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Will other banks spin off their debts overseas?

The revelation that Barclays bank has in effect passed all the management of its toxic debt pile to a company in the Cayman Islands has surprised many in the banking sector. The deal, which will see Barclays bank pay a $400 million retainer over 10 years, involves transfer of the company's $12 billion toxic debt pile with the potential of further bonus payments on top of the $400 million already agreed. So will other UK banks follow suit?

While it must be something which many banks in the UK are considering, there is no way that the UK government would allow Lloyds bank, Royal Bank of Scotland and Northern Rock to transfer any of their bad debts overseas. Indeed, Lloyds bank and Royal Bank of Scotland are currently in detailed negotiations regarding the UK government's toxic debt insurance plan although there is some concern about the level of premiums demanded by the authorities. This puts the UK government in a very difficult situation because these large premiums will impact upon cash flow and short-term profitability but will allow the government to maintain some form of hands-on involvement.

There is also the fact that the government will need to make Lloyds bank and Royal Bank of Scotland as competitive as possible because ultimately the taxpayer share stakes will be sold to the highest bidder in due course.

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