At that time, there was a lack of confidence in both monetary policy and fiscal policy. The costs proved to be substantial. Unemployment increased more in line with that experienced in some European countries today. However, when the financial crisis reached Norway in 2008, our country was in a particularly favourable position. A long period of substantial petroleum revenues – and a clear savings plan – had provided us with considerable leeway. As a result, fiscal policy could also be put to effective use during the downturn. The guidelines stipulate that the government budget deficit shall over time be equivalent to 4 per cent of the capital in the Government Pension Fund Global, – more in bad times, less in good times. Chart 8: Fiscal policy. Change in the non-oil budget surplus from 2008 till 2010. In billions of NOK A fall in output and employment automatically leads to reduced taxes while unemployment benefits increase. An important aspect of the fiscal rule is that it includes a mechanism whereby these effects also translate into a weaker budget balance. These automatic stabilisers generated strong impulses through 2009 and 2010. The decline in output and employment automatically triggered a reduction in taxes and an increase in transfers of more than NOK 40 billion for the two years as a whole to the benefit of households and firms. The increase in the Government Pension Fund Global provided, under the fiscal rule, room for a NOK 25 billion increase in spending.
That group is being chaired by Stuart Siddall, Chief Executive of the ACT, and is due to issue a report in the next few months. Syndicated loans and asset backed securities A substantial part of lending to larger UK corporates is normally undertaken via syndicated loans. The Bank investigated whether there was a market failure or illiquidity premium in this market which could be addressed by making APF purchases. After a thorough investigation, the Bank concluded that what was needed was more large-scale bank funding, particularly to replace the foreign bank lenders who had been withdrawing from the UK market. But the appropriate way to address that was through the various schemes in place to support the banks. Similarly, the Bank investigated the state of securitisation markets. Here, there were two problems. First, many investors were extremely wary of buying mortgage-backed securities and similar products, because the crisis had raised uncertainty over their underlying risk characteristics. At the same time there was a huge outstanding stock of such assets already issued, which would swamp any operation aimed at improving liquidity. In the United States the authorities have undertaken substantial purchases of mortgage-backed securities, and funded the purchase of other securitised assets. It is not clear yet whether those markets will be self-sustainable once official intervention comes to an end. In the United Kingdom, we have made a range of ABS, including mortgage backed securities, eligible collateral in the Bank’s permanent liquidity insurance facilities as well as in the SLS.