UK throws banks a lifeline as RBS posts record loss

Announcing Britain's bank bailout, Finance Minister Alistair Darling said fourth-quarter GDP figures out Friday would confirm the UK was in recession for the first time since 1992.

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The European Commission, meanwhile, forecast the euro zone economy would contract for the first time this year, by 1.9 percent, and grow by only 0.4 percent in 2010.

 

"There is a way to go yet. Looking out toward the next year, there's no doubt the downturn in economies across the world is really quite sharp now," Darling said.

 

RBS said it made a loss of up to 28 billion pounds ($41.3 billion) last year, including a huge goodwill hit on its purchase of parts of ABN AMRO in 2007. The state's stake in RBS will rise to 70 percent from 58 percent.

 

The worst financial crisis in 80 years has already felled top banks and pushed much of the world into recession.

 

The euro zone's fourth largest member, Spain, suffered a credit rating downgrade by Standard & Poor's. The agency cut Greece's rating last week and has Ireland and Portugal under review.

The move by S&P to cut its rating to "AA+" from "AAA," a level Spain had held since late 2004, sent the euro to a session low against the dollar as investors feared other euro zone economies could suffer the same fate.

 

"The downgrade ... reflects our expectations that public finances will suffer in tandem with the expected decline in Spain's growth prospects, and that the policy response may be insufficient to effectively counter the related economic and fiscal challenges," S&P credit analyst Trevor Cullinan said.

 

UK QUANTITATIVE EASING?

Britain pumped 37 billion pounds into the banks in October but credit remains scarce.

 

The UK government will now allow banks to insure themselves against losses on their riskiest assets. It will offer guarantees on their debt and set up a 50-billion-pound fund to buy up high-quality securities to get cash flowing freely again.

 

The government also gave the Bank of England a green light to increase money supply if it thought it necessary as interest rates, now at 1.5 percent, approach zero.

 

"It sounds very much like quantitative easing," said Alan Clarke, UK economist at BNP Paribas. "The government is giving the Bank of England an additional policy tool."

 

 

The Danish government unveiled a 100 billion crown ($17.8 billion) bank credit package of its own Sunday to jump-start corporate and private lending, prompting shares in leading Danish banks to trade higher Monday. 

 

The market mood is feverish -- shares in Britain's Barclays crashed 25 percent Friday prompting it Monday to say it knew of no justification for that fall and that it expected to report annual pre-tax profit well in excess of the 5.3 billion pounds consensus estimate.

 

Its shares climbed but then slid into the red as RBS plunged 42 percent on the back of its colossal loss and Lloyds TSB dropped 22 percent on fears for the sector.

 

"If recent history is a guide, any market euphoria related to such a bailout package generally evaporates on the realization that such mammoth support was required in the first instance," said Daragh Maher, Deputy Head of Global FX Strategy at Calyon.

 

OBAMA POISED

The incoming U.S. administration is also poised to act, saying it will make its bailout funds work harder to get credit flowing again to cash-starved consumers and companies.

 

In Washington, a senior adviser to Barack Obama, who will be sworn in as president Tuesday, said the new team would soon change the way the second half of the $700 billion bank rescue scheme was run to make it more effective.

 

One option under discussion is a government-run "aggregator bank" that would absorb toxic debt weighing down banks' balance sheets. Obama is also working with lawmakers to launch an $825 billion fiscal stimulus plan by mid-February.

 

The U.S. economy has already been declared in recession. Data this week will do little to dispel the gloom.

 

One forecasting group said Britain's economy was set to shrink 2.7 percent this year, the biggest annual contraction since the end of World War Two.

 

Japan is expected to report Thursday a record 30 percent drop in exports and its central bank is set to forecast that the world's second-biggest economy will contract for the full two years to March 2010 and will soon return to deflation.

 

China is expected to show its economy expanded at its slowest rate in nearly a decade in the fourth quarter.

 

International Monetary Fund chief Dominique Strauss-Kahn said more countries may soon need IMF bailout packages.

 

"I'm afraid that some other countries, not only in eastern Europe, but all around the world (may need help)," he said.