/ 19 January 2009

UK to unveil bank rescue, Obama to tweak bailout

Britain is set to announce its second bank rescue plan on Monday and the incoming US administration said it will make its bailout funds work harder to get credit flowing again to cash-starved consumers and companies.

The global credit crisis that has pushed the world’s major economies into recession and top banks and manufacturers deep into the red is also claiming political casualties with reports out of Seoul that several economic ministers will get the sack.

Britain, which has already pumped £37-billion into its banks, is poised to guarantee banks’ ”toxic debt” of up to £200-billion ($296-billion) and allow them to insure against steep losses in the second rescue in four months, sources said.

The plan aims to prevent the lending drought from driving the world’s fifth-biggest economy into an ever deeper slump. One forecasting group said the economy was set to shrink 2,7% this year, the biggest annual contraction since the end of World War II.

Sources close to the talks between the Treasury and bankers told Reuters the rescue would also see the government boost its stake in Royal Bank of Scotland.

In Washington, a senior adviser to Barack Obama, who will be sworn in as president on Tuesday, said the new team would soon change the way the second half of the $700-billion bank rescue scheme was run to make it more effective.

”We want to see credit flowing again. We don’t want them to sit on any money that they get from taxpayers,” the adviser, David Axelrod, said on Sunday on ABC’s This Week news programme.

The US economy has already been declared in recession.

British figures later this week are expected to confirm what is widely accepted, that it also has slipped into a recession, its first since 1992. Prime Minister Gordon Brown hopes that the latest bank rescue plan will help limit the damage.

”The essential problem is the resumption of lending,” Brown told reporters on a trip to Egypt.

High stakes
Brown is playing for high political stakes. He was applauded for his initial response to the financial crisis, but a poll published on Sunday showed his party falling further behind the opposition Conservatives, with the next election due by mid-2010.

Stakes are also high in South Korea, which faces the threat of its first recession since the Asian financial crisis 11 years ago.

President Lee Myung-bak, who has repeatedly challenged his Cabinet to do more to prop up Asia’s fourth-largest economy, is due to replace five economic ministers, including the finance minister, media reports said.

The president’s office confirmed five ministers would be replaced, but declined to elaborate.

The worst financial crisis in eight decades has already felled some of the banking industry’s biggest names, and shares in Barclays, one of Britain’s biggest banks, crashed 25% on Friday.

Swiss banking giants UBS and Credit Suisse were both expected to cut thousands more jobs this year, possibly by about 5 000 each, a Swiss newspaper reported on Sunday.

A spokesperson for UBS declined to comment on the report and a Credit Suisse spokesperson said the bank had no plans to cut headcount further.

In yet another sign that no economy was sheltered from the global financial tsunami, Denmark offered to inject about $18-billion in public funds into its banks. Singapore, hit-hard by the slump in global trade, is considering dipping into its hefty foreign reserves to pull its economy out of recession, a local newspaper reported on Monday.

Worries that the haemorrhage brought by the meltdown of the US subprime mortgage market in the summer of 2007 was far from over drove stock markets to one-month lows last week, snapping a modest recovery from rock bottom levels hit late last year.

Aggresive action
Economic figures due this week will do little to dispel the gloom.

Japan is expected to report on Thursday a record 30% drop in exports, while China is set to show its economy grew at its slowest rate in nearly a decade in the fourth quarter.

But stocks have clawed back after the US government injected a further $20-billion into Bank of America on Friday and Britain and the United States promised more aggressive action to revive their economies.

In Washington, one of the options discussed by the US Federal Reserve, Treasury and Federal Deposit Insurance Corporation is a government-run ”aggregator bank” that would absorb toxic debt weighing down banks’ balance sheets.

Obama is also working with lawmakers to launch by mid-February a $825-billion fiscal stimulus plan.

In Britain, the new package — to be unveiled before markets open at 8am GMT on Monday — would see the government boosting its stake in RBS to nearly 70% from 58% by swapping up to £5-billion of preference shares for ordinary shares.

RBS will unveil up to £25-billion of losses for 2008 on Monday due to bad debts and writing off goodwill on its acquisition of ABN AMRO, the Daily Telegraph reported, calling it the ”biggest loss in UK history”.

RBS declined to comment on the report. – Reuters