News

Britain has become the latest country forced into a humbling bank bailout as the global financial contagion continues to resist unprecedented emergency triage.

Stocks in Canada, the United States and much of the rest of the world spiralled downward again Tuesday, highlighted by a 508-point, or 5.1 per cent, drop in the blue-chip Dow Jones Industrial Average, to 9,447.11. In the past five trading days, the Dow has lost a record 1,400 points, or 13 per cent, wiping out investor wealth faster than governments can pump cash back into the banking system.

Early Wednesday, Japan's Nikkei stock index plummeted 9.4 per cent to close at a five-year low on deepening fears over the global financial crisis, while Indonesia suspended trading after the country's benckmark index by dropped 10 per cent.

The panic has continued in spite of a series of unprecedented efforts in the United States, Europe and elsewhere to halt the spread of the credit crisis.

The latest hot spot is Britain, which unveiled details of a £50-billion ($100-billion) banking-rescue package early Wednesday.

The Treasury made the announcement before markets opened, saying eight banks have signed up for the so-called recapitalization plan, which offers up to £50-billion in the form of preference shares.

The Treasury said the eight banks are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.

"It is a process that inevitably will take time. It is not an instant change but it is a restructuring, it is stabilizing the system, and that is very important," Treasury chief Alistair Darling told Sky News.

The Treasury said the Bank of England would expand its Special Liquidity Scheme to facilitate short-term borrowing and help to free up credit markets.

News of the government's plans leaked out Tuesday morning, triggering a sharp sell-off in bank shares.

Prime Minister Gordon Brown has so far avoided the sort of massive taxpayer bailouts of the entire banking system to which the governments of the United States, Germany, Russia, Ireland, Iceland and other countries have succumbed.

After Tuesday's enormous collapse of confidence in the British banking system, during which shares in some major banks fell by more than 40 per cent, Mr. Brown no longer has much choice. The largest and heretofore most secure British banks — including Lloyds TSB, Barclays and possibly HSBC — are likely to be partially nationalized.

Similar efforts have so far been unable to stabilize the U.S. banking system. U.S. Federal Reserve Board chief Ben Bernanke announced the latest in a series of moves aimed at fixing the country's broken banking system Tuesday, a plan to become the buyer of last resort in the dysfunctional $1.6-trillion (U.S.) market for short-term company debt.

The so-called commercial paper market is where major companies, such as General Electric and American Express, will go to get the money they need in the next month to fund their daily operations, including paying employees and buying supplies.

“These are momentous steps, but they are being taken to address a problem of historic dimensions,” Mr. Bernanke said during a speech in Washington in which he also hinted at an imminent cut in the Fed's benchmark lending rate. The rate is now two per cent.

Last week, Congress passed a $700-billion plan to buy up toxic mortgage-related investments held by banks and other financial institutions in a bid to get them to resume making loans to business, consumers and each other. There are now growing calls for a more co-ordinated global response to a problem that has spread from Wall Street to virtually every part of the planet.

The head of the International Monetary Fund joined others in calling for swift and co-ordinated international efforts to restore stability in financial markets.

“The time for piecemeal solutions is over,” said Dominique Strauss-Kahn, managing director of the IMF, which is due to play host to a pivotal meeting of Group of Seven central bankers and finance officials this weekend in Washington.

In an uncharacteristically sober report, the IMF said the world faces a potentially disorderly global unwinding of debt that could precipitate “a severe adverse feedback loop between the financial system and the broader economy.”

In Europe, tensions mounted over the disjointed response to the crisis. German Chancellor Angela Merkel criticized Ireland's unilateral move to set up a sweeping guarantee for its banks.

“We need coherent, common action” Ms. Merkel told the European Parliament.

She singled out “the Irish way – stretching a shield over one's own financial institutions, not including other international institutions that also have long paid taxes in Ireland, and so producing competitive distortions that, from my point of view, are not acceptable in an internal market.”

The move put many British banks at a competitive disadvantage because they enjoy significantly weaker government deposit insurance.

Ms. Merkel said it was also unacceptable for “27 member states to set up a shield and everyone to pay into a fund, in order then ... to conduct crisis management in individual member states.”

U.S. President George W. Bush acknowledged that a series of rescue measures would take time to put the economy on firmer foundation.

“Right now, we're in tough, tough times. No question about it,” he said in Chantilly, Va., a Washington suburb. “I wish I could snap my fingers and make what happened stop. But that's not the way it works.”

Earlier in the day, Mr. Bush pressed European countries to co-ordinate their efforts to ease the financial crisis spreading around the globe. The White House said Mr. Bush was open to the idea of a leaders' summit on the economic upheaval.

Mr. Bush talked on the phone with Mr. Brown of Britain, French President Nicolas Sarkozy and Italian Premier Silvio Berlusconi.

Details of the British bank rescue are expected to be announced this morning, before the London Stock Exchange begins its trading day – and before Mr. Brown faces a fractious House of Commons for the first time since the summer break. The Prime Minister is expected to appear before the country to announce a government investment package of at least £50-billion in the troubled banking sector, and an increase in deposit protection beyond the current £50,000 ($100,000) limit.

The British government will spend the money on preferred shares, which would put it ahead of common shareholders in getting its investment back, with the purchases based on the size of each bank's capital.

One condition for the taxpayer purchase, British government sources said last night, will be a suspension of dividend payments to shareholders. Instead of receiving dividends, bank shareholders may be able to take part in the recapitalization of the banks.

Few analysts believe this will be sufficient to restore investor and deposit-holder confidence in the banking sector, leading to worries among bankers and among members of Mr. Brown's Labour Party that the banking sector will become a major Treasury expense, taking Britain into large-scale deficit for the first time in a decade.

“This is seismic,” Danny Gabay, a former Bank of England economist and now an analyst, told Bloomberg last night. “Recapitalizing banks is probably the right way. The problem is that banks may come back for another cheque in the future.”

The first task of this bailout will be the rescue of Royal Bank of Scotland Group PLC, the owner of several banks and mortgage lenders including NatWest and parts of ABN Amro, which it acquired last year. Analysts believe that RBS, whose shares collapsed by roughly 60 per cent before finishing the day down 39 per cent, has the largest exposure to bad mortgage debt in Britain, as well as a large stake in the troubled U.S. mortgage sector. Its failure, analysts say, would jeopardize the entire British banking sector.

With a report from The Associated Press