'This is like giving the kiss of life to a corpse'

Andrew Grice
Tuesday 20 January 2009 01:00

The Government does not know whether the second bank rescue package it launched yesterday will work, senior ministers admitted last night.

"The truth is that we can't be sure whether it will be effective," one told The Independent. "We have to look calm to try to instil some confidence in the system. But we don't know what will happen next. No one can be sure that this is the end of it."

Another added: "We are in completely uncharted waters. The position is changing all the time."

Gordon Brown and Alistair Darling claimed the second bailout did not mean the first package they unveiled last October had failed. That deal, they argued, was about preventing banks from going bust; yesterday's was about ensuring they had the confidence to lend to businesses and the public.

Ministers struggled to explain why, if the new package was not a "blank cheque", they could not disclose how much it would cost taxpayers. Officials dismissed talk of a £200bn bailout, saying some measures had a low risk and figures were still being calculated.

Labour backbenchers conceded it would be difficult to "sell" the rescue plan to an increasingly hostile public.

One said: "If we saved them once, why did we need to save them again? People do not understand why hard-pressed taxpayers who have done the right thing should again bail out fat-cats in the City who have done the wrong thing." As job losses mount, the "Brown bounce" in the opinion polls helped by the first bailout is subsiding.

Surveys published at the weekend gave the Tories leads of nine and 13 points. Yesterday, Ipsos Mori put them on 44 per cent, ahead of Labour on 30 per cent and the Liberal Democrats on 17 per cent. The poll also found 49 per cent of respondents feared they would be made redundant this year.

Mr Brown's popularity will not be helped by government figures released last night, which showed the number of bankruptcies in England and Wales had trebled between 2000 and 2007, from 21,550 to 64,480.

Mr Brown and Mr Darling will not admit it yet but it is an open secret that Mr Darling will have to revise his optimistic forecast made in November that growth would resume this summer, as the recession is going to last longer. "This is going to last for another year, at least," one minister said.

The slower than expected recovery and the prospect of more banking bailouts could add to the already sky-high public borrowing forecast of £118bn for the financial year starting in April. But ministers have borrowed a phrase from Margaret Thatcher, insisting "there is no alternative" because no one apart from the Government can put right such a huge market failure.

The turbulence and uncertainty in the political world was illustrated when the Tories offered broad support for yesterday's measures, even though their concern over soaring borrowing led them to oppose the Government's £20bn fiscal stimulus designed to keep the economy moving.

The new package fuelled calls from Labour MPs for the full nationalisation of the banks but the Government says that is not its goal. Mr Darling said: "We have a clear view that British banks are best managed and owned commercially and not by the Government. That remains our policy."

In the Commons, Tory MPs questioned how the Government would ensure value for money for the taxpayer when last autumn's £37bn injection had not worked. Labour MPs said the banks had "let the Government down" by failing to resume lending.

John McFall, the Labour chairman of the Treasury Select Committee, who believes full nationalisation of the banks is inevitable, asked Mr Darling if the Government would take a 100 per cent stake in the banks if the new package did not restart lending.

Vince Cable, the Treasury spokesman for the Liberal Democrats, said: "The Government increasingly resembles somebody who is trying to give the kiss of life to a corpse. The Government now effectively controls one of the largest banks in the world. It will almost certainly have to put more money in, it may well acquire other banks."

That was ominous for ministers, since Mr Cable had also predicted the bursting of the house price and personal debt bubbles – and the nationalisation of Northern Rock.

Q&A: The bank rescue

By James Daley, Personal Finance Editor

*How does the new bank bailout work?

Yesterday's announcement had a number of different elements, all of which were aimed at freeing the banks to lend more money to consumers and businesses. Chief among these measures is an insurance scheme, which will provide protection for banks against their poorest-quality loans. Just as most families pay car insurance premiums – which protect you from financial loss if your vehicle is stolen – the banks will now start paying the Government an insurance premium. In return, the Government will promise to help the banks shoulder the cost, if it turns out that more of their customers default on their loans than they'd expected.

Another central element of the bailout is the creation of a new guarantee scheme for books of good quality bank loans. This should help reinvigorate the market for mortgage-backed securities – an important source of finance for the banks, giving them more money to lend to businesses and consumers.

*Why did bank shares fall so much yesterday?

Royal Bank of Scotland issued a statement yesterday morning, revealing that it expects to make losses in the region of £28bn for 2008.

This loss was much greater than anyone was expecting, and spooked investors in all the major British banks. As a result, many sold their shares. Some analysts have also suggested that the banks' share prices fell in reaction to the government announcement. Although the government measures should help to provide some much-needed stability in the banking sector, they also ensure that the Government is best positioned to see most of the upside from any recovery. It will be difficult for banks to make healthy profits. Hence, shareholders are selling out.

*Why has Royal Bank of Scotland been hit so hard?

The huge losses announced at RBS are mainly the result of its acquisition of ABN Amro in 2007. RBS paid a high price for ABN and yesterday admitted that the business was worth around £20bn less than it had previously thought. This unexpected announcement resulted in a 67 per cent fall in its shares.

*What will happen to RBS?

The Government may decide that it has no choice but to nationalise the remaining 30 per cent of the bank which it does not already own. If it does this, the remaining private investors will get little or nothing for their shares. However, the Government may want to wait and see whether RBS's share price settles down today. For the moment, the bank is still a going concern and even has the capital to increase its lending.

*I'm a customer of RBS/Natwest – is my money safe?

Yes. Now that the Government has a 70 per cent stake in the bank, it's inconceivable that RBS will be allowed to go bust. So if the panic selling continues this week – or there is any sign that there might be a run on the bank – the Government will inevitably step in and nationalise the remainder of the bank. Nevertheless, it's inadvisable to keep any more than £50,000 of your money with one institution. If a bank were to go bust, this is the maximum that the Financial Services Compensation Scheme would pay out.

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies


Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in