THE government is preparing to buy a huge stake in Britain's stricken banks to boost confidence in the economy as the freefall in global markets continues.
News of the drastic measure emerged after the UK's leading shares suffered their biggest ever one-day fall and as European governments failed to agree a common strategy in their war against the global financial crisis.
Under the plan, to be announced later this week, The Scotsman understands that the government will inject between £30 billion and £50 billion into the banks, with more to follow if required.
In return, the state will receive preference shares to be held for the duration of the crisis. The four key banks involved are believed to be HBOS, Lloyds TSB, Barclays and Royal Bank of Scotland.
They are understood to have agreed the capital injection in outline over the weekend and in further discussions yesterday. Indeed, yesterday's massive sell-off of bank shares leaves them with no alternative.
However, the move will raise concerns over the exposure of taxpayers to financial risk, following the use of public funds to nationalise the stricken bank Northern Rock earlier this year.
The FTSE 100 fell 7.85 per cent, wiping about £93 billion off the value of the UK's largest firms – the biggest percentage fall since the Black Monday of 1987 and the largest points fall since the index was launched in 1984.
No company was spared the agony, but the Edinburgh-based banks RBS and HBOS were among the biggest losers, with crashes of 20.46 per cent and 19.8 per cent.
RBS saw its credit rating brought down a notch by Standard & Poor's, the rating agency, indicating less certainty among key analysts as to its position. A House of Commons statement by Alistair Darling, the Chancellor, did nothing to ease the panic, as confusion reigned over what action individual European countries were taking to try to avert the crisis.
In the United States, the main Dow Jones share index fell sharply – further evidence that the American government's $700 billion (£380 billion) bail-out had not proved to be the silver bullet that many predicted it would be.
The Dow recovered in erratic trading to a loss of 369.88 points, or 3.58 per cent, to close at 9,955.50, dropping below the 10,000 mark for the first time since October, 2004.
At its worst point, the Dow was down more than 800 points, an intraday record – surpassing its previous record for a one-day decline, 778, which was set a week ago.
Underlining the economic devastation, a new report today by the British Chambers of Commerce will say that the UK is already in a recession, with business confidence, profits and turnover at record lows and unemployment set to rise by up to 350,000 in the next year.
The authoritative survey of 5,000 firms by the British Chambers of Commerce shows a worsening economic outlook and rising unemployment amid a "collapse" in confidence across all sectors of industry. In addition, the country's largest insolvency specialist has warned that more than 300 UK retailers are likely to go under in the new year, when banks cut off their lifeline funding.
Two arguments have made the unprecedented government intervention in Britain's banks an urgent necessity.
One is that they are unable, in the current chaotic conditions, to raise fresh capital from their own shareholders.
HBOS, RBS and Barclays have already raised extra capital by way of rights issues and shareholders would simply balk at a further cash request. The second is that the outlook for the global economy has nosedived over the past few weeks and banks will need additional liquidity in which to operate as trading conditions worldwide worsen.
Separate arrangements may be made for HSBC and the Spanish bank Santander, which owns Abbey and has just bought the retail operations of Bradford & Bingley.
Although they make the bulk of their profits overseas, they also have substantial operations in the UK.
The fine details have still to be worked out between government ministers and the banks over the next couple of days, but authoritative sources say that a deal should be announced before the end of the week.
Speaking to the United Jewish Israel Appeal in London last night, Gordon Brown, the Prime Minister, said the government was ready to take action to prevent "irresponsible risk-taking" by banks and other financial institutions.
The cash injection will be designed to lift the banks' "tier one" capital ratios – the amount of capital a bank is expected to hold to allow it to absorb losses but still protect its depositors – from about 6 per cent to between 7 and 8 per cent.
Further help for the banking system may come on Thursday with a half-point cut in interest rates.
While the Bank of England's monetary policy committee will maintain its independence, events of recent days, and in particular the scale and savagery of the falls in stock markets yesterday, should compel members to reduce rates at the earliest opportunity – and that is when they hold their regularly monthly meeting this week.
Only two days after European leaders had assembled to find a united way forward, cracks were apparent, with countries taking unilateral action.
Confusion reigned over whether Germany had guaranteed to back all savings, after Angela Merkel, the chancellor, seemed to make such a statement on Sunday, only for sources to claim that she had not intended for legislation to be drafted to back it up.
Denmark, Greece, Ireland and Austria have given their own guarantees, while Spain hinted yesterday that it might do the same.
Iceland – hugely exposed to the turmoil because of its reliance on banks – teetered precariously close to total economic chaos, as its government belatedly issued a guarantee but failed to deliver a wider escape plan.
In his speech to the Commons, Mr Darling said the £50,000 savings guarantee would come into force today, and that the Financial Services Authority would look at raising the threshold further.
But even as he spoke, markets were tumbling around the world. There were no winners on the FTSE 100, which fell almost 8 per cent, while the Dow Jones fell below the 10,000-mark for the first time in four years.
"Another Monday, another banking crisis," said Manoj Ladwa, a senior trader at ETX Capital. "Just when the market thinks it has found a base level, there's another jolt to the system. Black Mondays used to be a once-a-decade event, now they're coming along more regularly than a London bus."
How financial crisis is taking its toll across the world – and what governments are doing about it1. UNITED STATESCongress has passed a £380 billion banking bailout.
2. GERMANYBailed out Hypo Real Estate bank with a £40 billion rescue package, and Angela Merkel, the chancellor, has offered a "political promise" to people that their private savings are safe.
3. IRELANDGuaranteeing all domestic deposits in six main banks for the next two years.
4. GREECEGovernment said it would guarantee all domestic bank deposits but stressed move was a political one.
5. AUSTRIAGovernment guaranteeing bank deposits of up to 20,000 (£15,500).
6. BELGIUMFortis, in difficulty since it joined RBS in ABN Amro deal, is selling 75 per cent of its operations in Belgium and Luxembourg to BNP Paribas.
7. ICELANDGovernment offering an unlimited guarantee on all domestic savings accounts. It came after trading in six of Iceland's biggest banks and financial firms was temporarily halted.
8. JAPAN The Bank of Japan yesterday offered to lend 1 trillion yen against pooled collateral in an attempt to inject liquidity into the market.
9. INDIALocal currency fell 11 per cent yesterday.
10. CHINAMarkets in mainland China dropped sharply yesterday while the Shanghai Composite Index sank 3.7 per cent.
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Q&A: How new safety net for savings could benefit you•
'Recession here and 350,000 jobs will go'•
More than 300 retailers could go bust after Christmas The full article contains 1354 words and appears in The Scotsman newspaper.
