Will Britain's rescue plan work?
Prime Minister Brown unveiled an $87 billion plan Wednesday to buttress British banks. Hailed by some European leaders, credit markets responded tepidly.
A major British government bank-rescue plan, that bears some similarities to the American bailout, was greeted with tepid enthusiasm by European stock markets Wednesday.
The £50 billion ($87 billion) plan was announced just hours before a coordinated central bank cut in key interest rates around the world. Russia and several other European nations also took further steps to buttress their banks.
German deputy finance minister Joerg Asmussen hailed Britain's plan. "It contributes to the stability of the British financial system and we know what importance that has for the European financial system," he said Wednesday.
The unprecedented move by the British government means it may buy stakes in banks worth a total of £25 billion initially, rising to £50 billion if necessary. Britain's seven leading banks and one major building society have already signed up. Some will sell bigger stakes than others, depending on their individual needs.
The government will buy preference shares, meaning it will be first in line for dividends. Another £250 billion is being made available in lending guarantees. The institutions involved are Abbey, Barclays, HBOS, HSBC Bank plc, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland, and Standard Chartered. But Standard Chartered and Nationwide indicated that they did not need to raise new capital.
Prime Minister Gordon Brown solemnly declared the importance of the intervention. "Extraordinary times call for bold and far-reaching solutions," he said. "This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem."
Initially, analysts and investors were unsure if the blanket response would be enough to smother the panic that has set in during recent days. Some British banks' stocks rebounded. But the overall London stock market, as measured by the FTSE 100 index, plunged another 5 percent, partly in response to large drops in Asian markets Wednesday.
"It is truly extraordinary and I'm not sure there is sufficient hyperbole to do what has happened justice," says Jeremy Batstone-Carr, head of research at Charles Stanley stockbrokers.
But will Britain's rescue plan give bankers enough confidence to start lending again? Mr. Batstone-Carr notes that the most significant market reaction Wednesday was the interbank lending rates, which remained stubbornly high, indicating that banks were still reluctant to lend to each other.
"If the authorities thought that by action it would improve money markets it hasn't worked," he added. "That's bad news."
Jonathan Loynes, an economist at consultancy Capital Economics in London, says that the move was "bold and welcome," but added: "We have severe doubts that it will dramatically alter the outlook.
"Even if the banks recapitalize, it doesn't mean they will want to lend to each other," he adds.
British politicians expressed some of the same doubts heard last week in Congressional debate over the US rescue plan. Some were concerned that bankers were being helped at the expense of taxpayers, and were deeply skeptical of any moves involving the taxpayer underwriting financial institutions widely perceived to have been reckless.
Labour Party MP John McDonnell said that the part-nationalization effectively meant that the government was "nationalizing the banks' losses and privatizing the profits so that taxpayers will now pay for this crisis caused by the greed of the bankers."
But Batstone-Carr says the taxpayer might not necessarily get a bad deal. The government should get dividends from its ownership stakes (unless the banks in question go bust) and eventually be able to divest itself of the stakes, presumably at a profit.
"I'm not entirely sure what part-nationalization is – it's a bit like being partly pregnant," he says. "The shareholders have clearly been subordinated and the Treasury is in the driving seat. It will be deciding how the banks go about their business."
He says that the British example could be replicated elsewhere in Europe, where the authorities have been chastised for adopting a go-it-alone, uncoordinated response to the crisis instead of banding together and presenting a united front to the fear and panic stalking the markets.
There were indications from Rome that Italy might enact a similar scheme. "It could certainly work in other countries – part of what the government is doing is to create a blueprint for European counterparts to follow," he says.
Mr. Loynes agreed, saying that there was a growing sense that the US 'TARP' didn't go far enough in helping out banks. "There is a growing sense that something further needs to be done in the form of direct recapitalization," he says. "This is now the example for other countries to follow."
On Tuesday, Spain announced it was setting up a €30 billion (US$41 billion) fund to help the financial sector. Prime Minister Jose Luis Rodriguez Zapatero called it a short-term loan aimed at improving liquidity into the system. But he said that, unlike the US rescue plan, Spain would not be buying up bad debt.
In Russia Tuesday, the government also announced it would provide five-year loans to banks totaling 950 billion rubles ($36.3 billion). Most of the money is expected to help the country's two largest state-backed lenders, Sberbank and VTB.