More on the UK banking bailout

So to avoid the awkwardness of a Eurozone summit in Paris excluding Europe’s biggest financial centre, Gordon Brown went to Paris before the meeting and it sounded like he and Nicolas Sarkozy were on the same wavelength about how bailouts should work. One section of the Elysee summit declaration, signed onto by Brian Cowen, inter alia, says

So as to allow financial institutions to continue to ensure the proper financing of the Eurozone economy, each Member State will make available to financial institutions Tier 1 capital, e.g. by acquiring preferred shares or other instruments including non dilutive ones. Price conditions shall take into account the market situation of each involved instution. Governments commit themselves to provide capital when needed in appropriate volume while favouring by all available means the raising of private capital. Financial institutions should be obliged to accept additionnal restrictions, notably to preclude possible abuse of such arrangements at the expense of non beneficiaries.

Yet several news outlets (Bloomberg, Times, Wall Street Journal [subs. only]) that the UK plan now includes controlling stakes in RBS and HBOS, meaning that anyone concludng from previous indications that the stakes would be minority non-voting holdings with private funding given a chance would be very mistaken. Apparently the calculation of how much capital RBS and HBOS would need to get to a comfortable level was leading to too big a number for anything short of a controlling government stake to be feasible. It seems that European stock markets and London in particular will be opening in a few hours with a shocker.

So what about Ireland?  The original Irish measure, the comprehensive unlimited guarantee, is now looking very timid on the question of control of banks, notwithstanding the broad powers that Brian Lenihan has in the accompanying legislation.  There is still nothing specific on the table from the government on capital infusions for Irish banks.  One little irony is that the Irish guarantee scheme now covers Irish subsidiaries of government controlled UK banks!  More seriously, when investors look at the Irish system and wonder why the government didn’t see the need for something like the latest UK measures, do they conclude that things just aren’t as bad here or there’s an unpleasant surprise still sitting there?

One point in favour of the Irish banks can be made.  RBS is now the biggest casualty of what looks like the most jinxed banking takeover in history, the RBS-Fortis-Santander purchase of ABN Amro just 17 months ago.  RBS and Fortis went quickly to severe capital depletions and now government control, while ABN Amro is now owned by the Dutch state.  No Irish bank did anything that bad.