Correction to This Article
The article incorrectly said that all eight participating banks would take injections of government capital. Two of the banks, HSBC and Standard Chartered, said they would not accept injections of government capital and would achieve government-mandated levels of capital on their own.

Europe's Stocks Plunge Despite Massive British Rescue Plan

The British government has announced a plan to partially nationalize eight of its largest banks. The pricetag is 87 billion dollars. This move comes as Asian markets faltered in early trading on Wednesday. Stocks in Japan fell more than 9%. Video by AP
By Kevin Sullivan
Washington Post Foreign Service
Thursday, October 9, 2008

LONDON, Oct. 8 -- Britain's mammoth new bank bailout plan, potentially nearly as large as the rescue package in the United States, failed to calm European investors Wednesday after its early morning emergency announcement. All over the continent, stocks dropped sharply again and even some of the banks the plan is meant to stabilize suffered new sell-offs.

Hastily put together by Prime Minister Gordon Brown, the plan was the latest example of the go-it-alone response in the 27-member European Union. But Brown signaled he may be coming around to the joint approach, proposing a Europe-wide fund for medium-term loans.

London's main stock index, the FTSE 100, was down 5.2 percent Wednesday, bringing it to its lowest level in four years. The French and German markets fell by similar amounts, on general fears that the bank bailout, coordinated central bank interest-rate cuts and pledges of cooperation among European leaders will not stave off a deep recession.

"Markets have not felt placated," said Mike Lenhoff, an analyst at Brewin Dolphin, a London investment firm. "They've had a poor day. Who knows why. It really is quite dreary, the whole thing."

Business and political leaders across the ideological spectrum, and across Europe, fell in line behind Brown's bank plan, which he personally unveiled before markets opened Wednesday, with Finance Minister Alistair Darling beside him. The plan is potentially worth up to $692 billion, nearly equaling the size of the U.S. bank bailout, and is Europe's largest bank rescue program.

The program will inject $88 billion in capital into eight major banks: Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered. Brown said each bank had agreed to use the measures announced Wednesday to raise its capital holdings by at least $44 billion.

The Bank of England, Britain's central bank, will provide another $173 billion to money markets, doubling the sums it is pumping in to help banks borrow and lend. Brown also extended government guarantees worth up to $431 billion to help banks restart lending.

Alex Potter, a banking analyst at Collins Stewart in London, said that Brown had done "material damage to the economy by delaying action" but that the plan was welcomed in London's financial district. "This stabilizes banks' books and allows them to get back to lending," Potter said.

Christopher McKenna, a lecturer in business history at Oxford University, praised Brown for a "bold" plan and for "throwing away ideological reasoning." According to McKenna, Brown's Labor Party has until now been careful to distance itself from its past, when it was widely criticized for advocating a broad government role in industry. "We're seeing a parallel situation in the U.S. where Bush is saying: 'I don't care what the conservative approach traditionally is to the economy. We have to come together,' " McKenna said.

Bank stocks were mixed at Wednesday's close. HBOS was up 25 percent, but the bank that is to buy it, Lloyds TSB, was down 6.8 percent. Royal Bank of Scotland was up less than 1 percent -- after falling about 50 percent in the previous two days. Standard Chartered lost 11.5 percent, HSBC fell 2.5 percent and Barclays was down 2.4 percent.

British officials also announced plans to safeguard British consumer deposits at several Iceland banks that have been taken over by the government there. Officials said all 300,000 or so Britain-based depositors in Icesave, an online banking subsidiary of the failed Icelandic bank Landsbanki, would get their money back.

Treasury officials announced that the branchless bank ING Direct had agreed to take over more than $5.2 billion in deposits held in Kaupthing Edge and Heritable Bank, subsidiaries of another ailing Icelandic bank.

CONTINUED     1        >

© 2008 The Washington Post Company