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‘Lloyds offers to exchange up to £5bn in debt’

FT- Tracy Alloway, 1 Dec 2011

The Euro zone debt crisis has seen the continent go into economic turmoil, Lloyds Banking Group as well as the other big three banking firms have injected over £190bn into Europe’s most debt ridden countries. (See Appendix 2)

These economic implications could potentially be catastrophic for both Lloyds and the other major banking groups, it means that if these financially struggling countries default on debt the four major banking groups could lose together over £190bn. For Lloyds this major deficit may possibly result in another government bail out or even worse, the firm could go bust.

Due to the unpredictable nature of the current economical climate in the foreseeable future Lloyds can only look to strengthen its balance sheet. While in the mean time they have to rely on European politicians reaching an agreement about how they are going to avoid default and come to grips with how they are going to reduce expenditure as well as improve on income. This theory was supported by the governor of the Bank of England Sir Mervyn King as he told lenders to ‘limit distributions and shore up their balance sheets, given the exceptionally threatening environment’ (King, 2010). Sir King reiterated his point further by outlining that ‘lenders should cut bonuses and dividends and use the money saved to bolster their defences against the storm raging in the eurozone’ (King, 2010).

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Appendix 2: UK bank exposure to eurozone countries at the end of Sep 2011.

(http://www.thisismoney.co.uk/money/news/article-2068825/British-banks-190bn-tied-debt-ridden-eurozone-countries-warns-Bank-England.html?ito=feeds-newsxml)