Wednesday, 8 October 2008

Britain follows with UK Bailout Plan

Those in the US who thought the $700 billion bailout package passed by the congress last Friday was extremely unusual might be reassured by seeing another bailout unveiled across the pond - a £500 billion ($870 billion) plan for the UK. But importantly, the British bailout plan is entirely different from its counterpart in the US. Here's why.

For starters, the £500 billion figure being used by the British media this morning is a bit misleading. Though all $700 billion of the US package will be coming directly from taxpayers, only £50 billion ($87 billion) of the UK plan is coming from taxpayers money. That part of the plan will be used by the government to partially buy out failing UK banks. This is where the plan differs significantly from the one in the US. The $500bn US taxpayer-funded bailout package will be used to buy the bad debt from the ailing financial institutions to clear up their balance sheets. The
£50bn UK taxpayer-funded bailout package will be used by the government to buy partial ownership in failing UK high street banks, the banks most people use to store their savings.

Additionally, because of the differences between the US presidential system and the UK parliamentary system, there is no doubt as to whether this bailout plan will become reality. It's definitely happening.

So where is the £500 billion figure coming from? Some news outlets have decided to include the other part of the plan, half of which is theoretical money being made available and the other half of which is just a larger injection than normal by the Bank of England into the money markets, in the headline. £200 billion will be coming from the Bank of England under its existing Special Liquidity Scheme. The Bank of England always injects money into banks under this scheme, although now it will be putting in much more money much faster. Additionally, the Government is making £250 billion "available" for banks to guarantee medium-term debt in a bid to encourage banks to start lending to each other again, although so far the banks have said they won't use it.

Brown said that the £50 billion investment by the taxpayers will yield a return on the investment, as is being claimed in the US. Like in the US, Brown seemed to be throwing the financial philosophy of the ruling government (in this case New Labour) out the window in order to urge the new plan. "This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," he said this morning. This language perhaps struck more than a few people as unusual this morning, as that "outdated dogma" was developed and followed by Brown himself when he was chancellor under Tony Blair. Such quick philosophical rethinking echoes the language that has been being used in the US about the Anglo-Saxon model of free-market capitalism.

The two men said the government had been working on this plan for weeks, but has chosen to unveil it now because of the market meltdown which took place yesterday, in which the high street banks plummeted on the UK stock markets. My bank, for instance, lost 40 percent of its value in the course of yesterday, making me feel quite nervous about my savings. This morning's announcement seems to have had a small rallying effect on the UK markets - for now.

European Plan?

So now that the UK has become the first EU country to come up with its own bailout package unilaterally, does this mean any talk of a pan-European bailout fund is dead in the water? Not necessarily, said Brown. The prime minister also announced that the UK has put forward ideas this morning for a pan-European funding plan. Yet he still ruled out extending the UK's savings account guarantee to cover all deposits, even as other European nations are scrambling to do so.

The fact that Brown didn't have much else to say about a pan-European response probably means that coordinated action is unlikely, which may mean that his announcement does little to calm the European markets in the long run. The market turmoil over the past two days was largely in response to the fact that the EU seems to have disintegrated in response to the economic crisis, with each member nation taking drastic unilateral steps which seem to conflict with one another. As Swedish finance minister Anders Borg told reporters in Luxembourg yesterday, "One country's solution is another country's problem.'' Though Brown's announcement this morning may temporarily calm the British markets, it may send the continental European markets into even more turmoil, and by tomorrow the beneficial effect of the announcement for UK trading could be overtaken by continues fears about the lack of a coordinated Europe-wide response.

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