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UK Economy: RBS Losses at Record High

Posted by Manish Agrawal on Thursday, 22 January, 2009

Royal Bank of Scotland announced it would report losses before write-downs of £7 to £8 billion for 2008. This has caused its shares to sink 67%.

Furthermore, it will report losses of assets related to its 2007 ABN Amro acquisition of nearly £20 billion. This beats even Vodafone’s record losses of £15 billion in 2006. Jobs will be lost as well, according to the bank.

It’s probably no surprise to most of the public that the government would step in to help bail out the troubled institution…again. The Treasury announced it would trade £5 billion of preference shares for ordinary shares in RBS. The move would increase its holdings in the bank from 58% to almost 70%. This is after the government handed £20 billion over to the bank in late November.

In an attempt to restore some confidence to the public, an RBS spokesman said, “Credit and market conditions in the fourth quarter of 2008 were particularly challenging.” RBS conveniently left out the fact that they led the acquisition of ABN Amro, along with Spanish bank Santander and Holland’s Fortis.

Robert Peston, business editor for BBC, emphasized that this takeover, “must now rank as one of the worst and most ill-timed takeovers in history”.

The pound has fallen to an all-time low against the yen, and a seven-and-one-half-year low against the dollar. With RBS becoming essentially nationalized, and Lloyds Banking Group heading in the same direction, its existing debt levels are further strained.

Moreover, the Bank of England is about to slash it interest rate even more in coming months. This will bring it below its existing historic low of a mere 1.5%. Some speculate this will happen as soon as February and again in March, as the economy shrinks as consumer and commercial confidence plummets.

“Although such action will sow the seeds of recovery for the economy and the pound, the near-term impact is likely to be further pound weakness,” said Daragh Maher, of Calyon Credit Agricole. 



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