What does the government rescue plan involve?
November 16, 2008
Recently the UK government, like some other global government officials, announced details of a proposed rescue plan to bail out the struggling financial markets in the UK, restore consumer confidence, and boost the economy. The details of the plan were unveiled by the Prime Minister, Gordon Brown, and the Chancellor, Alistair Darling, at the same time as the announcement about the surprise base rate cut of 0.5%, which came just a day ahead of the scheduled Monetary Policy Committee meeting where the base rate is usually set.
The rescue package is likely to take up around £400 billion worth of fresh funds, according to industry reports. The extra money is initially to be made available to eight of the largest banks and building societies in the UK by the government, which will want preference shares in those banks in exchange for the bailout cash. The Prime Minister, Gordon Brown, has said that the plan is designed to try and get the banking and financial sectors back onto a sounder footing.
Unfortunately, following the announcement made by the government banking shares in banks did fall, and one industry official said: “What Gordon Brown and central banks have done today should stave off economic Armageddon - but it’s probably too late to save us from months, or even years, of sluggish growth.”
He did add that HBOS shares had increased because the bank was more likely to benefit from the rescue plan than other banks.
After unveiling the rescue plan Alistair Darling said that the main problem that was affecting the financial and banking sectors was the unwillingness of banks and financial institutions to lend to one another, and he said that this new proposal hoped to deal with this issue, encourage lending amongst the financial institutions, and in turn increase liquidity amongst lenders. He said: “This is beginning a process of un-bunging a big problem where banks won’t lend to each other for long periods.”
Officials have said that they hope the plan will get the financial markets moving again. One official said: “They’ve got additional capital now if they want it, they’ve got an unlimited source of liquidity. That certainly should stop the panic in terms of people wondering whether or not the banks are safe.”
The banks have welcomed the move as well, and an HBOS official said: “The government’s announcement represents a very real and serious intention on the part of the authorities, following consultation with the banking industry, to bring stability and certainty to the UK banking system.”
The government has released details of the bailout plan, but the plan has received mixed reactions from members of the public. Some have said that it is time for action to be taken to try and clam the turbulent financial markets, which are affecting so many people in so many ways, but others are angry that the public purse is being used to bail out banks after they have acted irresponsibly, given out fat bonuses to executives, and found themselves in a financial mess as a result.
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