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Is the bailout of the banks unwinding?

In a move which could quite literally blow apart the well structured bailout of the UK banking sector it has been revealed that the government is looking to do a U-turn on dividends for Lloyds Bank. Initially all banks which agreed to take capital from the government were informed that they would not be able to pay out dividends to shareholders while the government held preference shares in the group. However it now seems as though Lloyds Bank shareholders are looking to scupper the takeover of HBOS unless dividend payments are resumed.

This has left the Treasury in a very difficult situation - do they hold their ground and risk the Lloyds Bank / HBOS merger unravelling or do they perform a U-turn and see shareholders from RBS demand the same conditions?

It all seemed to be going very well for the government with the City apparently beaten and under the control of the authorities. However, as we warned some time ago the endless criticism of the City was sure to backfire at some point. It seems that investors have spotted a chink in the government's armour and they are making a beeline for the jugular. This is the probably the first of many critical decisions the government will need to make in the short term.

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