Britain, still stumbling, expands its stimulus package
Nov 5th 2009 10:40AM
Updated Dec 4th 2009 4:22PM
This additional stimulus will be through the central bank's purchase of government securities with freshly printed money. While other countries are beginning to slow their emergency stimulus programs, the U.K. isn't ready to do so. For example, the U.S. Federal Reserve has completed its program of buying $300 billion of government bonds, but it's still buying mortgage-related debt. The European Central Bank left interest rates at 1%, a record low, while economists wait for clues indicating when the ECB can start exiting its stimulus programs.
Britain's growth prospects look worse than France, Germany and the U.S. because the British economy relies heavily on financial services. On Wednesday, Britain made it clear that the financial crisis wasn't over when it announced that it would break up banks deemed too big to fail.
The Royal Bank of Scotland (RBS) and Lloyds Banking Group (LYG) are being forced to sell off parts of their operations to get additional help from the government. Of the two, RBS will unload the larger share. The new cash infusion of 25.5 billion pounds into RBS means the government will own 84.4 percent of the bank but will have 70.3 percent of the voting rights.
RBS will sell off its branch network in England and Wales, as well as NatWest branches in Scotland. It will also have to sell RBS Insurance, Global Merchant Services and its interest in RBS Sempra Commodities. In exchange for the divestments, RBS will get access to a new government program to insure its bad assets, in addition to the cash infusion. Sales won't be made quickly, nor will they be at fire-sale prices. Indeed, it could take several years for the bank to get appropriate offers for the divested assets, according to a report in The Wall Street Journal.
Lloyds plans to move forward by raising $21 billion pounds ($34.48 billion) through a rights issue and other private means, so it won't be required to divest as much as RBS. Lloyds will sell off its retail banking business and about 19 percent of its mortgage balances. It will also sell 180 billion pounds in noncore assets over time and will be forbidden to make new acquisitions in the next three to four years, according to the Journal.
A Threatened Credit Rating
Britain also got some good news. On Monday, a manufacturing survey raised hopes that the country might finally see economic growth in the fourth quarter. But the third-quarter gross domestic product report showed it's still in a recession that dates back to early 2008.While Britain leads the way breaking up big banks, its financial health remains one of the weakest among the industrialized nations. Last May, Standard & Poor's cut Britain's sovereign rating outlook because the net general government debt burden could approach 100 percent of GDP and remain near that level in the medium term. Clearly, the additional stimulus spending will add to that debt. That could hurt Britain's rating and raise its costs of borrowing.
Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Foreign Currency Trading.