LONDON – Britain announced a second rescue plan for the country's ailing banks on Monday, hoping to thaw frozen lending by offering to insure banks against large-scale losses on bad assets they already hold.
Stock investors, however, were spooked by fears that the second bank rescue plan in three months was a step toward full nationalization of one or more banks. Fears focused on the Royal Bank of Scotland, which disclosed that it is likely to report a record full-year loss — its shares closed down 67 percent.
"There is a great deal of uncertainty. There seems to be some concern doing the rounds that the group will be totally nationalized sometime in the near future," said Keith Bowman, analyst at Hargreaves Lansdown stockbrokers.
RBS said its losses for the full year could be as much as 28 billion pounds ($41.3 billion), which would be the biggest loss ever by a British corporation.
Prime Minister Gordon Brown said on Monday that the government has increased its stake in RBS to almost 70 percent, but declined to say whether he believed the bank will eventually be fully nationalized. The government took a stake under a first round of bailouts late last year.
Announcing the new rescue package, Brown said the government would offer to insure banks against default on toxic loans in exchange in return for a fee and legally binding commitments to make credit more available to British businesses and home buyers.
Brown's plan will also see 50 billion pounds (about $74 billion) set-aside to create a special fund for the Bank of England to buy high quality loans and other assets directly from banks. That plan is also aimed at bringing down borrowing costs.
Britain's Treasury said precise details of the asset purchase program would be finalized later this month.
Both Treasury chief Alistair Darling and Brown acknowledged that October's pledge of 37 billion pounds (about $55 billion) to bail out Britain's banks hadn't done enough to encourage them to resume normal lending volume.
"Good businesses must have access to credit, jobs should not be lost needlessly," Brown told reporters at his Downing Street office. He said stimulating lending is vital to spark Britain's economy and to limit job losses as Britain tackles a recession prompted by the global downturn.
Britain's Treasury said the government will offer to insure banks against losses on about 90 percent of specific shaky loans. The plan would require banks to identify their riskiest assets which could be insured with government backing.
It's hoped the offer will reduce anxiety in the banking sector about the value of past investments, boosting their confidence to offer new loans. Losses on securities backed by shakey U.S. mortgages has damaged banks' financial condition and threatened
Neither Brown nor Darling could say how much the plan will cost taxpayers, as details won't be agreed until banks start participating.
The problems facing the banking sector were stoked last week by Citigroup Inc.'s announcement of a massive $8.3 billion fourth quarter loss.
Bank of America Corp. also revealed a $2.4 billion quarterly loss and said last week that it would get an additional $20 billion in support from the U.S. government's emergency bailout fund, plus guarantees against losses on up to $118 billion in troubled assets. The $20 billion will come from the government's $700 billion rescue fund, called the Troubled Asset Relief Program, or TARP.
Opposition Liberal Democrat lawmaker Vince Cable said some financial experts claimed British taxpayers face losses of up to 40 billion pounds ($58 billion)
Brown said the "investments will be held for no longer than is necessary to ensure stability," but could not specify how long the government expects to operate the program.
"Governments across the world are having to do all sorts of things that they might not wanted to have done a few years ago," Darling told reporters.
Some critics called the latest rescue plan a gamble, coming only three months after October's bailout.
"We still think that the government may eventually have to set state-decreed targets for the banks to lend, perhaps via further nationalization," Vicky Redwood, an economist at Capital Economics Ltd., said in a statement.
The European Commission said Monday that the bank-rescue programs, along with falling tax revenue, would push Britain further into debt.
It predicted that Britain's deficit — the difference between annual spending and revenue — will rise from 2.8 percent of gross domestic product in the financial year that ended in April 2008 to 5.7 percent in the current financial year. The Commission predicted Britain's deficit would reach 9.5 percent in 2009-2010.
Overall debt will likely soar to nearly 72 percent of gross domestic product by fiscal year 2010-2011, way above the government target of 40 percent or less, the EU executive said.