Baby bailout
Alistair Darling, the Chancellor of the Exchequer, has unveiled a package of measures designed to restore liquidity to the UK financial system. In spite of that the FTSE 100 dropped by over 300 points in early trading.
The UK bailout is essentially a three part package. The first is an offer to buy shares in banks using tax payers' money up to a £50 billion ceiling. This is designed to restore confidence in the balance sheets of the banks and is reminiscent of Warren Buffet's investment in Goldman Sachs a couple of weeks ago.
The second is an offer to underwrite the medium term (up to three years) loans banks make to each other, up to a limit of $250 billion, for a fee. The third is a doubling, to £200 billion, of the amount available under the Special Liquidity Scheme. This allows lenders to trade in dodgy mortgages for Treasury bonds.
So the UK tax payer is in the hole for a cool half a trillion quid, surely that's enough to get the markets to cheer up a bit - right? Sadly not; the FTSE 100 was trading around six percent down on yesterday's close at around 9:30 this morning.
There are a couple of big reasons why the market is unmoved by the UK bailout. Firstly global markets all had a nightmare yesterday, with the Dow and NASDAQ both closing over five percent down, the Hong Kong market down eight percent and the Japanese Nikkei losing over nine percent on the day. This was bound to have an effect on the UK market this morning.
The second fly in the ointment is concern about any unilateral measure taken by a single European country. One by one individual states are coming up with their own solutions, which are adding to the chaos by causing money to flee to whichever country appears to be offering the best deal. It could be that only a Europe-wide move will restore stability.