As UK Shares Plummet, Government Considers Recapitalisation
07/10/2008
The UK's FTSE 100 saw the largest ever one-day points fall yesterday as the index plunged down to 4589.2. The drop of 7.8% on the previous close was the third worst ever in percentage terms.
The Dow fell nearly 5%, breaching the 10,000 level for the first time in four years, as the US government's $700 billion bailout measure failed to bolster confidence.
Investors around the world were left wondering what the chances were that the plan could stem a global recession if it failed to even help the US domestic economy.
In the UK, it is believed that Treasury officials are seriously looking at a recapitalisation plan funded by the taxpayers. Some believe that this is what was on Alistair Darling's mind when he said on Sunday that he was considering 'some pretty big steps which we would not take in ordinary times'.
Under a recapitalisation plan, the government would buy stakes in UK financial institutions, giving them an injection of capital that would help restore confidence and encourage them to start lending to each other and to customers.
Shareholders in the banks may well lose out in the short term as the value of their holdings would dilute. In the longer term, if all went according to plan, the shares would rise as the banks regained strength.
There is pressure on the government to do something, and fast. Inaction seems to be exacerbating the crisis and dragging bank shares down further.
Another option is to follow other European nation's move to extend the deposit guarantee to all individual savings. However this would not help corporate depositors, nor would it, in itself, help free up liquidity.
The Dow fell nearly 5%, breaching the 10,000 level for the first time in four years, as the US government's $700 billion bailout measure failed to bolster confidence.
Investors around the world were left wondering what the chances were that the plan could stem a global recession if it failed to even help the US domestic economy.
In the UK, it is believed that Treasury officials are seriously looking at a recapitalisation plan funded by the taxpayers. Some believe that this is what was on Alistair Darling's mind when he said on Sunday that he was considering 'some pretty big steps which we would not take in ordinary times'.
Under a recapitalisation plan, the government would buy stakes in UK financial institutions, giving them an injection of capital that would help restore confidence and encourage them to start lending to each other and to customers.
Shareholders in the banks may well lose out in the short term as the value of their holdings would dilute. In the longer term, if all went according to plan, the shares would rise as the banks regained strength.
There is pressure on the government to do something, and fast. Inaction seems to be exacerbating the crisis and dragging bank shares down further.
Another option is to follow other European nation's move to extend the deposit guarantee to all individual savings. However this would not help corporate depositors, nor would it, in itself, help free up liquidity.
