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Bank of America sees bad debt provisions mushroom

In what has turned out to be a sharp injection of reality into markets in the US and the UK, US banking giant Bank of America has announced profits of $4.2 billion in the first quarter of 2009 with a significant increase in bad debt provisions. The company has been forced to put aside $13 billion to cover credit losses causing a substantial pullback in the US financial sector.

Even the $4.2 billion profit announced for the first quarter is slightly misleading as after taking account of large one-off gains the figure was actually around breakeven. The suggestion by the Bank of America's chief executive that credit will become more expensive in the short term is also a sharp reminder to investors who were pinning their hopes on a short recession in the US and the UK.

As and when the US and UK economies finally recover there is no doubt that the last 18 months will have left a significant scar on many balance sheets and cause something of a drag on the eventual recovery in economies. As we have commented on a number of occasions, the recovery in the UK and US is very fragile and more hopes and could easily be knocked off course by announcements such as that made by Bank of America.

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