Brown denies nationalisation but Lloyds needs cash injection as shares fall

17 February 2009 / by Rachael Stiles
Gordon Brown has denied there are plans for Lloyds Banking Group to become another nationalised British bank, but it has emerged that it is in need of a huge cash injection.

The Prime Minister came to Lloyds Banking Group's defence last night, denying that it was next in line for a full-blown nationalisation, but at the same time the Government is reportedly drawing up plans to bail out the bank.

Lloyds Banking Group revealed late last week that it is expecting losses of £10billion at the newly acquired HBOS, fuelling fears that the new group is headed for state-ownership and causing its shares to fall a further 20 per cent yesterday.

Shares recovered slightly after a spokesperson for Mr Brown offered reassurances that there is "no active consideration" to nationalising Lloyds Banking Group, calming fears that it is to follow its fallen rivals Northern Rock and Bradford & Bingley.

Stephen Timms, Financial Secretary to the Treasury, told the BBC that putting more money into Lloyds is not something that the Government is "contemplating at the moment", but did not rule out either possibility.

The Prime Minister was a cheerleader for the merger of Lloyds TSB and HBOS to go ahead, and in October 2008 the Secretary of State for Business, Peter Mandelson, modified legislation regarding competition law to make way for a merger, so that "the stability of the UK financial system could be taken account of in consideration of public interest".

But now there are warnings that the group could rack up losses of £35billion, and inside sources have suggested that a further injection of taxpayers' money is needed to keep it afloat.

The shotgun merger is attracting calls for an enquiry over allegations that the Prime Minister was motivated by political interests to back it, as thousands of HBOS jobs hung in the balance before Lloyds took it on.

Shareholders of Lloyds are angry to have taken on the dead-weight of HBOS, which some believe was in a worse state than the Lloyds board realised when they agreed to the merger.

One of the potential rescue plans for the group is for the Government to convert £4billion of its preference shares into ordinary shares, which would give Lloyds a boost but would also leave the taxpayer holding a majority stake.

Last night, the Number 10 spokesperson denied that the Prime Minister regrets the merger, adding that HBOS would have found it difficult to continue as a viable entity without the take-over.

Liberal Democrat Treasury spokesman, Vince Cable, said that "With Lloyds continuing to be dragged down by the weight of HBOS's losses", if the Government is not considering nationalisation as an option then it is being "highly irresponsible".

"The Government and the Conservatives must appreciate we are in a new financial world." he added. "We must now concentrate on sorting out the British banks, even if this means further nationalisations in the short term."

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