BRITAIN IS poised to guarantee “toxic debt” worth up to £200 billion (€221 billion) in a second bank bailout designed to boost lending and fend off a prolonged recession triggered by the worst economic turmoil in 70 years.
Government officials and bank chiefs have spent the weekend in talks, a finance ministry spokesman told reporters yesterday, as they seek a solution to a credit freeze that has crippled industry, small businesses and homeowners already struggling to cope with the downturn.
Prime minister Gordon Brown said details of the package would be announced in the next day or two. Speaking to reporters in Egypt, where he was attending talks on Gaza, he said: “We know the essential problem is the resumption of lending.”
The package is designed to get lending moving in the economy to help families and businesses, he added.
According to some reports, key parts of the bailout may include a huge state insurance scheme to guarantee billions of pounds of banks’ bad assets and the government taking bigger stakes in several banks. Banks would have to identify their riskiest loans and pay a fee to a state-backed insurer for protection against losses above a certain level.
As part of a series of measures, the government is expected to offer to exchange £10.5 billion of preference shares it holds in Royal Bank of Scotland and Lloyds banking group for an increased stake in the quasi-nationalised banks.
It may also revise the business plan for Northern Rock in order to allow the state-owned mortgage bank to make more new loans.
In return for the second bailout, the British government is expected to seek an explicit commitment from the banks that they will start lending again.
Downing Street and the finance ministry have declined to comment on reports giving details of the planned bailout.
Britain has been forced into a second rescue after state injection of £37 billion to recapitalise three of the biggest banks last October failed to get credit moving again.Confidence in banks has plummeted due to fears over the exact scale of their exposure to bad loans. On Friday, Barclays, one of Britain’s biggest banks, saw its shares dive by a quarter in the final hours of trading.
Royal Bank of Scotland fell by 13 per cent and Lloyds Banking Group dropped nearly 5 per cent.
The package, which could be formally unveiled as early as today, represents an admission that the bailout package agreed last October, while successful in preventing a complete collapse of confidence in the banking sector, has failed to stop the UK economy from tipping into a severe downturn.
In an interview published on Saturday, Mr Brown said banks must come clean over their bad debt to kick-start any recovery.
"One of the necessary elements for the next stage is for people to have a clear understanding that bad assets have been written off," he told the Financial Timesnewspaper. – (Reuters/ Financial Timesservice)
