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Britain to launch second bank rescue plan to boost lending

BRITAIN will throw its banks another multi-billion pound lifeline today by allowing them to insure against steep losses and guaranteeing their debt to stop the credit crunch pushing the economy into a deep slump.

Sources close to the talks between the Treasury and bankers told Reuters the second bank rescue package in four months would also see the government boost its stake in Royal Bank of Scotland.

The multi-pronged plan is aimed at getting banks lending again to credit-starved consumers and companies.

"The essential problem is the resumption of lending," Prime Minister Gordon Brown told reporters on a trip to Egypt ahead of figures this week that are expected to confirm the British economy is now in recession for the first time since 1992.

In the United States, President-elect Barack Obama is also trying to figure out how the second half of a US$700 billion bailout package can be administered so credit will flow again, as the debt crunch and weakening economies drive businesses to the wall across the world.

Brown is playing for high political stakes. He was applauded for his initial response to the financial crisis, but a poll published yesterday showed his party falling further behind the opposition Conservatives, with the next general election due by mid-2010.

Britain had already pumped 37 billion pounds (US$55 billion) into its banks in October.

Under Brown's latest plan, lenders would have to identify their riskiest assets which they could then insure with the government for a fee.

They would still be liable for initial losses but could at least put in a ceiling, boosting confidence.

The worst financial crisis in living memory has already felled some of the banking industry's biggest names, and shares in Barclays, one of Britain's biggest banks, crashed 25 percent on Friday. The United States had to throw more money at Bank of America last week.

The new UK package -- to be unveiled before financial markets open at 0800 GMT today -- will also build on the recommendations of a government-sponsored report that called for guarantees of the mortgage-backed securities market, perhaps to include other asset-backed products.

The British Treasury would also extend the window for its Credit Guarantee Scheme -- which underwrites debt for banks that were recapitalized by the government -- to the end of this year, the sources said.

A successor would also be found for the Bank of England's Special Liquidity Scheme, which expires this month and allows financial institutions to swap their hard-to-trade assets for more liquid ones.

The sources said the government would also no longer run down the loan book of Northern Rock, the bank it nationalized last year.

Under the plan, the government will also swap up to 5 billion pounds of preference shares in Royal Bank of Scotland for ordinary shares, aiming to remove pressure on the bank to pay 12 percent annual interest, one of the sources said.

That could see Britain increase its stake in the lender to near 70 percent from 58 percent.

RBS will unveil up to 25 billion pounds (US$37.30 billion) of losses for 2008 today due to bad debts and writing off goodwill on its acquisition of ABN AMRO, The Daily Telegraph reported today, calling it the "biggest loss in UK history."

RBS declined to comment on the report.


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