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City Republic: Banks in the last chance saloon

LONDON - The Government today announced its latest measures for coping with the credit crunch including insuring 90% of the major UK banks' "toxic" assets, mainly packages of iffy mortgages, and the purchase of £50bn worth of sounder mortgages directly from the banks.

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At the same time Royal Bank of Scotland, arguably the biggest loser in the credit crunch, will declare a 2008 loss of £8bn as well as a write-off of around £15bn on its disastrous £63bn takeover of Dutch bank ABN Amro in 2007.

To help the bank the Government is to convert its holding of preference shares, on which RBS had to pay a penal 12% interest, into ordinary shares, increasing its holding in RBS to around 70%.

At the same time it is to extend the period over which nationalised Northern Rock, which is where the UK's version of the credit crunch started, has to pay back the £25bn the Government was obliged to pump in last year.

This means the Rock will be able to start lending again, vital for the domestic mortgage market into which the Rock was one of the largest lenders.

PM Gordon Brown and Chancellor Alistair Darling hope this will finally get the banks lending at desired (by them) levels again as the insurance scheme in particular (which could amount to £200bn) will take lots of nasties off their books and leave them with more money to lend.

Just in case the banks aren't aware of the alternative, energy and climate change secretary Ed Miliband and business secretary Peter Mandelson offered their views about bankers at a Fabian Society conference at the weekend.

Miliband observed that nationalizing the banks was now a "mainstream consensus" while the more cautious Mandelson spoke of his disapproval of incentives in the banking world which "destroyed value".

It's hardly surprising then that the banks signed up to the Government's latest lending plan over the weekend.

If this doesn't work then they know from Miliband, a former Treasury wonk under Gordon Brown before he became a cabinet minister, and Mandelson what the alternative is.

Ken Clarke rides to the rescue

Of the Tory Party's economic team, not the economy, but David Cameron's decision to bring the old bruiser back into the shadow cabinet to mark ebullient business secretary Peter Mandelson is significant all the same.

Unfortunately Clarke and Mandelson won't be facing each other across the chamber as Mandelson is in the Lords now, so we'll have to hope they meet on the Today programme or Newsnight.

And we may well find that, on most things, they agree.

Mandelson is generally reckoned to have played a blinder since he re-entered the cabinet, giving an anxious public the sense that he at least is capable of facing up to the credit crunch calmly and constructively.

The Tories badly need someone with similar gravitas (not a description that would have been used of Mandelson in his previous incarnations) so it's sent for Ken.

In his Fabian Society contribution, Mandelson spoke of the need for government to take the course of "innovation and activism" to re-purpose British commerce within Europe.

By this he meant less of a dependence on out of control financial services in favour of an increased focus on niche activities such as high technology manufacturing and consultancy and the currently equally battered creative industries.

There's nothing in this that Clarke would disagree with, but neither would Tory leader David Cameron.

Where Clarke and Mandelson also agree of course (and Cameron doesn't) is on the vexed issue of the euro, both men being among its keenest supporters in their respective parties.

Cameron will have begged Clarke to shut up about the euro although he knows perfectly well that, if asked a straight question, Clarke will give an even straighter answer.

But Mandelson too, when asked, has made no secret of his approval of the euro either, despite frowns from Gordon Brown.

The euro is having problems of its own of course, with the European Central Bank slow to cut interest rates, much to the distress of the unflatteringly named "pigs", Portugal, Italy, Greece and Spain.

All these countries are saying that they need the currency to be lower to boost their economies. Some people in Greece and Italy particularly are saying their countries will need to leave the euro if their economies are to revive.

But for the supposedly stronger economies in Europe, France, Germany and the Low Countries, the euro is deemed to be a benefit.

And most big British businesses would still like to be members. So this just might be an interesting election issue in 2010.

Signs of life in the bond market

Labour industry minister Shriti Vadera got herself into trouble last week when she said she detected signs of life in the corporate bond market.

All the papers jumped on the former investment banker's head, comparing her to chancellor Norman Lamont in the early 1990s who detected "the green shoots of recovery" as interest rates briefly hit 15%.

But Norman wasn't wholly wrong and neither is Shriti.

Last week European companies raised £15.2bn on the corporate bonds market, one of its busiest weeks ever.

These included Gaz de France, Mercedes maker Daimler and Deutsche Telekom.

One reason for the popularity of such bonds is the shortage of bank lending, although huge companies like these are surely still allowed to talk to their bank managers.

We keep hearing that the health of small and medium-sized businesses is fundamental to the economy.

They are, particularly in terms of employment. But the bedrock of the major European economies, including the UK, is made up of very large companies because they buy the goods and services offered by the smaller ones.

So Shriti Vadera, known as "screech" in some quarters for her vigorous debating style, was right to be encouraged.

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