Government measures intended to lessen the effects

The government is attempting to limit the effects of the credit crisis on the British economy through the part-privatisation of some of the UK’s ailing banks. It hopes that by guaranteeing loans and securing the future of UK banks, it can stem the flow of cash out of the country to other countries that have guaranteed the safety of deposits in their banks, such as Ireland.

It also hopes that the banks will start lending to each other and, in turn, cut the cost of borrowing to Britons and UK businesses, which should help all consumers in the long term by securing their savings and helping to preserve jobs. The credit crisis is not over, but in the long term, the government’s measures are intended to lessen the effects of a deep recession by ensuring that banks continue to lend to people who can afford to pay them back.

According to data released on 23 October, the UK is now officially on the brink of a recession. Figures showed that the economy shrank for the first time in 16 years between July and September. A recession is defined as two quarters of negative Gross Domestic Product (GDP) growth.

If the government were to allow the banks to fail, there would be a knock-on effect for people and the likelihood of large-scale job losses and higher housing repossessions. It is unclear at the present time whether the money borrowed by the government for the funding of this bail-out will require taxes to be raised, or whether it will mean less money for public sector spending.

The Prime Minister, Gordon Brown, initially announced on 8 October 2008 that he would make available hundreds of billions of pounds to underwrite banking debts that would be underwritten and guaranteed by the Treasury. This was followed on 13 October by an announcement that the government would provide up to £37bn of taxpayer funds to help the UK banking system.

The rescue bail-out unveiled was for three of Britain’s biggest banks. The government had previously said that it would use taxpayers’ money to inject cash into UK banks in return for a stake in the banks. As many of the banks’ share prices have been trading well below, this could mean that taxpayers make a profit in the long term if the government’s stake is sold at a higher price once the banks have recovered.

Royal Bank of Scotland (RBS) would raise £20bn of new capital through a government-guaranteed £15bn share issue and a £5bn government cash injection. Lloyds TSB would also raise £5.5bn of new capital, and said it would revise the terms of its acquisition of rival HBOS.

HBOS itself would seek to raise from government £11.5bn of additional capital, including £3bn worth of ‘preference shares’ to be held by the UK government. Preference shares rank above ordinary shares in terms of payments but don’t come with voting rights attached.