Only Abba can save the world financial markets

08 October 2008

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Martin Vander Weyer says that the collapse in the markets reflects a loss of confidence that is out of proportion to all reason: a trip to Mamma Mia! is the answer to this hysteria

In the first half of this week, all this came sharply into focus. The conventional 19th- and 20th-century remedy of injecting ‘abundant’ liquidity through central banks wasn’t working. Banks continued to refuse to lend to each other, and rumours of near-insolvency blew from the canyons of Canary Wharf to the capitals of Europe, where a series of banks with very large balance sheets but unfamiliar names — Fortis, Dexia, Hypo Real Estate — suddenly went into intensive care. Even the Paulson bail-out in its revised form made no difference to market sentiment: in this mood of madness, there were those who were prepared to declare it a failure even before the ink was dry.

And so, on this side of the pond, bank shares started to collapse — particularly those of Royal Bank of Scotland, until last year the aggressive front-runner of British commercial banking, and the ailing HBOS, whose forced merger with Lloyds TSB looked in doubt. On Monday night, we heard that the major high-street banks were in conclave with the Chancellor. On Tuesday, Robert Peston of the BBC — now the nation’s town crier — announced that a capital injection by the government was imminent; Barclays, for one, responded that it had not asked for capital and did not need it. Then we woke on Wednesday morning to find that Gordon Brown and Alistair Darling had decided to do something really bold and in Brown’s word, ‘far-reaching’: to inject up to £50 billion of taxpayers’ money in the form of new equity for British banks (either in ordinary shares or on the preference-share model of Warren Buffett’s recent stake in Goldman Sachs), and up to £200 billion of additional liquidity to free up interbank lending markets. RBS and HBOS looked certain to take up the new capital on offer. For fear of further attacks on their shares and credit ratings, Barclays and others are likely to follow. Only HSBC looked strong enough to stand aside from the scheme.