As we predicted the UK government has been forced to use several hundred billions more of tax payers’ money to prop up the UK banking system. The banks exposure to the recession, the house and commercial property markets and derivative financial assets has driven them worldwide to the edge of bankruptcy. The £37 billion given in October 2008 to UK banks has been quickly been eaten up by further losses.

Barclays for the first time have to the begging well and Royal Bank of Scotland (RBS),whose share price fell to 12p, have  reported that it is likely to lose £28 billion, not £8bn as the BBC is reporting, in 2008. In the other side of the Atlantic Citicorp needed another $300bn from the US government and Bank of America received another $130bn. The US government is set to ask for another $800 bn for their fighting fund to save the financial system.

In the UK the government has exchanged its preference shares for ordinary shares because the banks are not able to repay the guaranteed dividend on the preference shares. We now own 70% of RBS.

They have also guaranteed up to £100bn pounds of debt issued by the banks. They need this money to cover the losses they are making. If the banks go bankrupt then we will have to make good the £100bn plus interest payments.

Finally, the big one the UK government is willing to underwrite the bad loans/assets of the banks – it is not clear who decides the current value of these loans/assets or what can be included. The banks can do this for an insurance payment and wait for this they can pay in the shares of the banks. So we carry all their unlimited and unknown losses and be paid in the shares of banks which could well be worth nothing! Only HSBC is not currently in the scheme because of its large capital reserves.

The unlimited losses have the potential to bankrupt the country with the government having to go to the International Monetary Fund for a handout. It will also mean a squeeze on public service spending and less help for the rest of industry and commerce as it falls into difficulties in the ever deepening recession.

This is likely as the government will have trouble raising the money on the international financial markets because we are seen as a credit risk. UK government bonds (gilts) fell as investors feared a flood of government debt which consequently pushed up long term interest rates at a time the government is trying to keep rates low to help borrowing. Sterling fell to as the UK economy’s full weakness was exposed to the world.  UK shares having initially risen 1.5% on the news of the bailout finished the day down 1.5% as the full implications for UK incorporated became apparent.

The hope that the banks will lend in a climate when individual and corporations’ economic prospects are bleak is more pie in the sky from Darling. Never mind that the banks will need all the money the can get to match further losses they face in 2008. In the shadow stands the credit default swap market which the banks stand to loose around £10 trillion as companies start go bankrupt.

2009 will see bankruptcies stretch from individuals, to banks to companies to countries.