Debt guarantee seen key to UK bank rescue package
LONDON, Oct 8 (Reuters) - The British government's offer to guarantee new debt issuance by banks may be key to the success of its multibillion pound package to shore up the financial system, credit analysts said on Wednesday.
Britain said it will inject 50 billion pounds ($87 billion) of emergency capital into banks left reeling by the global financial crisis and will extend 250 billion pounds in guarantees to help them refinance senior debt.
"Taking part -- with preference shares or PIBS -- makes a bank eligible for a government guarantee of maturing senior liabilities. This is the critical part as it should begin to free up UK interbank markets," said Nigel Myer, banking credit analyst at Dresdner Kleinwort, in a research note.
"Without that lifeblood, the banking system and economy could freeze. In the near term the liquidity support is way more important than the capital injection."
The government's move follows days of pressure on British banks, some of which lost nearly half their value on the stock market amid investor fears they could collapse if they were not handed a massive liquidity lifeline.
The scheme will entitle participants who commit to increase their Tier 1 capital -- the main measure of a bank's financial strength -- to a government guarantee on short and medium-term debt issued to refinance maturing liabilities.
Banks already signed up include Abbey SAN.NC, Barclays (BARC.L), HBOS HBOS.L, HSBC (HSBA.L), Lloyds-TSB (LLOY.L), Royal Bank of Scotland (RBS.L), Standard Chartered (STAN.L) and Britain's largest building society, Nationwide.
"The proposal envisages the issue of senior unsecured debt instruments of varying terms of up to 36 months, in any of sterling, U.S. dollars or euros," a Treasury statement said.
"The Government expects the take-up of the guarantee to be of the order of 250 billion pounds, and will keep this under review alongside ongoing monitoring of capital positions and lending volumes."
SURPRISE
Alan Brown, group CIO at Schroders, described the debt guarantee as "a pleasant surprise" that had prompted a tightening in credit spreads.
The cost of insuring British banks' debt against default fell sharply after the package was announced.
Five-year credit default swaps on senior debt of RBS were quoted at 225 basis points at 1055 GMT, about 45 tighter from Tuesday, with Barclays CDS about 70 tighter at 130 basis points.
"The fact they have guaranteed future senior issuance for up to 250 billion pounds is a major, major aspect of this," said Emanuele Ravano, managing director at PIMCO Europe.
"Because not only are they putting in capital but they are also guaranteeing senior reissuance, so this means they are sorting out all the refinancing problems for 2009."
"This package is operating at two levels -- immediate capital strengthening (and it) takes out all the future issues in terms of future raising and allow banks to operate with some degree of higher certainty, which allows them to operate as the financial entities they are supposed to be."
(Editing by Erica Billingham)
