What to make of Brown and Darling’s £50 billion rescue plan for the banks? As with so much during this financial crisis, there’s a distinct air of uncertainty around it. There are potential upsides: it should help restore some degree of confidence in the banking system, help banks lend to each other, and stabilise the markets. But there are potential downsides as well, including:
1) Debt. The £50billion will be funded by increased national borrowing. And there could be more on top of that if HMT ever has to act on its promise to underwrite loans between the banks. As Fraser’s pointed out, the deficit is already daunting enough. This latest could make it hit the stratosphere.
2) Precedent. What happens when the £50 billion runs out? The pressure on the government to provide more funds will be immense, particularly if the biggest banks either didn’t take advantage of this first-time offer or remain in trouble despite it.
3) Destabilising effect. Many believed that the astonishing drop in the Royal Bank of Scotland’s share price yesterday was attributable to the leaked news that that same bank had allegedly asked about the possibility of government funds being made available. Would there be a similar – and possibly even more severe – effect should major banks actually start dipping into the money reserves that are now in play.
The Damoclean Sword has now been inched towards the space above taxpayers and the next government. Of course, the argument goes that the risk of it falling is a risk worth taking to get the country through the current turmoil. That might be correct. As the cliché goes: only time will tell.
UPDATE: It’s certainly not stabilising the markets yet. As of 1000, the FTSE has fallen by 5.39 percent.
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