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United Kingdom Leads European Nations in Coordinated Effort to Cut Off the Credit Crisis

By , Money Morning •

By Jason Simpkins
Associate Editor

Governments across Europe yesterday (Monday) took the first step in a new, coordinated effort to subvert the widening credit crisis and restore functionality to the markets by guaranteeing new debt and using taxpayer money to bail out troubled lenders all over the continent.

The sweeping actions followed a pact reached Sunday by members of the European Union, most notably the United Kingdom, Germany, and France.

“The steps taken in Europe are very positive,” billionaire investor George Soros told Bloomberg News. “The European governments have got religion and realized this is a serious problem they have to address.”

The British government, which last week unveiled its own $87 billion bailout plan, spent $64 billion (37 billion pounds) for controlling stakes in three U.K. banks: The Royal Bank of Scotland Group PLC (RBS), HBOS PLC (OTC: HBOOY), and Lloyds TSB Group (LYG).

In exchange for the bailout money, the participating banks will be required to help the homeowners who are struggling to pay mortgages, to cancel board-level bonuses this year, and to accept government-appointed non-executive directors. Dividends will not be paid to shareholders until the government redeems the preferred shares it takes in the banks.

"This does not come cost free," said Chancellor of the Exchequer Alistair Darling. "There are strings attached. We will put people onto the boards, and they're there to protect the taxpayers' interests."

In exchange for its bailout, RBS – the second-biggest British bank before its shares collapsed last week – was forced to oust Chief Executive Officer Fred Goodwin after eight years of service.

British Prime Minister Gordon Brown was certain to make clear that the stakes would not be permanent, but would instead be held "at arm's length," and sold as soon as the banks are sufficiently strengthened.

Brown said that the United Kingdom had to be a "rock of stability" during this time of economic crisis and lead the way in restoring confidence in the country’s financial sector. The bailout was "unprecedented but essential for all of us," he told reporters.

The U.K. Treasury last week said it would provide $43.5 billion (25 billion pounds) to recapitalize banks and boost Tier 1 capital ratios – a measure of the strength of a bank’s balance sheet. An additional $43.5 billion (25 billion pounds) will also be available, if needed. The government hopes to have all banks reach a Tier 1 capital ratio of 9%.

U.S. economist Paul Krugman, who won the Nobel Economics Prize on Monday, said in his New York Times newspaper column Sunday that Brown and Darling "have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up.

"The Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions," Krugman rote. "And this combination of clarity and decisiveness hasn't been matched by any other Western government, least of all our own.” [For an article on Krugman’s Nobel Prize, check out this article elsewhere in today’s issue of Money Morning.]

Europe United Behind Brown

Other European nations followed Prime Minister Brown’s lead yesterday, with France, Germany, Spain, the Netherlands, and Austria having committed $1.8 trillion (1.3 trillion euros) of their own to guarantee bank loans and recapitalize lenders, Bloomberg reported.

“Instead of tearing us apart, this global crisis has strengthened the necessity of dialogue, understanding and compromise," French President Nicolas Sarkozy said Sunday. "It's not so easy. We don't have the same traditions, for some we don't share the same currency, we have different regulators. And with this crisis, in a few hours, day and night, we've had to learn and understand each other's problems and find a common solution."

Sarkozy said France would guarantee $436 billion (320 billion euros) of bank loans and set up a fund that could spend up to $55 billion (40 billion euros) – 2% of the nation’s gross domestic product (GDP) – to recapitalize banks. Those figures represent a maximum, which Sarkozy said may not be required if the markets resume functioning on a more normal basis.

France will also establish a new company to ensure bank liquidity and purchase commercial paper.

Germany, meanwhile, pledged as much as $681 billion (500 billion euros) in aid for the financial sector. About $545 billion (400 billion euros) has been earmarked for loan guarantees, $109 billion (80 billion euros) will be used to recapitalized banks, and the remaining $27 billion will be set aside to cover potential losses from loans.

The rescue package will amount to about 20% of the Germany’s GDP, but German Chancellor Angela Merkel believes the measures are totally necessary.

“We're taking measures in order to prevent a repeat of what we've just experienced,” Merkel said. “These are sweeping steps but they're necessary to restore market confidence.”

Like the U.K. deal, the German government could influence management decisions and limit dividends at banks that get capital. The package is due to be ratified by Germany's two houses of parliament by the end of the week.

Spanish Prime Minister Jose Luis Rodriguez Zapatero said his country’s government would guarantee up to $135 billion (100 billion euros) in bank bond issuance this year. Zapatero said measure is to guarantee credit operations by Spanish banks up to end of 2008, but that the amount for 2009 had yet to be studied.

The Dutch government will guarantee up to $272 billion of inter-bank loans, and Norway will provide $57 billion in liquidity for its commercial banks.

Austria will spend up to $115 billion (85 billion euros) to prop up its troubled banks, and pledged an additional $20 billion (15 billion euros) in capital.

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