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Over the weekend the finance ministers, regulators and central banks of the G-7, the EU as well as the US and UK have all been hard at work – and it looks like all are pulling in the same direction. Three concerted short-term approaches seem to have evolved – improving liquidity, shoring up failing banks (but not their management), and improving the capital situation of those left standing, with an added commitment of protecting depositors’ funds.
The UK government will inject £37bn of taxpayer’s money into Royal Bank of Scotland (RBS) and the merged Lloyds TSB (LTSB) and HBOS, with £20bn going to RBS and the rest to LTSB/HBOS as part of Lloyds conditions on taking over responsibility for HBOS. This now means the government will own 60% of RBS and 40% of the merged LTSB/HBOS.
The 15 eurozone countries met over the weekend and agreed they would take the same steps as the UK and France, Germany and Italy are expected to present their plans today. Member states will offer to guarantee any new bank debt for five years at commercial rates and to re-capitalise their banks with injections of public money in return for preference shares. “Hundreds of billions of euros” in government investment are being talked about. European financial institutions are also to be set targets for minimum tier 1 capital requirements and banks are scrambling to reach these levels or face government injections and reduced independence.
The G-7 and the IMF have been mirroring the above statements without actually giving any plans – although they came out solidly in condemning the US for allowing Lehmans to fail – something the US Fed have subsequently admitted was a mistake – and said that no more major banks should fail. Subsequently we have seen Dexia, Fortis, Wachovia, RBS and others all pulled back from the brink.
And the market reaction? Asian markets have all reacted positively with rises of 5-8% being seen, and European markets opening this morning with around 5% improvements – but there is a way to go yet before the 20% falls of last week are recovered.
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