UK Government moves to clean up toxic bank debt

The UK Government is to allow banks to swap their ‘toxic’ debts for either cash or shares to stave off possible bankruptcy.

Under the scheme, banks will agree with the Government on the amount they expect to lose from particular debts.

The Government will then sell insurance against 90 per cent of the institutions’ additional losses from the debt.

By taking control of the debts, the UK taxpayer will be liable for any losses, although the UK Chancellor Alistair Darling could not say how much money will be needed for the latest bailout.

Speaking on BBC Radio, he said the Government would need to talk to the banks to find out how much money they need.

“We’re doing it because if the banking system [collapses] É the economy would come down with it,” he said.

“I don’t think anyone would argue you ought to let that happen.”

Last year the UK Government pledged £500billion to rescue the banks and ensure they started lending again.

This has not happened fast enough to stimulate the UK economy, which is in recession.

The banks are also racking up bigger losses, with Royal Bank of Scotland reporting losses of more than £20 billion — the biggest loss in UK corporate history.

The outlook for the UK economy is not good, with Darling admitting the situation “looked grim”.

Other measures announced overnight to support UK banks include extending the Government’s £250 billion Credit Guarantee Scheme until the end of the year to support inter-bank lending.

The Government will also move to accept consumer car loans in exchange for government bonds to keep the car industry going.

As the banks’ troubles continue, the Government has offered to take a bigger stake in Lloyds and has indicated it could take stakes in Barclays and HSBC under its Asset Protection Scheme.

However, analysts in the City of London believe if this latest rescue doesn’t work, the Government will have to look at nationalising the major banks — a move it was forced to do with the smaller regional bank Northern Rock.

The Royal Bank of Scotland will be 70 per cent owned by the Government after accepting Treasury packages, while Lloyds is resisting accepting any further offers, as it does not want state ownership to exceed 50 per cent.