Familiar ring: Britain bails out its banks — and stocks tumble

McClatchy NewspapersOctober 8, 2008 

LONDON — The British government took a bold gamble to try stemming its financial crisis on Wednesday, unveiling a sweeping rescue plan that partly nationalizes its major banks. But the initial reaction from financial markets and people on the street was chilly.

The package totals about 400 billion pounds (about $692 billion), which equals about 16,000 pounds ($27,680) per taxpayer. About one-eighth of that money involves a direct infusion of capital.

After two days of chaos in London markets amid leaks about the bailout, the U.K. Treasury laid out the full details before the start of trading Wednesday. The government plan includes a 50 billion pound ($86.5 billion) injection of public money to recapitalize banks; up to 250 billion pounds ($432.5 billion) in loan guarantees that will be offered at commercial rates to encourage banks to resume lending to each other; and a doubling of the amount, to 200 billion pounds ($346 billion), of liquidity for the money markets.

This differs from the recently approved American financial bailout, which focuses on buying up so-called "toxic" assets. Such international banks as HSBC and Barclays should benefit from the British plan.

Will Hutton, a British economist, said in a radio interview Wednesday that Britain is "ahead of the curve" globally with its plan. He and other analysts particularly praised the provision to guarantee lending between banks, but he told the BBC that other governments around the world must craft "as comprehensive and as aggressive a response as the British government or we're not going to get through this."

Government officials, who had worked through the night on final details, had hoped to restore confidence in financial markets. But the London Stock Exchange's main index plunged more than 7 percent in the first hour of trading Wednesday, with bank stocks especially hard hit. The market regained many of those losses after a coordinated interest-rate cut by the Bank of England, acting in concert with the U.S. Federal Reserve, the European Central Bank and others. Shares sank again in the afternoon and the index closed down 5 percent, suggesting lingering doubts about whether the plan is little too late.

Many average Britons, who have already been hit with rising inflation and falling home prices, sounded cynical about the government move.

"It's wrong," said Paul Dawson, the owner of a small shoe-repair and key-cutting shop in Surbiton, a London suburb. "They'll bail the banks out but the same banks will still foreclose on people." Sam Chi, a real-estate broker who said the rate of home sales through his office is less than half what it was a year ago, called the bailout "outrageous." He scoffed at a plan to "help out the people who caused the problem in the first place."

Such sentiments could spell trouble for Gordon Brown's already unpopular Labor government, which must call a national election before the middle of 2010. He gained some political cover, though, from the fact that the plan was approved not just by big banks, but also by the main opposition political parties.

Brown's government may appear decisive in comparison with the muddled attempts at a joint response by the European Union in the past week, but it also has more at stake. Finance is by far the largest contributor to the economy in London, the leading financial center in Europe.

Eight big banks will be prime beneficiaries, and they have watched the market reaction to America's bail-out plan with particular interest and fed their input to policymakers in the British government, whose regulators work closely with the financial sector. The plan specifically addresses the three problems — bank capital, funding and liquidity, and some analysts are calling on the American government to take similar measures.

The interest-rate cut should make more difference in the short-term to individuals and small-business owners. Still, some people along the high street in Surbiton said they were holding up fine in these increasingly difficult times.

Annette Mullen, manager of the Fara Charity Shop, said her business has been booming as shoppers switch from upmarket stores to buy designer-label clothing (and even wedding dresses) at discount prices. Paul McVicar, a barber, said his business is "pretty much recession-proof." Admitting that some of his clients have been laid off by big banks recently, he noted "they still need to get their hair cut for job interviews."

(Sell is a McClatchy special correspondent.)

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McClatchy Newspapers 2008

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