Britain announces 2nd banking rescue plan
Monday January 19, 10:20 am ET
By David Stringer, Associated Press Writer
UK announces 2nd banking rescue plan, offering insurance in hope of freeing credit market
London's stock market, however, was spooked by fears that the latest government move was a step toward full nationalization of one or more banks. Fears focused on the Royal Bank of Scotland, which disclosed that it is likely to report a record full year loss -- its shares were down 66 percent by early afternoon.
"There is a great deal of uncertainty. There seems to be some concern doing the rounds that the group will be totally nationalized sometime in the near future," said Keith Bowman, analyst at Hargreaves Lansdown Stockbrokers.
RBS said its losses for the full year could be as much as 28 billion pounds ($41.3 billion), which would be the biggest loss ever by a British corporation.
Prime Minister Gordon Brown said on Monday that the government has increased its stake in RBS to almost 70 percent, but declined to say whether he believed the bank will eventually be fully nationalized.
Announcing a new banking rescue package, Brown said the government would offer to insure banks against default on toxic loans in exchange for legally binding commitments to make credit more freely available to British businesses and home buyers.
Both Treasury chief Alistair Darling and Brown acknowledged that October's pledge of 37 billion pounds (about $55 billion) to bail out Britain's banks hadn't done enough to encourage them to resume normal lending volume.
"Good businesses must have access to credit, jobs should not be lost needlessly," Brown told reporters at his Downing Street office. He said stimulating lending is vital to spark Britain's economy and to limit job losses as Britain tackles a recession prompted by the global downturn.
Britain's Treasury said the government will offer to insure banks against losses on about 90 percent of specific toxic loans. The plan would require banks to identify their riskiest assets which, for a fee, could be insured with government backing.
It's hoped the offer will reduce anxiety in the banking sector about the value of past investments, boosting their confidence to offer new loans.
Neither Brown nor Darling could say how much the plan will cost taxpayers, as details won't be agreed until banks start participating.
Opposition Liberal Democrat lawmaker Vince Cable said some financial experts claimed British taxpayers face losses of up to 40 billion pounds ($58 billion)
Brown said the "investments will be held for no longer than is necessary to ensure stability," but could not specify how long the government expects to operate the program.
"Governments across the world are having to do all sorts of things that they might not wanted to have done a few years ago," Darling told reporters.
Some critics called the latest rescue plan a gamble, coming only three months after October's bailout.
"We still think that the Government may eventually have to set state-decreed targets for the banks to lend, perhaps via further nationalization," Vicky Redwood, an economist at Capital Economics Ltd., said in a statement.
Brown's plan also includes efforts to boost mortgage lending and will see 50 billion pounds (about $74 billion) set-aside to create a special fund for the Bank of England to buy high quality loans and other assets directly from banks.
Bank shares were broadly lower on the news, with Lloyds Group off 34 percent, HSBC down nearly 13 percent and Barclays down 8 percent.
The European Commission said Monday that the bank-rescue programs, along with falling tax revenue, would push Britain further into debt.
It predicted that Britain's deficit -- the difference between annual spending and revenue -- will rise from 2.8 percent of gross domestic product in the financial year that ended in April 2008 to 5.7 percent in the current financial year. The Commission predicted Britain's deficit would reach 9.5 percent in 2009-2010.
Overall debt will likely soar to nearly 72 percent of GDP by fiscal year 2010-2011, way above the government target of 40 percent of less, the EU executive said.
Associated Press Writers Robert Barr and Nancy Zuckerbrod in London and Aoife White in Brussels contributed to this report
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