Darling warns of economic collapse without latest banking bail-out
Alistair Darling today insisted he was right to use hundreds of billions of taxpayers' money in a fresh bail-out of the banking sector, saying the recession would be much worse if he did not act.
The new measures to support mortgage lending and consumer loans were attacked as a "blank cheque" by critics this morning, but the chancellor warned that the consequences of inaction would be grim.
"If the banking system collapses, every single one of us would see the obvious problems. The economy would come down with it," he told the BBC. "The cost of not doing anything would be far, far greater. If we don't get lending going, the recession will be longer, deeper and more painful"
"It may seem a very wet, miserable January morning, things out there look very grim, but we will get through this," Darling added.
Darling was speaking after the Treasury released details of a second banking bail-out, and Royal Bank of Scotland announced it will make a loss of up to £28bn for 2008 - the biggest loss in UK corporate history.
Gordon Brown told a Downing Street press conference that the loss showed the consequences of "irresponsible lending".
Under the new plans, the government will insure bank loans for corporate and consumer debt. By offering to cap potential losses, the government hopes to encourage banks to lend again. Economists said the Asset Protection Scheme looks like a form of quantitative easing - effectively pumping more money into the economy.
The government is also making a three-pronged effort to stimulate the mortage market: up to £100bn will be provided to underwrite new mortgage lending, the existing £200bn scheme will be extended, and state-owned Northern Rock is being given a new mandate to increase its lending.
And the Bank of England is also being given new powers, in addition to its control of interest rates. It has been authorised to spend up to £50bn buying a range of assets from the banks, both to increase corporate credit and for monetary policy purposes.
The government said it was taking the measures - just three months after its first £37bn bail-out - after the global financial and economic situation continued to deteriorate. It said that it was "essential" to meet demand for lending from businesses, homeowners and consumers.
The plan means that the taxpayer is exposed to billions of pounds of potential losses. In return, the government plans to force the banks to increase their lending to help the UK economy through the recession. Banks will be charged a fee, which can be paid in cash or shares - suggesting that companies like Barclays and HSBC could soon be partially owned by the government.
Vince Cable, Liberal Democrat Treasury spokesman, said the original bail-out had failed because the government had not forced the banks to increase their lending in return for their capital injections.
"It's now clear that the money was not used for lending, but was instead used to cover bad debts," said Cable.
"I don't like to talk about blank cheques, but I fear that's where we are now," he added.
And Peter Spencer, from the Item Club, said that "it sounds like heads the banks win, tails the taxpayer loses".
The chancellor insisted today that the banks will have to pass the money on offer into the wider economy.
"If the banks use the measures we are offering today then they will have to enter into legally binding measures to increase lending. Just hoarding the money doesn't help us as businesses or individuals," Darling said.
The Treasury is also changing the terms of the first banking bail-out, which has failed to revitalise the sector. It will swap its existing preference shares in RBS, which carried a high rate of interest, for ordinary shares, taking its stake in the bank to almost 70%. In return, RBS has promised to increase its lending over the next 12 months by £6bn - another attempt to get money flowing to borrowers.
The City gave today's measures a broad welcome, with the FTSE 100 up by 76 points, or 1.8%, to 4223 this morning. But RBS plunged by nearly 30% to 24.8p, extending the taxpayer's losses since taking a large stake in the bank.
The new measures, which come three months after the first banking bail-out, were announced this morning following a weekend of talks between the government and bank chiefs. The banking crisis reared up again last week when America's Merrill Lynch posted an unexpectedly large loss and which culminated with Barclays shares plunging by 25% in the last hour of trading on Friday afternoon. It insists, though, that it made a profit of at least £5.3bn last year.
RBS sees huge loss
RBS said this morning that it expected to make a full-year loss of between £7bn and £8bn before goodwill is taken into account, having taken more writedowns on so-called toxic assets, some based on mortgage loans that turned sour in the credit crunch.
It expects to take a goodwill impairment charge of between £15bn and £20bn - an admission that assets such as ABN Amro, which it bought in 2007, are worth much less than it paid for them.
A full-year loss of £22bn, the best-case scenario according to today's numbers, would exceed the previous biggest loss - made by Vodafone.
Chief executive Stephen Hester, who took office late last year, said RBS had suffered a difficult end to 2008.
"The dislocation of credit markets and the global economic downturn continue to hit RBS hard, as with many other banks," he said.
[Source: The Guardian, London, UK, 19Jan09]
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