U.K., Spain Go Solo on Rescues to Fight Credit Crunch

By Simon Kennedy and John Fraher

Oct. 8 (Bloomberg) -- The U.K. and Spain raced to buttress their banking systems after European policy makers failed to form a united front to combat the deepening financial crisis.

British Prime Minister Gordon Brown's government will invest as much as 50 billion pounds ($87 billion) in struggling banks and the Bank of England will provide at least 200 billion pounds of loans. Spain will spend as much as 50 billion euros ($68 billion) to buy bank assets, the first move by a European nation to copy the U.S. strategy.

The measures are biggest in a series of go-it-alone initiatives by national governments after European Union leaders proved unable to develop a plan acceptable to all its 27 nations. With European Central Bank President Jean-Claude Trichet powerless under legal limits to intervene, more governments may pursue a unilateral approach.

``It has clearly been impossible to have coordinated action,'' Marco Annunziata, chief economist at Unicredit MIB in London, said in an interview. ``Once one country moves ahead, it becomes more difficult for others not to do the same.''

Spain and the U.K. acted after three days of separate EU talks in Paris and Luxembourg fell short of a common approach to the banking crisis that has engulfed their economies. While Italy and France proposed a rescue fund similar to the $700 billion plan now being rolled out in the U.S., Germany balked at the cost and questioned its necessity.

EU Principles

Without a pact to implement, EU finance ministers yesterday agreed to a set of principles that pledged communication and taking account of the cross-border implications of their decisions, while freeing each government to act as it deemed best.

Investors have responded to the division by dumping stocks. The Dow Jones Stoxx 600 Index tumbled for a third day to the lowest in more than four years. It dropped by the most since 1987 on Oct. 6.

``Markets would have much preferred a more common approach and something similar to the U.S., but we don't have the same federal system as the U.S.,'' said Mark Wall, an economist in London at Deutsche Bank AG.

Europe is struggling to find a comprehensive approach because power is disseminated through 27 capitals, and there is a minimal budget for the bloc. That raises the stakes for not having a joint plan in the event a large bank with interests across many borders fails.

No Point Man

The region also lacks a point man akin to U.S. Treasury Secretary Henry Paulson or Federal Reserve Chairman Ben S. Bernanke. While Trichet would be one candidate for such a role, he lacks the Fed chief's legal authority to help bail out banks. That power has enabled Bernanke to extend credit to financial companies such as Bear Stearns Cos. to stave off their collapse. Trichet has had little option but to stand by and watch as governments bicker.

``The mandate and structure of the ECB mean it doesn't have the powers and flexibility of the Fed,'' said Neil Mackinnon, chief economist at ECU Group Plc in London.

Under the 1992 Maastricht Treaty that created it, the ECB can grease the wheels of the banking system, as it has been doing with cash auctions. It doesn't supervise banks and is not required to ensure their financial health.

Trichet himself noted the bank's constraints yesterday at a conference in Evian, France, saying: ``There are limits to what we can do, as we can't intervene with solvency problems.''

The ECB may eventually be awarded greater authority to aid banks that fail across multiple borders, said Klaus Baader, chief European economist at Merrill Lynch & Co. in London. ``Regulation is clearly going to be rewritten and when it is, the ECB's role will be enhanced,'' said Baader.

Heading to Recession

For now, the central bank may try to underpin confidence by lowering interest rates. Jacques Cailloux, chief European economist at RBS forecasts a cut of 50 basis points before its next meeting on Nov. 6. The governing council considered lowering borrowing costs at its Oct. 2 meeting, Trichet said that day.

Credit Suisse Group and JPMorgan Chase & Co. have declared the first region-wide recession since the single currency began in 1999 and predict the economy will contract over 2009. Credit Suisse says the economy will shrink until next June, resulting in a 0.3 percent decline over the year, compared with 1.4 percent growth in the U.S.

``The outlook for the European economy is grim,'' said Mackinnon.

U.K. Bailouts

Under Brown's plan in the U.K., lenders including Royal Bank of Scotland Group Plc would be eligible for additional guarantees on customer deposits, immediate cash injections and subsequent payments should credit markets deteriorate.

The proposal followed a meeting among Brown, Chancellor of the Exchequer Alistair Darling, Bank of England Governor Mervyn King and the country's financial-services regulator.

The U.K. government already has stepped in to bail out Bradford & Bingley Plc and broker Lloyds TSB Group Plc's takeover of HBOS Plc. It also nationalized Northern Rock Plc in February after the first run on deposits in more than a century.

In Spain, Prime Minister Jose Luis Rodriguez Zapatero said in Madrid yesterday that the fund will buy assets ``of the highest quality'' from all banks operating in the country. The funds set aside equal almost a third of the proposed 2009 central government budget.

``We don't know what the assets are,'' said Inigo Lecubarri, a manager at Abaco Financials Fund in London. ``I'd guess they're probably mortgage-backed securities of some sort. The key is how much the government pays for them and we don't know that yet.''

To contact the reporters on this story: John Fraher in London at jfraher@bloomberg.net; Simon Kennedy in Paris at skennedy4@bloomberg.net