Governments across Europe yesterday (Monday) took the first step in a new, coordinated effort to subvert the widening credit crisis and restore functionality to the markets by guaranteeing new debt and using taxpayer money to bail out troubled lenders all over the continent.
The sweeping actions followed a pact reached Sunday by members of the European Union, most notably the United Kingdom, Germany, and France.
“The steps taken in Europe are very positive,” billionaire investor George Soros told Bloomberg News. “The European governments have got religion and realized this is a serious problem they have to address.”
The British government, which last week unveiled its own $87 billion bailout plan, spent $64 billion (37 billion pounds) for controlling stakes in three U.K. banks: The Royal Bank of Scotland Group PLC (RBS), HBOS PLC (OTC: HBOOY), and Lloyds TSB Group (LYG).
In exchange for the bailout money, the participating banks will be required to help the homeowners who are struggling to pay mortgages, to cancel board-level bonuses this year, and to accept government-appointed non-executive directors. Dividends will not be paid to shareholders until the government redeems the preferred shares it takes in the banks.
"This does not come cost free," said Chancellor of the Exchequer Alistair Darling. "There are strings attached. We will put people onto the boards, and they’re there to protect the taxpayers’ interests."
In exchange for its bailout, RBS – the second-biggest British bank before its shares collapsed last week – was forced to oust Chief Executive Officer Fred Goodwin after eight years of service.
British Prime Minister Gordon Brown was certain to make clear that the stakes would not be permanent, but would instead be held "at arm’s length," and sold as soon as the banks are sufficiently strengthened.
Brown said that the United Kingdom had to be a "rock of stability" during this time of economic crisis and lead the way in restoring confidence in the country’s financial sector. The bailout was "unprecedented but essential for all of us," he told reporters.
The U.K. Treasury last week said it would provide $43.5 billion (25 billion pounds) to recapitalize banks and boost Tier 1 capital ratios – a measure of the strength of a bank’s balance sheet. An additional $43.5 billion (25 billion pounds) will also be available, if needed. The government hopes to have all banks reach a Tier 1 capital ratio of 9%.
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