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tisonlyi · 01-21-2009, 12:54 AM

Quote:

Calls to nationalise RBS and Lloyds as markets lose faith in bail-outs
Sterling hammered on currency markets as traders take fright at state of UK banking sector and cost of government rescue

* Ashley Seager, Jill Treanor and David Gow in Brussels
* guardian.co.uk, Tuesday 20 January 2009 21.11 GMT
* Article history

John McFall, confidant of Gordon Brown and chairman of the Treasury select committee, called for the complete nationalisation of Lloyds and Royal Bank of Scotland tonight after shares in both banks crumbled, the pound skidded to a seven-year low against the dollar and government bonds were sold off sharply.

As markets took fright at the state of Britain's banking sector and the wider economy the day after the government's latest bail-out plan, shares in the loss-making RBS slumped to 10.3p, continuing Monday's 66% slide, while the new Lloyds Banking Group continued to fall rapidly as it looked likely that many UK banks would not be paying any dividends for years.

McFall, an influential Labour MP, called for the complete nationalisation of Lloyds and Royal Bank of Scotland "for the sake of financial stability". In an article in the Financial Times co-authored by the veteran private equity expert Jon Moulton, McFall said: "Let us get it over with – nationalise the pair of them."

The pound fell to $1.386, hitting the lowest point since June 2001. It also slumped below €1.07. Sterling was not helped by a surge of confidence in the dollar, as Barack Obama was sworn in as US president.

Jim Rogers, a veteran US investor, said the UK economy was "finished". He told Bloomberg: "I would urge you to sell any sterling. It's finished. I hate to say it, but I would not put any money in the UK."

Rumours were awash in febrile markets that ratings agencies could downgrade the UK's sovereign debt ratings if the government had to issue tens of billions of pounds of government bonds to finance its latest rescue for the banks. A downgrade would increase the cost of raising debt for Britain, the world's fifth largest economy. The price of insuring British debt against default also rose sharply.

Alistair Darling, the chancellor, was forced in Brussels to dismiss market talk that he, like Denis Healey in 1976, would have to turn to the IMF for a bail-out, saying he had laid out at the pre-budget report in November how he intended to pay for the government's schemes.

But Peer Steinbrück, Germany's finance minister, also at the EU finance ministers meeting in Brussels, said he and others had urged a swift return to sound public finances and expressed fears about the situation in Britain, which is forecast to have a 9.5% budget deficit next year, and Ireland, whose deficit in 2010 is put at 13%.

Saying he did not understand Darling's scheme to insure UK banks' multibillion-pound toxic assets via the Bank of England and a "bad bank", he said: "I am sceptical that a national scheme will work."

Steinbrück echoed market fears about the UK scheme by saying it was unclear how to find the right price for the securities in a bad bank. The bank might have to be capitalised with up to 30% of what was on lenders' balance sheets – up to €200bn.

The bail-out also worries the City. "The market rightly fears the long-term fiscal costs of a collapsing banking system," said Graham Turner, of consultancy GFC Economics. The gilts market was spooked by the potential costs to the public purse. Gilts prices fell sharply on the fear of greater supply, which in turn pushed yields up to 3.55% for a 10-year benchmark gilt. Falling yields recently have helped bring down the price of some corporate borrowing and fixed-rate mortgages.

Shares in Lloyds lost half their value before ending 31% lower at 44.8p. Lloyds' stockmarket value is just £6bn – barely half the sum put in by the taxpayer. RBS, soon to be almost 70% state-owned after a £20bn cash injection, has a stockmarket value of less than £4bn. In 2007 it was worth £78bn. Barclays was also hit hard, touching 69p before ending 17% down at 72.9p, to be worth £6bn – little more than the £5.3bn of profits it expects for 2008 and down from £58bn 18 months ago.

Even HSBC, the UK's biggest bank and the only one not to have raised funds from investors, was caught in the rout. It fell 3% to a stockmarket value of about £58bn – less than half the £120bn it was valued at before the credit crunch began.

Darling insisted he had won backing in Brussels for the bail-out. EU ministers said: "Member states continue to remain committed to taking all necessary steps." He said the statement proposed to the EU's Czech presidency by Britain – which demands the proper functioning of credit channels through banks' use of their capital reserves – showed EU unity.

News that UK inflation had its biggest fall in 17 years, dropping to 3.1% in December from 4.1% a month before, did little to calm markets, partly because it had been expected to fall further, but also because the Bank of England has already slashed interest rates to a historic low of 1.5% and is widely expected to cut them further.

Mervyn King, Bank governor, paved the way last night for "quantitative easing" – radical steps to combat deflation and thaw credit markets – by promising to start buying corporate bonds and other assets within "weeks, not months", to pump cash into the system. In a speech to the CBI in Nottingham, he said the Bank was ready to take "unconventional measures" to kick-start the economy, once the weapon of interest rate cuts was exhausted.

King said as well as buying bonds and other securities (to raise reserves on banks' balance sheets and encourage them to lend) the Bank would also consider buying particular classes of assets where markets were malfunctioning. He also threw his weight behind Alistair Darling's new rescue package for the banking sector.

A minister has admitted that the centre-piece of the rescue – the scheme to insure banks against unexpected losses – may last nine years. The admission made by the City minister, Lord Myners, contrasts with Gordon Brown's claim on Monday that the scheme would be short-lived.

Myners told peers: "We are probably talking about a policy duration of no fewer than five years, and probably no longer than eight or nine years … we need a policy that will take financial markets through this economic downturn and beyond."

Inflation is widely expected to turn to deflation this year as the recession deepens and the impact of falling oil prices feeds fully into the figure.

Oil prices fell as low as $32.70 a barrel yesterday, partly on the resumption of Russian gas supplies and partly due to renewed strength in the dollar. That is barely a fifth of the record level hit last summer. The FTSE 100, though, was little moved overall, closing at 4091.17 points on the day as firming pharmaceutical, tobacco and oil shares counterbalanced the losses in bank shares.

Calls to nationalise RBS and Lloyds as markets lose faith in bail-outs | Business | guardian.co.uk

So figures close to the heart of financial and economic policy are now advising that RBS and Lloyds/HBOS are taken under state ownership. Taken together, those two probably add something like 6-700% to the UK's national debt, including massive debts denominated in foreign currencies. This is following exactly the same pattern as the collapse of Iceland.

I think the massive vote of no confidence that will come with and follow those nationalisations will drag the other large banks down, probably with full scale runs on the banks and Argentina-esque scenes of pensioners sitting out the bank, trying to get their money. That'll bring the other banks under the nation's wing in swift order.

Barclays is collapsing as I type. 25% down as of 1 hour into trading.

http://newsvote.bbc.co.uk/2/shared/f...hree_month.stm

Sterling will creak under the weight of the first two banks, but the rest, when they follow, will tear it asunder.

I'm only amazed that Ireland and the other big Irish banks haven't rapidly fallen apart after Anglo-Irish was nationalised...

Urgh, this is all too depressing... But maybe there's some hope:

Britannia and Co-operative to create 'super-mutual' | Business | guardian.co.uk

Go mutuals and cooperatives!