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British Govt steps in to save UK market -

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British Govt steps in to save UK market

The World Today - Wednesday, 8 October , 2008 12:19:00

Reporter: Stephanie Kennedy

TANYA NOLAN: The British Government is preparing a rescue package for the UK's bludgeoned financial
market.

The country's banking system went into freefall as its four major banks shed value, some as much as
a third.

The details of the $120-billion taxpayer-funded rescue package will be revealed in time for the
opening of the London markets.

To tell us more I spoke to our reporter Stephanie Kennedy in London earlier today.

So will the rescue package simply take the form of a cash handout to the banks?

STEPHANIE KENNEDY: Well at this stage we think it's partial nationalisation of the system,
different banks have different levels of requirements, some of the bigger banks are looking for an
investment of around $30-billion, the smaller banks possibly, obviously not that much.

What we do know is that the Government is planning to take different levels of equity in each bank.
We just don't know how much each bank will require, and that detail will be fleshed out in a few
hours.

TANYA NOLAN: What's led to the collapse of UK bank stocks?

STEPHANIE KENNEDY: Well certainly the markets were in turmoil for a second day, and the banks were
sold off heavily, this followed discussions between the heads of the banks and the chancellor
whereupon there was no firm rescue package announced after that meeting.

HBOS for example, lost 42 per cent yesterday and the Royal Bank of Scotland, 39 per cent. So there
was some serious selling off on the London stock market, and in a bid to stop the flood of
investors, the Government moved eventually and announced that they will reveal details of this plan
just before the London markets open.

Now they're calling it a stability and reconstruction plan, and they're adamant that it's not a
bailout and that it's very different to what the Americans did last week. It's not about buying up
toxic debt, so to speak, and it's based on a Swedish rescue plan from the 1990s.

Back then the Government took a stake in the banks that were in trouble, and later on when they
recovered, they sold off the shares, which the British Government is also planning to do.

TANYA NOLAN: So this crisis has obviously spread beyond the troubles of one or two banks, how deep
does it run?

STEPHANIE KENNEDY: Well it's certainly across the whole banking sector, there are a lot of
investors in the UK who invested in banks not in the UK; and a good example was this Icelandic bank
that overnight also apparently went bust.

It froze all the assets, of its savings accounts and over 300,000 investors and savers have been
left up in the air not knowing whether they will receive access to their money; if they'll receive
access to their money or if they've lost their money.

So it certainly does go very deep into the whole banking system within the UK and also through
Europe.

TANYA NOLAN: The British Government has been criticised for failing to act quickly, why didn't it
move sooner to restore confidence in the markets?

STEPHANIE KENNEDY: Well the Government's actions have been quite extraordinary over the last few
days, the banks and the markets have been calling for some sort of government indication or
intervention, but the Prime Minister and the Chancellor appeared to have dithered on the whole
issue.

All they would say was that they would do whatever it takes, but they never actually spelled out
exactly what they were prepared to do and in the past 24 hours, the Government has been under
enormous pressure to make some sort of announcement to restore liquidity and confidence in the
whole banking sector.

But it seems only when the banks were literally on their knees begging for support that their share
prices went through the floor and then the Government actually stepped up. So, the Government has
been under enormous pressure and has really copped a lot of criticism here about the fact that it,
it failed to act quickly enough.

TANYA NOLAN: Is there much confidence that this rescue package is likely to work; and if so how
quickly would it work?

STEPHANIE KENNEDY: Well, the history tells us that it worked in Sweden and it certainly did so in
the short term. They're hoping that the markets will rally when the London stock exchange opens and
they're hoping that the banks share prices will hopefully bounce back.

But it won't stop a recession and that's the next major problem for the British Government, and all
the signs are there that the UK is already in a recession. We've had new figures out today from the
British Chamber of Commerce backing that up and by the end of this quarter we'll know for certain
whether Britain is in a recession.

TANYA NOLAN: Stephanie Kennedy in London.