Alistair Darling, the UK’s finance minister, yesterday said that his package of measures for unfreezing credit markets and recapitalizing failing banks was gaining support as a model for the other G7 nations.
The UK’s strategy received support at a high level meeting with US President George Bush, the Chancellor of the Exchequer told Emerging Markets.
“What we argued was for [the G7 communiqué] to be toughened up so that it concentrated in five points rather than the customary three pages,” he said. “What is striking from the discussions yesterday and informal meetings this morning is really a great deal of interest in what we announced last week.”
Darling last Wednesday unveiled plans to inject up to £25 billion of capital into banks in exchange for preference shares; allow banks to borrow a further £25 billion to add to their capital base; offer up to £250 billion in loan guarantees to unlock the interbank market; and make available a further £100 billion of short-term loans from the Bank of England, on top of an existing £100 billion loan facility.
Darling spoke yesterday of a “clear recognition” of three problems – the need to inject liquidity, recapitalize banks and guarantee interbank loans – that need to be resolved. “That was discussed again today at my meeting with fellow finance ministers and President Bush at the White House. The President made clear it is of the utmost priority.”
Later today, UK Prime Minister Gordon Brown will meet European Commission head Jose Manuel Barroso in Paris to outline what the UK is proposing.
Senior bankers have also backed the British approach to the crisis. In an interview with Emerging Markets this weekend, Barclays president Bob Diamond hailed the UK package, and urged European nations to adopt similar measures.
Diamond said: “In the UK we’ve seen a system put in place with deposit guarantees, equity that’s optional but available to banks if they need it, and coordinated rate cuts. At the same time there has been a marked increase in the size and scale of the special lending facilities. “It would be nice to see the European countries working together rather than reverting to a state by state approach.”
Observers at the IMF meetings have said that Britain’s claim to have designed the correct solution have antagonized France and Germany. However Raghuram Rajan, a professor of finance at the University of Chicago and a former IMF chief economist, agreed the UK model was the way forward particular in terms of unlocking the interbank market.
“The UK might have shown the way to the US, which is a good thing,” he told Emerging Markets. “We may have not have had this plan if the UK [response] had been coordinated by the US Treasury.”
The British plan also emerged as the popular model among analysts for other OECD economies. “We view the British plan as a more creditable way forward, because it addresses the three critical issues in one go – liquidity, interbank funding and capital,” said Danny Gabay, a former Bank of England economist and co-founder of consultancy Fathom Financial.
John Higgins, an economist at Capital Economics, told Emerging Markets that share prices could rebound on the basis of the G7’s united stance on Friday. “