Subscribe to this blog's feedThe UK bailout is going ahead - £50 billion in two tranches will go into buying UK banks' preferred shares.
There's also £200 billion more in an expanded special liquidity scheme, and the prospect of a government guarantee for medium-term bank debt, details to be confirmed.
Paul Krugman approves:
Unlike the Paulson plan, this sounds as if it makes sense. However, given the strong financial linkages among the world’s economies, I wonder how much Britain can do on its own. Let’s see what the plan actually looks like; if it’s good, it can be a model for US emulation, and for the eurozone too if they can get their act together.
In fact, the reaction is generally positive - both in the commentariat
this is far more sensible than anything done in the US to date (save the AIG bailout, which was concluded on appropriately punitive terms). The government is making a direct investment, instead of the much more costly, indirect, and administratively complex route of buying dud assets at inflated prices, and taking preferred stock and possibly warrants...This is going the right way, it addresses directly the tier 1 capital problem, better than TARP and will dilute stockholders.
and on the markets - CDS spreads on the UK banks have tightened significantly.
There's the slight problem that the FTSE has fallen off a cliff AGAIN but that's more or less what you'd expect - after all, the major UK banks have just announced what's effectively a massive issue of new equity. Naturally their shares are going to fall. There's also been some bad news from the East as people start worrying about contagion.
Meanwhile, Brad Setser casts a wary eye at another bailout - that of Iceland (essentially the entire country is a giant hedge fund, rather like the US, he says, which makes you think a bit).
The possibility that countries with large reserves might displace the US, the G-7 and institutions like the IMF from their traditional role as the world’s financial crisis managers was one of the strategic changes that I discussed in my Council Special Report. I am though still surprised by Russia’s move, largely because I assumed that Russia’s current financial troubles would keep it from financial adventures abroad. Russia’s reserves fell by $40b between the end of July and the end of September, though part of that comes from the fall in the dollar value of Russia’s euros and pounds. It almost certainly isn’t pegging to the ruble. Finally, Russia’s central bank has had its hands full — or so it seemed — managing Russia’s own crisis...
I consequently wouldn’t characterize this move as “stabilizing.” It may help Iceland — but it also destabilizes the world’s existing architecture for crisis management. The IMF has plenty of cash. It could have been at the center of an international effort to support Iceland...
And, in line with his Council for Foreign Relations brief, he casts a wary eye at the implications of Russia buying out the keystone of the GIUK line. Just in case the news from London was making anyone feel too cheerful this morning.
