McLean’s Financial Services

Reducing the effects of the credit crisis on the UK economy

By taking the action of bailing out the banks, the government is attempting to reduce the effects of the credit crisis on the UK economy. The government also wants to stop cash flowing out of the UK to other countries, many which have guaranteed the safety of deposits in their banks. By guaranteeing loans and securing the future of UK banks through part-privatisation, the government hopes the banks will start lending to each other again. The effect of this would be that both individuals and UK businesses should start to benefit from future rate cuts in the cost of borrowing.

The three-part package initially included committing up to £50bn of taxpayer funds for a partial nationalisation of the struggling banks, and this is in return for a stake in them. As many of the banks’ share prices are trading at their lowest levels for nearly two years, this could mean that taxpayers eventually make a profit in the long term if the government’s stake is sold at a higher price once the banks have recovered.

This was followed on 13 October by an announcement that the government would provide up to £37bn of taxpayer funds to help the UK banking system. This will be paid for by increased public borrowing, and political strings will also be attached that include reining in executive pay.

In addition, the Bank of England is to pump at least £200bn into the money markets under its existing Special Liquidity Scheme. The government is also making a further £250bn available for banks over the next three years to guarantee medium-term debt to help restore confidence and get banks lending to each other again. At the time of going to print, it was unclear whether the government would have to increase taxes or make cuts in public spending.

Did you know?
The taxpayer will fund the total $700bn US bailout, the plan which was almost derailed several times as the House of Representatives voted against it. The $700bn will be used to buy bad and toxic debts from struggling banks to clear up their balance sheets.

For more information or to discuss anything in this article feel free to contact Doug McLean via email or phone.