By Ben Livesey and Jon Menon Oct. 8 (Bloomberg) -- Britain's banks will get an unprecedented 50 billion-pound ($87 billion) government lifeline and emergency loans from the central bank after the freeze in credit markets threatened to bring down the financial system. The government will offer to buy preference shares from Royal Bank of Scotland Group Plc, Barclays Plc and at least six other banks, and provide about 250 billion pounds of loan guarantees to refinance debt, the Treasury said in a statement today. The Bank of England will make at least 200 billion pounds available. The plan doesn't specify how much each bank will get. Prime Minister Gordon Brown is following U.S. President George W. Bush, who approved a plan last week to spend $700 billion to prop up financial institutions with untested measures as equities plunged around the world. ``The global market has ceased to function,'' Brown said today at a press conference in London. ``The banking system must be sounder, and that is why we are putting the capital in.'' Brown's government was forced to act as the economy tumbled toward a recession and shares of the country's biggest banks lost more than half their value in a week. Edinburgh-based RBS, Britain's third-largest bank by market value, had its credit rating cut by Standard & Poor's for the first time in almost a decade on concern that its financial health was deteriorating. Nationalizing Banks The steps to partially nationalize the industry provide the ``building blocks to allow banks to return to their basic function of providing cash and investment,'' Chancellor of the Exchequer Alistair Darling said today. Britain joins the U.S. and many European countries in rushing out bailout measures. Germany, Ireland and Greece have pledged to guarantee savers' deposits. Iceland has taken over two of the nation's three biggest banks, and Spain has agreed to spend as much as 50 billion euros ($68 billion) to buy bank assets. The U.K. initiative comes after the government took control of Northern Rock Plc and Bradford & Bingley Plc earlier this year and arranged the takeover of Edinburgh-based HBOS Plc, the country's biggest mortgage lender. Darling and Brown are trying to prevent the financial-services industry, which accounts for about a fifth of London's economy, from collapsing under the weight of the global credit crunch. Financial-service companies will cut 12,000 jobs before the end of the year, about 33 percent more than a year earlier, according to estimates last month from the Confederation of British Industry, the country's biggest business lobby group. Brown's Pledge The government said today it will make 25 billion pounds immediately available to banks in the form of preference shares and is ready to provide another 25 billion pounds. The amount available to each bank will vary, depending on their dividend payouts and executive pay policies. The plan requires the banks to lend to small businesses and home owners, the government said. The rescue may break Brown's pledge to keep debt below 40 percent of the country's gross domestic product. The budget deficit climbed to the highest since 1993 in August, with debt amounting to 43 percent of GDP when the liabilities of Northern Rock are factored in. The Treasury probably will provide details later today on how it will fund the plan. ``These measures are better than blanket guarantees, which don't change the behavior of banks,'' said Peter Hahn, a fellow at the Cass Business School in London and former managing director of Citigroup Inc. ``The taxpayer has direct exposure and direct control on the banks, which is a good thing.'' Besides RBS and HBOS, Abbey, Barclays Plc, HSBC Holdings Plc, Lloyds TSB Group Plc and Standard Chartered Plc and Nationwide Building Society also are eligible to receive funding. London-based HSBC, Europe's biggest bank, said it doesn't plan to receive capital from the U.K. because it has sufficient funding. Standard Chartered, the London-based banks that makes most of its money in Asia, also it won't ask for government funding. Bank Stocks Banks rebounded from earlier declines after central bankers in the U.S. and Europe announced a coordinated cut in interest rates. HBOS jumped 63 percent to 152.8 pence at 12:05 p.m. in London, RBS gained 22 percent, and Lloyds TSB rose 5.1 percent. U.K. banks have been talking to government officials for weeks about selling stakes to the Treasury and raising the guarantee on bank deposits. ``The package addresses the most significant issues in the market, namely confidence in the strength of the banking system and the working of the money markets,'' Barclays Chief Executive Officer John Varley said today in statement. The government should have specified how much capital goes to each bank, said Robert Talbut, who manages 31 billion pounds at Royal London Asset Management in London. ``To say 25 billion pounds is available and it's up to each bank how they will draw it down isn't credible,'' he said. Short of Capital While RBS denied yesterday that it asked the government for help, the bank has been short of capital since it paid about 14 billion euros ($19 billion) last year for the investment banking and Asian units of Amsterdam-based ABN Amro Holding NV. The 12.3 billion pounds that RBS raised by selling shares at 200 pence apiece in June wasn't enough, and shares now trade for about half as much. RBS, Barclays, Lloyds TSB and three other U.K. banks need to repay as much as 54 billion pounds of debt by the end of March 2009 as borrowing costs reach record highs and banks are reluctant to lend to each other. The total, which includes bonds, convertible bonds and commercial paper, is triple the debt repaid in the same period a year ago. RBS has about 11.5 billion pounds of obligations coming due in the next six months, while Barclays, the U.K.'s second-biggest bank by market value after HSBC, has 15.9 billion pounds maturing, according to data compiled by Bloomberg. The government plan will address ``unprecedented conditions in the financial system'' and help RBS strengthen its position, RBS Chief Executive Officer Fred Goodwin said in a statement. HBOS-Lloyds TSB RBS, which bought NatWest bank for 24 billion pounds in 2000, is struggling with rising defaults and a slumping housing market in Britain and the U.S. The bank, which had 5.9 billion of writedowns and a net loss of 761 million pounds in the first half, will have about 1.1 billion pounds of writedowns later this year, threatening its ability to reach a target of raising Tier 1 equity capital to 6 percent by the end of 2008, analysts at JPMorgan Chase & Co. said Oct. 1. HBOS fell 41 percent yesterday to a new low as investors became skeptical of its government-arranged takeover by London- based Lloyds TSB, the U.K.'s biggest provider of checking accounts. Stock Swap Lloyds TSB agreed Sept. 18 to buy HBOS in a stock swap valued at the time at 10.4 billion pounds. HBOS's market value has since fallen to 5.1 billion pounds, even though Lloyds TSB's takeover was still valued yesterday at more than 10 billion pounds. Lloyds TSB ``is working with HBOS management on all aspects of the transaction,'' the London-based bank said today in a statement. The U.K. funding plan ``is very much in the interests of shareholders and customers,'' HBOS said in a separate statement. To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net

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