Britain threw its troubled banks their second multibillion-pound lifeline in three months on Monday and, with interest rates near zero, gave its central bank the green light to pump cash into the ailing economy.
The latest plan will see the government increase its stake in Royal Bank of Scotland (RBS) after the bank announced the biggest loss in British corporate history: £28-billion ($29,5-billion) in 2008.
Banks now will be able to insure themselves against losses on their riskiest assets. The government will also offer guarantees on their debt and set up a £50-billion fund to buy up high-quality securities such as corporate bonds, syndicated loans or paper issued under the credit guarantee scheme to get cash flowing freely again.
With figures this week expected to confirm the economy is now in recession for the first time since 1992, the government wants the multi-pronged package to kickstart lending to credit-starved consumers and companies.
”We have seen a global banking failure. There has got to be international action to deal with this,” Prime Minister Gordon Brown said at a news conference. ”Every economy has these problems and we have to be united in dealing with them.”
In the United States, one of President-elect Barack Obama’s first tasks when he takes office on Tuesday will be to figure out how the second half of a $700-billion bailout package can be administered so credit can flow again.
For Brown, the stakes could not be higher as an election is less than 18 months away. He won high praise for the country’s first bank bailout last October, which was emulated around the world, but a poll on Sunday showed his popularity waning again.
”What the government did the last time was supposed to work but it didn’t. Hopefully it will — it’s a lot of money for the taxpayer,” said David Peralta, a London shopkeeper.
Further nationalisation?
World stock markets cheered the bailout package but analysts were sceptical it would be enough to stop the rot of the worst financial crisis in living memory.
”The raft of economic measures announced by the government this morning are a significant step, but may not on their own be sufficient to get banks lending again,” said Vicky Redwood, an economist at Capital Economics.
”We still think that the government may eventually have to set state-decreed targets for the banks to lend, perhaps via further nationalisation.”
Bank shares were mixed following the sharp falls of last week while the pound and government bonds fell on the prospect of quantitative easing — literally boosting the money supply.
”So far there is quite a bit of confusion regarding the market response,” said Adrian Pankiw, a strategist at Henderson Global Investors.
”Government bonds have come off quite sharply but no one is certain whether this is a continuation of Friday’s sell-off or renewed weakness because the market thinks this will have to be financed through more issuance or a straight private sector for government bonds switch.”
Details scant
Others noted that details of the measures were scant.
”The scheme itself sounds like a step forward but there aren’t a lot of details on the terms and the fees,” said Simon Ward, chief economist at New Star Asset Management.
”The UK authorities have tended to apply quite penal terms and fees on their previous support measures compared with other countries, which has somewhat reduced their effectiveness, so that’s a possible concern,” Ward added.
As part of the latest UK package, lenders would have to identify their riskiest assets which they could then insure with the government for a fee. They would still be liable for initial losses but could at least put in a ceiling, boosting confidence.
It will also create a guarantee scheme for asset-backed securities starting in April that will build on the recommendations of a government-sponsored report late last year.
The Bank of England, meanwhile, gets a new £50-billion facility to buy high-quality assets and most strikingly will be able to use this framework to boost the money supply, so called quantitative easing, in order to boost the economy as it runs out of room on on interest rates.
The central bank cut interest rates to a record low of 1,5 percent this month and, like central banks around the world, has been looking at how it can ease monetary conditions once rates cannot fall any further. Brown said the BoE would give more details on Tuesday. – Reuters