Nationalisation calls mount as banks hammered again

As falling bank stocks increase the damage to the public purse, is nationalisation the least bad option?

Last Updated: 31 Aug 2010

More grim news from the financial markets this morning, as Britain’s biggest banks took another pasting, and the pound sank to a seven-year low against the dollar. It’s increasingly clear that despite the latest Government bailout, investors have lost all confidence in banks – and they’re selling off their shares on both sides of the Atlantic. As well as Barclays falling another 20%, Lloyds (which was down 30% yesterday) took another double-digit hit, while RBS continued its inexorable slide. The public finances are also in a bad way – and some think we should cut our losses and nationalise before things get worse...

Today’s latest banking rout wasn’t helped by the overnight news from Wall Street, where the likes of Citigroup and Bank of America both suffered huge drops. But it’s still a bit hard to see why poor old Barclays is coming in for so much punishment. In the last fortnight it’s lost about two-thirds of its value, despite its desperate pleas that full-year profits will be higher than expected, at about £6bn. Ridiculously, that’s about the same as its current stock market value. But with the market fretting that the Treasury will have to up its stake in RBS and Lloyds, it’s being caught in the crossfire – clearly the market feels that figure is literally too good to be true.

One thing’s for sure: the Government’s recent attempts to ‘backstop’ the banking sector haven’t had the desired effect. However, it has created a giant hole in the public finances: figures released today show that the government’s cash borrowing soared to £44bn in December, thanks largely to RBS, while the budget deficit for the year to date has ballooned from £22.3bn to £50.3bn. This means the Government will be forced to raise cash by issuing Treasury bills, which is likely to hammer our international credit rating. And this has sent sterling crashing again today (veteran investor Jim Rogers even said this week that our currency is ‘finished’).

Some influential voices reckon that the so-called ‘creeping nationalisation’ of the banks is only making things worse. In today’s FT, Labour MP John McFall and private-equity boss Jon Moulton argue that we should just ‘get it over with’ and take the ‘least worst course’ of nationalising RBS and Lloyds. As they rightly say, the banks currently have two conflicting priorities, i.e. building up their capital base and ramping up lending – and if it’s going to happen at all, it might as well be sooner rather than later.

Still, nationalising banks surely has to be the last possible resort. In the short term the extra liabilities would make the country’s financial position even worse. There’d be issues around competition and politicised lending. And then there’s the question of getting it off the public books further down the line. So in an ideal world, we'd give this latest bailout more time, to see if it can work - although the problem at the moment is that the market seems unwilling to wait...

In today's bulletin:

Nationalisation calls mount as banks hammered again
Unemployment nears 2m - and graduates feel the squeeze
Ofcom backs Channel 4/ BBC Worldwide merger
Sick told to get packing (their suitcases)
Fiat to rescue Chrysler - or is it the other way round?

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