What next as neighbours guarantee banks?

By Myles Neligan and Golnar Motevalli

LONDON (Reuters) - The government is weighing up its options after Germany and other European countries moved over the weekend to guarantee consumers' savings in an effort to avert a full-blow banking meltdown.

Below are some of the options available to the country's authorities.

TAXPAYER-FUNDED RECAPITALISATION

The government could use taxpayers' money to buy equity stakes in UK banks, providing them with a capital injection designed to restore confidence in their financial position and unfreeze wholesale money markets on which many lenders rely for their funding.

Analysts say this option could be politically attractive to the government as the dilutive effect on existing shares would force investors to bear some losses, allowing the government to side-step accusations that it is providing the banking industry with an unconditional bailout.

In the longer term, the strategy could even generate a profit for the taxpayer, assuming it had the desired effect of reviving the financial system and boosting banks' share prices.

Were the recapitalisation programme to be voluntary, analysts believe early applicants would likely include merger partners Lloyds TSB (LLOY.L: Quote, Profile, Research) and HBOS (HBOS.L: Quote, Profile, Research), keen to boost the capital strength of their combined entity.

On the downside existing shareholders stand to lose out as the value of their investments will be diluted and the tax payer will end up footing the bill directly should the bail out fail.  Continued...