New World Order

Global co-operation, nationalisation and state intervention - all in one day

thescotsman.scotsman.com

As the London stock market steeled itself to open again following days of
vicious battering, Alistair Darling, the Chancellor, rose to stake the
future of the country and the Cabinet on an audacious £500 billion
banking bail-out.

And barely had the City begun to digest the
hugely complex and unorthodox scheme when it was sent reeling again by
an unscheduled interest rate cut – mirrored across the world – by the
Monetary Policy Committee. It was the first such co-ordinated approach
since the 9/11 terror attacks in 2001 – yet another indicator, had one
been needed, of the gravity of the situation.

The half percentage point drop was immediately passed on to borrowers, with leading high street banks cutting their mortgages.

The
government's scheme, a three-part plan which takes in short, medium and
long-term measures, was welcomed by business leaders and analysts.

David
Kern, adviser to the British Chamber of Commerce, said: "The government
has taken a radical step but it is one we welcome."

But there
was concern a phenomenal amount of taxpayers' cash was being staked on
a last-ditch measure that could fail. The Taxpayers' Alliance accused
ministers of failing to address other options first.

Meanwhile, the International Monetary Fund (IMF) issued a fresh warning that Britain was on the brink of recession.

In
its latest World Economic Outlook it predicted the UK economy would
contract by 0.1 per cent next year as growth across the developed
countries slowed to almost zero.

The downturn will mean lost
jobs, with unemployment forecast to rise from 5.4 per cent to 6.0 per
cent, while the public finances were said to be "considerably weaker"
than in previous slowdowns. However, the IMF said it was expecting
Britain to bounce back strongly in 2010.

The £500 billion plan
includes the government taking shares of up to £50 billion in leading
banks, increasing funds available to banks to £200 billion, and
guaranteeing their debts when they lend to one another. The guarantees
are likely to cost up to £250 billion.

The Prime Minister described the plans as "bold and far-reaching" but admitted they would offer no quick fix.

Eight
UK banks and building societies – including Royal Bank of Scotland,
Barclays, Halifax Bank of Scotland, Lloyds TSB and Nationwide – have
pledged to increase their capital by £25 billion but government will
pump in the funds if called upon. The Treasury also stands ready to
make at least another £25 billion available if necessary.

The
Bank of England – alongside its interest rate cut – is taking emergency
action to help ensure banks have enough cash to run their day-to-day
activities. It has increased the size of its special liquidity scheme
that lets banks swap risky assets for Treasury bonds to £200 billion.

The government is also making £250 billion available for banks to guarantee debt.

Mr
Brown also moved to reassure taxpayers they would have the potential to
"earn a proper return" from their investment. There would be "strings
attached and conditions to be met" to protect taxpayer interests.

One
key concern is whether there will be controls over the bonuses of the
"fat cat" bank bosses. Gordon Brown, the Prime Minister, said such
issues would be dealt with case by case. Remuneration should be "based
on responsibility, hard work, effort and enterprise," he said.

It
had been claimed that RBS bosses, chief executive Sir Fred Goodwin and
chairman Sir Tom McKillop, had offered to leave under a boardroom
clear-out agreed with the government but this was denied by the bank.

The
announcement provided an initial boost to the FTSE 100 index of leading
shares, and in particular to banking stocks, but this fell away later
in the day. The FTSE closed at a loss of 5 per cent – its lowest close
since 2004 – while banks failed to hold on to the huge gains of up to
60 per cent made earlier in the day.

When Mr Brown stood to
address the House of Commons on the package, which could well determine
how his premiership is judged, he was able to also announce the
interest rate cut.

Central banks across Europe, the US, Canada and China also reduced interest rates in an emergency move.

The
banks hope to encourage nervous consumers and businesses to spend more
freely again after widespread housing, credit and financial problems.

The
cut – which was immediately passed on to more than five million
homeowners – was cautiously welcomed by analysts and business leaders.

Miles
Templeman, director-general of the Institute of Directors, said:
"Before today's announcement the financial system was in the deep
freeze. After today it might be in the fridge, but there is no
guarantee.

"Nobody should be under any illusion that the
financial system is now fixed. Our concern now is for the real economy
and how much it will slow.

"There remains a real risk that the
economic downturn under way will further undermine bank capital due to
rising repossessions and bad debt."

Economist Howard Archer, of
Global Insight, said: "It's not the magic pill. We have a lot of
difficult times ahead. But the first stage is stopping things getting
worse and the hope is this will help stabilise the economy."

Martin
Weale, director of the National Institute of Economic and Social
Research, said for the UK it was important that the move came alongside
the £500 billion package.

He said rate cuts were "a valuable
piece on the side", but added "the key issue is for affected countries
to do what Britain has done and show governments are prepared to inject
equity capital into banks that look as though they need it. We will
only be confident that the worst is over when the US adopts a scheme
like Britain."

And Louise Cuming, head of mortgages at
moneysupermarket.com, warned: "This is not a magic cure-all and we
won't see either the mortgage or the housing market bouncing back to
where it was 18 months ago."

Following the announcements, Mr
Brown spoke by phone to the French president Nicolas Sarkozy, the
German chancellor Angela Merkel and the Italian prime minister Silvio
Berlusconi, as well as the EC president, Jose Manuel Barroso.

The government is expected to hold up its plan as a potential model for the rest of Europe.

Mr Darling is due to fly to Washington today to discuss global action on the crisis.

How clever was it? We offer some marks out of ten

Bill Jamieson,on the wisdom and implications of the British bail-out

IMMEDIATE IMPACT:

5
out of 10. Shares in HBOS and Royal Bank rallied after a faltering
start. HBOS closed 24.5 per cent higher and RBS was up 0.8 per cent. UK
shares overall continued to plunge, with the FTSE100 down another 5 per
cent or 238.53 points at 4366.69. But the reaction in money markets to
the package was notably more positive.

TIMING:

1 out of 10. Work has been under way on a bank rescue for weeks. So why the long delay?

RATE CUTS:

9
out of 10. The co-ordinated nature of the move by the world's central
banks was particularly impressive. But more will be needed in the
coming weeks. The near immediate passing on of the half per cent rate
cut to mortgage borrowers is desperately needed good news for
home-buyers.

PRESENTATION:

3 out of 10. Not impressive. And negotiations going on till early hours smacked of panic.

CONTENT:

8
out of 10. The package itself broadly went down well in money markets.
It is seems well thought out, targeted at the key problems of capital
strength and liquidity, is flexible, and does not crush the ordinary
shareholders into oblivion.

OVERALL EFFECT:

Jury out.

This
is going to take time. And this emergency package for UK banks will be
of little use if the fiery panic across the world's markets is not
staunched.

It will not stop the recession that is already
under way. But what the deal has certainly prevented is a total
collapse in confidence in the UK's financial system. It has improved
the odds that there will still be a functioning banking system left by
the end of the month. Whether that will be true by the time the storm
has run its course may depend on further injections of central bank
funds – and more rate cuts.

The huge efforts of the US Federal
Reserve, the US Treasury, and the British and European governments and
central banks have still not turned the tide.

WHAT IS THE TREASURY'S AIM?

It
is to staunch the flight of confidence and to revive the inter-bank
market – banks lending to other banks. To meet these objectives, it has
effectively created a core group of banks of capital strength that will
form the heart of the new UK financial system. By doing so the hope is
this will end the flight of confidence and stop the run on bank shares.

The government is setting aside a further £25 billion to help
other institutions build their capital so that they too will be fit
counterparties for the core members. But in reviewing eligibility for
inclusion, the government "will have due regard to an institution's
role in the UK banking system and the overall economy".

It is
likely a two-tier banking system will develop, similar to the world of
40 years ago when there was a distinction between clearing banks and
secondary banks. The government will require a full commitment from
participants in its scheme to support lending to small business and to
home-buyers.

WILL IT WORK?

No-one can be
sure. And certainly nothing is going to work until the firestorm raging
across global markets is put out. Overnight Japan's stock market
plummeted 9.4 per cent – its biggest one-day drop in 21 years. In
Germany the Dax Index opened down 4.8 per cent while trading on the
Moscow stock exchange was again halted.

Not even that
co-ordinated rate cut by the US Federal Reserve (to 1.5 per cent), the
Bank of England (to 4.5 per cent) and the European Central Bank (3.75
per cent) rallied markets as had been expected.

Tumbling share prices are a signal that a severe recession is going to hit whatever governments now do.

The
overall aim of government is to reduce the risk that recession turns
into depression through the vicious cycle between the worsening
economy, deteriorating credit quality, heightened financial strains and
reduced credit availability.

The aim is to ensure that there
is still a functioning banking system left a) by the end of the month
and b) once the recession ends.

The measures themselves will
not on their own end the financial crisis. This is global in nature and
the interlinkages are complex – and potentially highly flammable. So it
is unlikely measures by any one country can return financial conditions
to normal.

Says Saunders: "We are not yet even halfway through
the decline in UK house prices. We are not even close to halfway
through the UK recession, with associated job losses, business
failures, mortgage arrears and repossessions and debt write- offs. Much
pain lies ahead."

TOO LITTLE TOO LATE?

Many
fear so. Further bank recapitalisation and liquidity measures may be
needed. And there will almost certainly need to be further rate cuts,
taking UK rates down to 3 per cent – possibly lower.

Banks move to pass on benefits
LINDSAY MCINTOSH

BORROWERS finally got some good news yesterday when UK banks passed on a shock interest rate cut.

The
Bank of England dropped the base rate from 5 to 4.5 per cent at noon,
in the surprise move 24 hours ahead of its scheduled decision. Some
economists said it might soon plunge much lower.

Yesterday's
action was mirrored by the world's major central banks, including the
Federal Reserve in the United States and the European Central Bank, in
an attempt to prevent a global economic meltdown.

Almost
instantly, Britain's high street banks pledged to pass on the cut to
customers. HBOS, Barclays and Lloyds TSB – which lends through the
Cheltenham & Gloucester – were the first to cut their standard
variable rates in line with the Bank of England.

Where the cut
is passed on in full, it will knock about £47 off monthly repayments on
a typical £150,000 mortgage, reducing repayments to £1,012.81 a month
and saving consumers £570 a year, based on a new rate of 6.5 per cent.

Those with loans of £250,000 will benefit even more, saving £79 a month or £950 a year.

The
rate reduction was welcomed by the Council of Mortgage Lenders,
alongside the other measures taken by the government to help the
banking sector.

Michael Coogan, the CML's director-general, said
in cutting mortgage rates, the banks had helped to strengthen the
rescue package announced by Gordon Brown, the Prime Minister, and
Alistair Darling, the Chancellor.

"Not only are the tripartite
authorities now pulling together decisively to address domestic
confidence, but international central bankers are also collaborating
much more effectively on their position," he said. "All this decisive
action augurs well for an improving market situation, even though
no-one is pretending the tough times are over yet."

The US
Federal Reserve reduced rates from 2 per cent to 1.5 per cent and the
European Central Bank trimmed its rates from 4.25 per cent to 3.75 per
cent. The central banks of Canada, Sweden and Switzerland all took
similar action.

The Bank of England said that the drop was justified by likely falls in inflation in the coming months.

Howard
Archer, the chief European and UK economist at Global Insight,
predicted interest rates could be as low as 4 per cent by the end of
the year.

Who thought what of rescue package

"Taken
together with the co-ordinated cut in interest rates, today's package
represents a welcome step on the road to normality in financial
mar-kets, which is so critical for the wellbeing of the United Kingdom
economy."

Keith Skeoch, CEO, Standard Life Investments

•
"The government is using taxpayers' money as an easy way out, and
haven't fully explored other options that don't put £50 billion of our
hard-earned cash on the line."

Matthew Elliott, chief executive of the TaxPayers' Alliance

•
"At last, the UK Treasury and Bank of England Monetary Policy Committee
are wakening up to the scale of the crisis triggered by the credit
crunch."

Jonathan Fair, chief executive of Homes for Scotland

•
"In the wake of the recent financial carnage, the MPC's decision to cut
the base rate by 0.5 per cent to 4.5 per cent is welcome news for
struggling UK homeowners. This is the first reduction since April, and
many borrowers will be breathing a long-awaited sigh of relief."

Ann Robinson, director of consumer policy at uSwitch.com

•
"It is very welcome that the Bank of England has heeded calls for an
interest rate cut to ease lending conditions and provide a stimulus to
households and businesses, and brought forward the announcement in
conjunction with other central banks.

Alex Salmond, First Minister

• "Excessive risk-taking should not be rewarded but punished."

Gordon Brown, the Prime Minister

CREDIT CRUNCH
IN NUMBERS

So what could £500bn buy?

• Four-and-a-half NHS's (based on annual UK health budget)

• Six UK education systems (based on budget for 2008-9)

• 55 UNs (based on its annual budget)

• 20 Beijing Olympics

• 1,250 Scottish Parliaments

• Seven Vietnam wars

• Four-and-a-half Iraq wars

•
South Africa, Nigeria, Cameroon, Ghana, Tunisia, the Ivory Coast,
Madagascar, the Republic of Congo, Chad and Malawi combined (based on
their GDPs)