“This is a momentous day — but extraordinary times demand extraordinary policy solutions.”
Richard Lambert, director general of the CBI, may be right, but businesses are wondering whether the government’s intervention on behalf of the banks will improve credit availability.
The UK government already backed the banks up last year, and has now thrown them another lifeline, allowing them to insure against losses which could run as high as £200bn for all banks. The Royal Bank of Scotland has the dubious honour of having the worst corporate loss in UK history. (The previous title holder was Vodafone, so clearly it’s possible to stage a comeback, although with 70 per cent of the RBS in government hands now, this looks unlikely.)
But why should this bailout be any more successful than the first? Under the Asset Protection Scheme, banks that meet government criteria will have the option of exchanging cash or shares for cover against toxic debt. The aim is to kickstart the banks into lending to each other, as well as to businesses. Other measures include a reduction in the amount of capital that banks have to hold in reserve against bad loans, and an extension of Northern Rock’s repayment deadline.
Even so, this second bailout’s been met by fear: the very fact a second round of support’s needed so soon after the last has left investors unnerved. There are concerns as to how much toxic debt has yet to be declared, not to mention worries about banking sector nationalisation. The idea that the government’s insuring against credit defaults, so instrumental in bringing down the financial system, is far from comforting.
“To issue one bank bail-out is unfortunate. To issue two looks like carelessness,” is HC Global’s Wildean take on the plan. The economy, adds blogger Nicholas Higgins, is “more scary than a slasher movie”.
This may be extreme, but even those with more measured views are unsure whether banks can be persuaded to part with cash freed up by today’s scheme, particularly if the recession worsens.
So Robert Peston’s right (again) when he says: “All of this represents the last chance saloon for Treasury initiatives to revive lending that fall short of direct government control of lending by banks.”
Here’s hoping that the penny has dropped in the banks’ boardrooms.
