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World financial crisis

UK to partially nationalise major banks as Asian stocks plunge

Article published on the 2008-10-08 Latest update 2008-10-08 16:17 TU

A branch of Lloyds bank in London, one of the banks to be partially nationalised(Photo: Reuters)

A branch of Lloyds bank in London, one of the banks to be partially nationalised
(Photo: Reuters)

As stocks around the world fell to new lows Tuesday, British Prime Minister Gordon Brown announced what he called a “bold and far-reaching” economic rescue package, devised to encourage banks to extend more credit and help unfreeze the economic situation. The Tokyo Nikkei fell 9.38 per cent when the market closed, the biggest loss in 20 years. Hong Kong closed down 8.2 per cent.

Analysis: Economics professor Roger Alford

08/10/2008 by Mathew Kay

London dropped briefly more than seven per cent early on Tuesday before the announcement of a three-part plan in which the government will use 50 billion pounds (64 billion euros) of taxpayer money to buy major stakes in the country’s eight main banks, effectively nationalising them.

 “We are buying shares in the banks itself,” explained Brown. “The 50 billion is to buy shares. And therefore we will have stakes in the bank.”

This is not an American-style bailout, the prime minister claimed, adding that the government would be expecting a return on the capital it will inject into the banks.

“That is why we are insuring that it's an investment stake in the banks, and that we are not just giving money to the banks,” said Brown. “The people of Britain expect there will be strings attached.”

This move follows Iceland’s announcement Wednesday that it has nationalised its third-largest bank, Glitnir, a day after it took over the second-largest bank, Landsbanki.

In the UK, the government will buy shares in the Royal Bank of Scotland, HSBC, Barclays, HBOS, Lloyds TSB, Standard Chartered, Abbey and Nationwide Building Society.

Additionally, the plan also provides 200 billion pounds (257 euros) to the Bank of England for short-term loans, and creates a company worth 250 billion pound (321 euro) to provide loans to banks.

“This is a fundamental step we are taking,” said Finance Minister Alistair Darling, who insisted it is part of a process. “Stabilising the banking system is one important part of that.”

He said he did not “rule anything out” for further action.

Elsewhere in Europe, as governments are guaranteeing consumer savings accounts, the French Finance Minister, Christine Lagarde, blamed the current financial meltdown on the United States’ decision not to save Lehman Brothers.

"As far as I am concerned, that was a mistake," she said in an interview with RTL radio. "When you let one domino fall, the others follow."

Lehman declared bankruptcy on 15 September, after the US government decided not to bail it out, a move that Lagarde said would have reassured markets.