receiving benefits then in a sense you don’t ask the most important question of all, which is how you can relieve poverty and make Britain fairer by getting people off benefits and into work,” Clegg explained, covering for David Cameron during his holiday.

The Treasury is fully behind the budget and gives full backing.

According to the Treasury, the IFS has made some glaring omissions in its analysis. Employment improvements as a result of the budget and pro-growth effects.

The FIS report came to some stark conclusions: “Once all of the benefit cuts are considered, the tax and benefit changes announced in the emergency Budget are clearly regressive as, on average, they hit the poorest households more than those in the upper middle of the income distribution in cash, let alone percentage, terms.”

Speaking on behalf of the FIS, James Browne said: “However, when you also include the measures that were pre-announced by Alistair Darling in previous Budgets and pre-Budget reports, the overall package does seem somewhat regressive, particularly within the bottom nine-tenths of the income distribution.”

Whilst discussing the matter, Alistair Darling stated: ”Just last week George Osborne told us that his Budget was ‘fair’.

“But it’s decisions, not warm words, that count. Today there’s conclusive evidence that far from being fair, the coalition has hit the poorest hardest, especially those with children.”