Britain’s financial bailout reaches $2 trillion

Bloomberg

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Prime Minister Gordon Brown’s government on Wednesday offered to guarantee some mortgage-backed bonds, adding as much as 50 billion pounds to the bailout that began with the collapse of Northern Rock in 2007. The amount invested in, loaned to or pledged to back bank assets now equals Britain’s gross domestic product, or 22,800 pounds for every person in the U.K.

"The size of this financial bailout is unprecedented," said Alan Clarke, an economist at BNP Paribas in London. "The worry is that this is not going to be enough and the government may need to come back and step in again."

Britain’s budget deficit rose to 12.4 percent of GDP as the government took over four banks, insured assets and underwrote loans to spur an economy ravaged by the global credit crisis. Brown is using that leverage to force banks to increase lending as he trails the Conservative Party in the polls and prepares for elections no later than June 2010.

Taxpayer burden
The Treasury, in the budget submitted to Parliament Wednesday, estimated the bailout may cost taxpayers 50 billion pounds. That contradicts with the International Monetary Fund’s estimate that the bill may climb to 9.1 percent of GDP, or about 132 billion pounds.

In return for state aid, Lloyds Banking Group, Royal Bank of Scotland Group and Northern Rock have pledged to increase lending by 44 billion pounds over the next year.

That’s 150 billion pounds less than the economy needs to return to a nominal growth rate of 5 percent, said Vicky Redwood, an economist at Capital Economics."This problem is not going to ease in the near term with unemployment rising sharply," Redwood said. "The government may put more capital into the banks or promise to put more capital into the banks to get lending going again."