Jeremy Warner: Maybe the Arabs should bid for Barclays outright

Outlook The Treasury is said to be incandescent with rage over news that Middle Eastern investors who recapitalised Barclays late last year can in effect block any attempt to part-nationalise the bank with UK taxpayers' money. If so, officials should have read the press release at the time of the deal, where the terms of a standard non-dilution clause were reasonably well spelt out. Subsequent documentation made it crystal clear.

Nor should it in any case have come as any surprise to ministers, regulators and officials that the Arabs had taken steps to protect their investment. Early sovereign wealth fund investment in banking recapitalisations was not a happy experience, with the necessity of a second round of rescue finance frequently wiping out the first. Once bitten, twice shy. Abu Dhabi and Qatar were alive to that possibility with Barclays.

With all this talk of nationalisation, the Arabs have chosen to remind the Treasury in a very public manner of their legal rights. If the Treasury insists on injecting fresh capital into Barclays it would trigger the non-dilution clause, enabling the Middle Eastern investors to take control of Barclays at no extra cost. Of course this couldn't stop the Government nationalising Barclays outright without compensation, yet there would be a major diplomatic incident if it did.

In any case, Paul Myners, the City minister, and Adair Turner, chairman of the Financial Services Authority, were at pains to stress yesterday that nationalisation is not yet on the agenda. Indeed, ministers seem intent on avoiding nationalisation at almost all costs, believing that banks properly belong to the commercial sector. That's why they are setting up the "asset protection scheme", allowing banks to insure their bad debts with the Government so that money market and investor confidence in banking balance sheets can be restored. Nor does Lord Turner appear to believe that banks at this stage need more capital. The deterioration in balance sheets is no worse, Lord Turner said yesterday, than regulators were expecting when the October recapitalisations were agreed.

Unfortunately, this double-headed reassurance didn't seem to do any good in the markets, where Barclays shares shed another 10 per cent of their value yesterday. The way things are going, they will soon be like Royal Bank of Scotland as little more than option money.

If the Government means what it says about wanting to keep the banks in the private sector, the Treasury must stop giving with one hand and taking away with the other. The impression is that the various Government reliefs only end up penalising the banks, which is why investors have given up on banking shares. If banks are to remain in the private sector, they have to be allowed to make profits, deleverage and reform their balance sheets in a manner which will attract private investment.

As for Barclays, perhaps the Arabs should call the Government's bluff and bid for the bank outright. At these levels, they could pick the whole thing up for thrupence. The destruction of value in banking stocks is not all down to lack of confidence in balance sheets. Investors have taken the view that banks are already so much at the whim of public policy that they might as well be in public ownership too.