Britain's hands tied in rescuing economy: James Saft

By James Saft

LONDON (Reuters) - Britain, which is in a lending drought every bit as serious as the United States', is far less able to mount a government rescue and may well come out much worse.

The country is about a year behind the United States in its property crash but seems to be doing its level best to narrow the gap, with prices falling at about 1.5 percent a month and mortgage availability collapsing.

Mortgage lender Bradford & Bingley BB.L, the nation's ninth largest, was nationalised on Monday after it could no longer fund itself in an increasingly dysfunctional interbank credit market. B&B's death will worsen mortgage conditions which are already pretty terrible. Net mortgage lending in August was only two percent of the level of a year before, and was the lowest since records began in 1993.

The announcement helped push the pound into its biggest one-day percentage fall against the dollar in over a decade on Monday. Whereas the United States has effectively nationalised its mortgage industry and is considering the further $700 billion bank bailout plan that is now struggling in Congress, Britain is still trying to fight fires as they flare up.

It probably has very little choice. Unlike the United States, which benefits from the dollar being the pre-eminent global reserve currency and is generally an 800-pound gorilla, though an increasingly battered one, Britain simply could not get away with borrowing and spending freely to try and stem its crisis. If Prime Minister Gordon Brown and his finance minister Alistair Darling tried to hatch a plan of proportionate size to the U.S. one, investors would sell the pound and shun British government debt, sending interest rates higher.

"Try to do a major bailout here and it would be a massive struggle," said Marc Ostwald, strategist at brokerage Monument Securities in London.

This doesn't mean that Britain's authorities won't at some point feel they must intervene more forcefully -- either by backstopping mortgage issuance or bailing out banks directly -- but that they will pay a higher cost for doing so and get less return on money spent.

There have already been rumblings from financial institutions that Britain needs to do more, and former Bank of England official Willem Buiter has explicitly called for a British version of the Paulson plan to buy up toxic assets from banks.