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Government throws a lifeline to lenders

Banks and other financial institutions providing loans for retail car buyers believe the Government’s “bonds for mortgages” plan could avoid a second-half sales slump.

Concern intensified during quarter one despite higher than expected registrations of news cars.

Dealers said their worry was that high levels of incentives to achieve the totals could not be sustained throughout 2008.

Now there is encouragement for the industry.

Analysts say the Bank of England’s idea to advance £50 billion or more to mortgage providers could revive the UK’s flagging economy.

The Bank of England cut base rate to 5% to help reduce the danger of a recession.

Plunging home values and tightening restrictions on mortgages have brought a direct threat to car sales.

Lenders have been reluctant to comment on the financial squeeze but a spokesman for one said: “Large numbers of people thinking of buying a car this year will have been changing their minds.

“The inclination is to stay put financially and see what happens.

“The retail market is always among the first to feel the effects of that sort of thinking.”

Chancellor Alistair Darling has backed the Bank of England rescue plan which, some analysts believe, could be extended to £100 billion in swapping risky mortgage debts for financial certainty.

Darling said there was “every chance” the UK’s financial crisis would get worse without the intervention.

The bank’s decision follows similar support for the economy by the Federal Reserve in the US and the European Central Bank.

It was described in the City as the bank’s biggest U-turn in its 300-year history.

The effects of the Bank of England’s rescue will be seen over the coming months.

High street banks competing with specialist automotive lenders will not be given full value by the Bank of England and will have to repay their debts.

Many though see the rescue as unfair because bad management decisions on lending are being resolved with “state aid”.

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