LONDON/MADRID - BRITAIN launched a second bank rescue plan on Monday and Royal Bank of Scotland recorded the biggest loss in UK corporate history, while a cut in Spain's credit rating caused fresh market wobbles.

Announcing Britain's bank bailout, finance minister Alistair Darling said fourth-quarter GDP figures on Friday would confirm the UK was in recession for the first time since 1992.

RBS shares closed down 67 per cent, denting British share indices, while concern about the rescue plan's multibillion price tag drove UK gilt futures to five-week lows and helped push sterling down nearly 1.6 per cent against the dollar.

European Central Bank policymakers again talked down the chance of euro zone interest rates getting close to zero on Monday, even as Brussels forecast the region's economy would slump almost 2 per cent in 2009.

'There is a way to go yet. Looking out towards the next year, there's no doubt the downturn in economies across the world is really quite sharp now,' Mr Darling said.

RBS said it made a loss of up to 28 billion pounds (S$61.3 billion) in 2008, including a huge goodwill hit on its purchase of parts of ABN AMRO in 2007. The government's stake in RBS will rise to 70 per cent from 58 per cent.

The worst financial crisis in 80 years has already felled top banks and pushed much of the world into recession.

Spain downgraded
Spain suffered a credit rating downgrade by Standard & Poor's to 'AA+' from 'AAA', prompting the euro to tumble as investors feared others in the euro zone could experience the same fate as they spend heavily to refloat their economies.

The agency, which cut Greece's rating last week and has Ireland and Portugal under review, said government policy might be insufficient to counter what is expected to be Spain's worst recession in half a century and could cause a severe deterioration in public finances.

'What people are coming round to is that everyone's going to have a bad 2009, but Spain is probably going to have a very bad 2010,' said Dominic Bryant at BNP Paribas.

European Central Bank President Jean-Claude Trichet said for the euro zone as a whole, 'after an exceptionally difficult 2009, to consider 2010 as the year of recovery seems to me like a good working hypothesis.' Britain pumped 37 billion pounds (S$82.3 billion) into the banks in October but credit remains scarce.

The UK government will now allow banks to insure themselves against losses on their riskiest assets. It will offer guarantees on their debt and set up a 50 billion-pound fund to buy up high-quality securities to get cash flowing freely again.

Also on Monday, Irish bank shares plunged over 50 per cent on fears for the banking sector after Anglo Irish Bank ALBK.I's nationalisation last week.

Bank of Ireland CEO Brian Goggin said he would step down amid moves by Ireland to inject 2 billion euro in the bank in exchange for 25 percent voting rights.

Quantitative easing
The British government gave the Bank of England a green light to increase money supply if it thought it necessary as interest rates, now at 1.5 per cent, approach zero.

'It sounds very much like quantitative easing,' said Mr Alan Clarke, UK economist at BNP Paribas. 'The government is giving the Bank of England an additional policy tool.'

The Danish government unveiled a 100 billion crown bank credit package of its own on Sunday. Shares in leading Danish banks slid on Monday as analysts doubted the aid would change banks' reluctance to extend credit.

The market mood is feverish - shares in Britain's Barclays crashed 25 per cent on Friday prompting it on Monday to say it knew of no justification for that fall and that it expected to report annual profit well in excess of forecasts.

Its shares climbed but then slid back as RBS plunged 57 per cent on the back of its colossal loss and Lloyds TSB dropped 36 per cent on fears for the sector.

'If recent history is a guide, any market euphoria related to such a bailout package generally evaporates on the realisation that such mammoth support was required in the first instance,' said Mr Daragh Maher, Deputy Head of Global FX Strategy at Calyon.

One forecasting group said Britain's economy was set to shrink 2.7 per cent this year, the biggest annual contraction since the end of World War Two. -- THOMSON REUTERS