Banks bail out a 'failure ... and there's no plan B'

Banks bail out a 'failure ... and there's no plan B'
By James Cusick, Westminster Editor
GORDON BROWN'S "DECISIVE" strategy to recapitalise Britain's banks and get them lending again with a £37 billion bail-out, which he claimed has been copied all over the world, has not worked - and the Treasury has no plan B yet.

"The government's plan A has not worked, and there is, as yet, no firm plan B," a government source told the Sunday Herald. However, a senior adviser to chancellor Alistair Darling insisted that lending shouldn't be taken as the sole measure of success: "Plan A has not failed, because the banks are still standing."

But although UK banks are open for business, Britain is still facing a lending drought with banks and building societies continuing to reduce the amount of credit available to businesses and would-be homebuyers.

advertisementThis has left Darling with a dilemma: does he throw more money at the banks, effectively admitting that £37bn of taxpayers' money wasn't enough, or does he wait?

Having committed the government to "do whatever it takes", the chancellor and the prime minister will now be under renewed pressure from Labour MPs to deliver a solution that forces banks to end their post-crash caution and assist economic recovery, rather than remain over-concerned with their own balance sheets.

Without a plan B, both Darling and Brown will increasingly be looking to Washington and the scale of the fiscal stimulus likely to be engineered quickly after Barack Obama's inauguration as US president on January 20, which should then have a substantial knock-on effect in world markets.

Although Darling has said he is prepared to look at other measures to encourage banks to end their current over-cautious regimes and begin lending more freely, a Treasury spokesman said no decision on a second bail-out had been taken.

A second bail-out would be a public and political humiliation for Brown. The prime minister has based Labour's poll recovery on his experience and ability to lead Britain out of recession and towards recovery. More taxpayers' money being thrown at the banks, even if it came with new strings attached, would be seen as a damaging admission of a strategy that hadn't worked.

It will also be embarrassing for the government if they are forced to adopt the strategy supported by the Conservatives of large-scale, state-backed loans which could offer guarantees in private finance deals. So far the government has accused David Cameron's Tories of being the "do-nothing party".