'Britain's not going bust' as Brown bails out banks again

GORDON Brown dismissed fears yesterday that Britain was on the verge of bankruptcy and insisted that a radical plan to underwrite unlimited amounts of banks' bad debts was crucial for shoring up the wider economy.

The Prime Minister and Alistair Darling, the Chancellor, unveiled a package of measures to help banks start lending again to homeowners and businesses.

But Mr Brown could not put a figure on the potential liability faced by taxpayers.

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The latest rescue package came as the European Commission predicted a significantly deeper recession in the UK than the Treasury has forecast – and one worse than in most other EU countries. The commission predicted the UK economy would shrink by 2.8 per cent this year, compared with 1.8 per cent contraction across the whole of the EU. In the Pre- Budget Report, the Treasury predicted UK growth would be between minus 0.75 per cent and minus 1.25 per cent.

Mr Brown insisted that – despite the state having to cover potentially hundreds of billions of pounds in toxic assets – the offer to banks was not a "blank cheque" but help for businesses and homeowners.

The Prime Minister and the Chancellor also expressed confidence that Scotland's reputation for fiscal prudence had not been tarnished by the record losses at RBS and the takeover of HBOS.

At a Downing Street press conference, Mr Brown said he would "utterly dispute" suggestions Britain was on the brink of bankruptcy and that the first 37 billion bail-out of banks had failed.

"I came into politics because of the scourge of unemployment in my own home area and I will not sit idly by and let people go to the wall because of the irresponsible mistakes of a few bankers," he said.

"At every point, conditions are laid and the greatest condition of all is that in return for our support for the banking system they have an obligation to lend to small businesses and to families in this country," he said.

However, Mr Brown admitted that there was no upper limit on the value of loans that taxpayers would underwrite.

A key measure confirmed yesterday was that the Treasury would "insure" banks against losses from toxic assets in exchange for a fee. The Bank of England will also for the first time be able to directly buy "high-value" assets from companies and financial institutions to shore up confidence and free up lending. Some analysts have drawn parallels between these measures and quantitative easing, whereby more money is pumped into the economy.

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Other moves announced included extending existing credit guarantee and special liquidity schemes to revive lending.

The government will also take greater stakes in banks by offering to swap preference shares for ordinary shares, freeing institutions from paying back onerous dividends first.

Shares in banks plunged as investors feared that the scheme brought the institutions one step closer to nationalisation.

Mr Brown said the impact on the public finances would be temporary. He said: "Investments will be held for no longer than is necessary to ensure stability. We will protect taxpayers' interests, liabilities will be backed by assets and fees will be charged for the schemes that we are introducing.

"But the costs of doing nothing are simply too great. These are extraordinary times, they require unprecedented action."

The Tories said Mr Brown appeared to be "blaming everyone else but himself" for the dire state of the economy.

George Osborne, the shadow chancellor, said the package was evidence that the first bail-out, announced less than three months ago, had failed. He told MPs: "This isn't some long-planned, carefully thought through, second phase of government policy.

"It is instead the clearest possible admission that the first bail-out of the banks has failed and now they have no option but to attempt a second bail-out – a bail-out whose size we still don't know, whose details remain a mystery and whose ultimate cost to the people of Britain will only be known when this government has long gone."

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At Holyrood, Derek Brownlee, the Scottish Tories' spokesman for finance and sustainable growth, called for an independent audit of banks. "The Conservative Party has been calling for this for over two months, during which time Scottish jobs have been needlessly lost and Scottish businesses have gone to the wall," he said.

Stewart Hosie, the SNP's Treasury spokesman at Westminster, called for more details. He asked: "Just how does the Treasury intend to value the level of toxic bank debt, how long will guarantees run for and who will this scheme be available to?"

Mr Brown, meanwhile, defended the reputation of Scotland when asked whether it had been damaged by the banking debacle. "I don't think you can single out one part of the UK and hold it responsible," he said.

Mr Darling also gave an upbeat assessment of the chances of recovery of both England and Scotland. "I'm confident not just in Edinburgh's financial future, but London's financial future and, indeed, the financial future of the whole of the UK," he said.

Yesterday's measures were welcomed last night by Sir Victor Black, chairman of the new Lloyds Banking Group, in its first day in business following the takeover of HBOS.

However, he added: "I think we can conduct our business better than the government can conduct it for us.

"The government is there as a shareholder, and was needed in order to bridge a very difficult financial position. We are happy to see it there, but with less than 50 per cent."

Sir Victor said HBOS had become too dependent on the inter-bank market for funding, which "evaporated in a way nobody would ever have anticipated".

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Grahame Smith, the general secretary of the Scottish Trades Union Congress, called for a full inquiry into the banking crisis.

Richard Lambert, director-general of the CBI, said the measures were "not silver bullets", but he added that they could halt a downward recessionary spiral.

Michael Coogan, director-general of the Council of Mortgage Lenders, said the latest measures "should be helpful".

Latest move hopes to get wheels of lending turning

Why is another bail-out necessary for the banks now?

The government insists that rather than a bail-out, this is a voluntary offer for banks.

Last October's 37 billion bail-out stopped the banks from collapse, but did not go far enough to encourage lending. Three banks had to be recapitalised at the time: HBOS, Lloyds TSB and RBS.

The crisis was revived when the ban on short selling was lifted and the share prices of the major banks plummeted last week, undermining confidence. Poor results are also expected as banks begin to report their annual results this month and next.

What happens next?

Treasury officials and external experts will visit interested banks one by one, and will assess at what price they will insure their assets. Ministers will then make the final decision about which banks to "insure". Contracts will be hammered out that will force the banks to lend more.

What will it cost?

The government cannot put a figure on the liabilities until it assesses every interested bank, but there is speculation banks have about 200 billion of "bad" debts. However, the government is looking at ring-fencing part of this and keeping the bad debts on the banks' books, rather than on the government's books.

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Banks will also have to pay a fee to have their bad loans underwritten by the taxpayer.

They will have the option of paying for the insurance through offering the government shares.

Why has lending dried up?

Individual banks have been reluctant to lend because of fears over the value of assets they were being asked to lend against.

There is still a lack of confidence in the economy. Foreign banks have begun to retrench. A significant amount of lending capacity has been withdrawn from individuals and businesses. There has been an evaporation of certain markets where banks had previously raised money to lend. Banks are also heavily restrained by rules requiring them to hold a certain amount of capital as a cushion.

What else is the government doing to get lending flowing?

It is freeing up the nationalised Northern Rock's remit to encourage taking on new mortgages. It is also switching its preference shares in RBS into ordinary shares, and it is speculated that it will do the same with the Lloyds Group, although the Chancellor yesterday denied this. The preference shares carried a 12 per cent interest rate, forcing banks to repay the government as quickly as possible, rather than giving them an incentive to put funds into new lending.

Why does the government not create a "bad bank" to soak up all the toxic assets ?

This was first proposed in the United States as part of its initial bank rescue plan. The US has recently said that it is revisiting this idea, but such a scheme has been played down by Whitehall officials.

First day share fall for Lloyds group

SHARES in the new Lloyds Banking Group fell sharply on its first day in business, following the takeover by Lloyds TSB of HBOS.

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They were down 34 per cent, ending the day at 65p, in what analysts said was a knock-on effect on the banking sector of the shock losses announced by Royal Bank of Scotland.

Lloyds, in which the UK taxpayer holds a 43 per cent stake after the government bought 17 billion of shares as part of its initial recapitalisation scheme, issued a trading update, saying both merging banks had experienced a stable December. This saw shares rise early in the day.

It also said that plans for 1.5 billion of annual savings by 2011, which have sparked union concerns over job losses, were likely to be more demanding than first proposed. The merged bank has about 145,000 staff and 3,000 branches in the UK.

Rock to roll out home-loan deals

MINISTERS will encourage the nationalised Northern Rock to intensify its lending to homeowners because so many other banks have pulled out of the market.

The policy reverses the government's edict last year, when it warned the troubled lender to offload as many mortgages as possible to comply with state aid rules.

There was concern Northern Rock had felt pressure to pay back its debt to the government so quickly that it had pulled back on lending.

But with the withdrawal of many mortgages, homeowners have been left with few deals to choose from.

Northern Rock said it had previously encouraged customers to remortgage with other lenders when their deals ended and had begun to pay back its debts ahead of time.

It would now go back to actively lending to comply with the government's aim of making more credit available.