Bank of England gets licence to print cash

THE Treasury has given the Bank of England the power to print new money as an "unconventional weapon" to tackle the recession.

The move, announced as part of the wider banking bailout, came as fears grew that the financial crisis could see the Royal Bank of Scotland nationalised "within days" after it announced it would unveil the biggest losses in corporate history.

News of the expected £28 billion losses from RBS saw a further £9bn wiped off its value yesterday, as its shares plunged 66 per cent to just 11.6p.

The shockwave from the announcement threatened to derail the Government's second banking bail-out, with the newly created Lloyds Banking Group – formed by the takeover of the Halifax Bank of Scotland by Lloyds TSB – seeing more than a third wiped off its value on its first day of trading on the Stock Market.

Shares in the country's biggest bank fell almost 34 per cent and while the company insisted its capital position remained robust, analysts said they were cautious about the bank's prospects.

The group is already 43 per cent owned by the Government and a city source said it was impossible to rule out further cash injections.

Barclays and HSBC were also hit by heavy share losses yesterday.

The share collapse came just hours after Prime Minister Gordon Brown and Chancellor Alistair Darling had unveiled a further rescue package for British banks that could see an additional £350bn of taxpayers money pumped into the system, on top of the £500bn announced last October.

The main aims of the deal are to provide £200bn insurance for banks against "toxic" debts, which could see the Government taking shares in more banks.

The deal will also force banks to agree to increase new lending, with the Government trying to free-up the money markets to help keep businesses afloat.

Concerns were raised about how the Government would pay for the bail-out however, and some clues to that may have emerged in the announcement from the treasury.

It stated that the Bank of England would set up a new facility, allowing it to buy up to £50bn of high-quality corporate assets, including corporate bonds and commercial paper, that could also be used to boost the supply of money.

This would only be done "should the monetary policy committee conclude that this would be a useful additional tool for meeting the inflation target", and the MPC are understood to be considering the move.

The policy of printing money, also known as "quantitative easing", is a dangerous one however – most recently it has led to hyperinflation in Zimbabwe, which earlier this month printed the world's first trillion dollar note, worth roughly £20 – and both Bank of England and Treasury officials are extremely cautious about the plan.

Shadow Chancellor George Osborne said it was "the last resort for governments that have run out of other options".