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Should the government support the Lloyds bank rights issue?

Today's revelation that Lloyds bank will be asking investors for around £5 billion, much less than the rumoured £10 billion only a few days ago, has put the UK government in a very difficult situation. The government currently holds around 43% of the issued share capital of Lloyds bank, on behalf of UK taxpayers, and its support of the fundraising is essential for it to stand any chance of success. So what does the government have to consider?

The UK government obviously needs to consider whether Lloyds bank is in any short-term danger if the fundraising is not successful as well the question, would a stronger Lloyds bank increase liquidity in the consumer and business markets in the short term?

Many analysts believe that Lloyds bank, while obviously weakened by the ongoing recession, is not in immediate danger of going under. However, experts are not so sure that Lloyds bank will be in a position to inject further liquidity into the consumer and business arena in the short to medium term, even if the £5 billion rights issue is successful. Whether the UK government will need to clarify this position before supporting any rights issue remains to be seen but taxpayers will certainly want more value for money than they have seen so far.

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