Eton College, arguably England's most exclusive school, boasts one of the country's most arcane games, the Eton Wall Game. Etonians maintain that the game follows rules and principles that have been carefully refined and adapted over the years, but to non-Etonian spectators, who in any case can't see most of the action, it looks as though the brawling players make them up as they go along. Cynics might suggest that the U.K. government is being similarly cavalier with its rules on bailouts, with firm assertions about the limited role of government being swiftly followed by financial assistance.
After shoring up banking, on a scale no one would have countenanced even a year ago, Gordon Brown's administration is now being drawn into propping up the struggling car industry. The problem is that, much as Brown would like to orchestrate a bailout along the lines of the Obama administration's strategy for Chrysler LLC and General Motors Corp., the British prime minister lacks both financial ammunition and popular support.
But nothing ventured, nothing gained. Recently, for example, the government extended a bridge loan of £5 million ($7.5 million) to vanmaker LDV Group Ltd. to enable it to complete a sale to Malaysia's Weststar Group. It's a small sum, to be sure, but it was an important departure from previous statements of policy and indicates the government will be quite willing to wade in if and when it can. The Department for Business, Enterprise & Regulatory Reform, or Berr, had for months insisted that LDV was the responsibility of its Russian parent OAO Gaz, owned by billionaire Oleg Deripaska.
The government has similarly insisted that Jaguar Land Rover is the responsibility of its Indian parent, Tata Motors Ltd., but it has been deep in talks with Jaguar for several months and has even been accused of attempting "back-door nationalization" by Howard Wheeldon, a senior strategist at interdealer broker BGC Partners Inc. in London. Reports say the government demanded the right to choose a chairman and to veto job cuts in exchange for loan guarantees worth £175 million for six months. Tata and Jaguar have reportedly asked for as much as £500 million of support.
A spokeswoman for Berr would only say the government was in "ongoing discussions with Jaguar Land Rover. She noted that her department "recognizes that the industry faces challenges" and that talks were also taking place with General Motors about its Vauxhall Motors Ltd. unit in the U.K.
While the auto industry is asking for support, it has been careful not to ask for bailouts. Tata chairman Ratan Tata told The Sunday Times recently, "The government controls the banks, and all I seek is facilitation of access to credit on commercial terms. Not a bailout."
Asked about how much further help he would like from the government, Paul Everitt, chief executive of the leading U.K. trade body Society of Motor Manufacturers and Traders Ltd., said "The key concern of the motor industry has always been access to finance and credit. The motor industry in the U.K. has not been seeking any form of government bailout but for ways to work with government to return to regular market conditions."
In any event, sources say the government's hands have been tied by Mervyn King, the governor of the Bank of England, who has opposed giving billions of pounds of assistance to the car industry as Peter Mandelson, business secretary, had wanted. Mandelson and Mervyn Davies, the former CEO of the bank Standard Chartered plc and now a junior minister, had held talks with King about making the bank's asset-purchase facility, recently extended from £50 billion to £125 billion and designed originally for the banking sector, available to the automotive industry. Under the facility, the central bank is able to buy up problematic commercial paper, bonds and syndicated loans.
Mandelson is keenly aware of the economic importance of the automotive sector, which is estimated to support more than 800,000 U.K. jobs and generate around 3% of GDP. Yet signs of distress are clear, with new car registrations falling by 24% in April compared with the same period last year, production plunging and layoffs accelerating.
Surveys show that bailouts are deeply unpopular with the electorate, whether the rescued are banks or car companies. To make its case for the next big bailout, the government will have to show that taxpayers will ultimately benefit.
For now, it looks as though the British government will have to settle for measures such as the £2.3 billion automotive assistance program, which provides loans and loan guarantees. But as Everitt said, "We welcome the packages announced to date as initial steps which begin to address the issues the automotive sector has raised. However, swift and resolute action by government to ensure announced guarantees and funding get to the companies that need it most is now critical."
Further action cannot be discounted. As with the Eton Wall Game, the rules of the bailouts game can change very easily because the spectators can't see the real action.