Atlantic Council

UK

In the UK, RBS became the latest bank to be taken over by the government as a result of the financial crisis, according to IHT:

The British government took majority control of Royal Bank of Scotland on Friday after investors shunned the lender's share sale, paving the way for a larger government role in Britain's banking sector.  Investors only signed up for 0.24 percent of the shares, which were offered as part of a plan to bolster the bank's capital, and the government had to take up the rest, leaving it with a 57.9 percent stake in RBS.  The government agreed to buy a separate block of preferred shares bringing its investment in RBS to about £20 ($30.8) billion.

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RBS was one of three British financial services companies that tapped government help to fulfill stricter capital requirements intended to help them survive the credit crisis.  Lloyds TSB and the mortgage lender HBOS, which have recently agreed to combine, also relied on the government to take up any shares they could not sell to investors as part of a banking bailout plan orchestrated by Prime Minister Gordon Brown.  But some analysts warned that even those stricter capital rules might not guarantee the stability of Britain's banks as the turmoil in the financial markets continued.

The government will hold the RBS stocks until they are profitable again.

France

Ahead of expected benchmark rate cuts by the ECB, a proposed bailout of major French banks was blocked by the European Commission, who said France must reduce its lending rate before approval.  The FT reported:

The French government’s plan to shore up the capital position of France’s six main retail banks is being blocked by the European Commission, which insists they must reduce their lending in return for state support.  Christine Lagarde, French finance minister, on Friday spoke to Neelie Kroes, EU competition commissioner, to persuade her to lift her veto on France’s €10.5 ($13.3) billion support package but Ms. Kroes is sticking to her view that banks cannot use state aid to increase their lending books.

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The French government reacted furiously to the Commission’s argument.  One senior official described it as "ridiculous" and "stupid" because it would exacerbate the credit crunch – the very thing Paris said it was trying to avert when it decided last month to inject capital into all its large high-street banks.

France – unlike the UK, Germany or Italy – intended to recapitalize all its lenders at the same time to ensure they did not tighten credit to business and households.  Paris argued that without state support, and in view of the frozen interbank lending markets, banks would have shored up their capital positions by reducing loans, with catastrophic consequences for the real economy.

Eurozone

Eurozone inflation fell in November due largely to increases in unemployment.  With fourth quarter projections anticipating a third straight quarter of negative growth, the ECB is expected to cut rates by as much as 1 percent in December from its current key rate of 3.25 percent.  This should continue to help inflation drop in early 2009.  The IHT provided details:

Euro-zone inflation declined in November and unemployment jumped more than expected, reports showed Friday, lifting chances that the European Central Bank would increase the size of an expected interest rate cut next week to aid a shrinking economy.

With recession pressing on growth, the Italian government became the latest European country to offer an economic stimulus package, totaling €80 ($101.5) billion.  That came one day after Spain announced a €11 ($14) billion plan.  President Nicolas Sarkozy of France on Friday said he would present a €19 ($24.1) billion program next week that would help the struggling car industry and invest in infrastructure.

More evidence of the slowdown was reflected in data released by the Eurostat statistics office.  It said consumer price inflation in the 15-country euro area fell this month by 1.1 percentage points to 2.1 percent.  Forecasters had expected a decline to just 2.3 percent.

Related Posts:

• France and Germany Clash over EU Economic Rescue Plans
• More Fiscal Stimulus Planned for Europe