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Drawing out the poison
6 Mar 2009Why are these talks so important?
The idea is to ring-fence Lloyds Banking Group's huge stock of “toxic” debts, which it mainly inherited from the HBOS takeover. Guaranteeing the losses on these debts should give the bank confidence to resume large scale “good” lending to credit-deprived small businesses and individuals.
So why are they taking so long to conclude?
Unlike Royal Bank of Scotland, which is effectively bust and concluded its guarantee deal last week from a very weak position, Lloyds was one of the healthier banks before its takeover of HBOS in October. Its management is reluctant to cede majority control of the bank to the Government.
Does this have anything to do with the quantitative easing announced yesterday?
Not directly, but both set of actions have the same aim in mind: breathing life back into the frozen bank credit markets. The credit crunch has been blamed for starving the real economy of money and helping to deepen the recession. The authorities are throwing everything they can to unblock the system. The guarantee scheme aims to remove poison from banks' balance sheets in return for pledges to increase lending. Quantitative easing is all about flooding them with fresh cash so that, in theory, they will lend on.
