UK government set to increase share in Lloyds Banking Group

The UK government could convert the £4bn in preference shares with an interest of 12 percent which would end up costing £480m a year and in early trading resulted in Lloyds’ shares climbing 5 percent to 43.2p.

The Chancellor, Alistair Darling, has outlined a deal to make sure that the bad loans are insured in return for non-voting shares and this will ensure that the taxpayer-backed Asset Protection Scheme will protect against the banks riskiest assets against further losses.

The Lloyds board has been stiff in their opposition to handing direct control to the government, although negotiations have been continuing for over a week so it seems as though the board will have little choice.

Assuming that the deal does go ahead and shares are converted to ordinary shares, it would bring the taxpayers voting stake to around 60 percent from 43 previously but because the insurance scheme will be paid for with the issue of non-voting shares, the real stake will be closer to 70 percent.

There is a precedent to the move as the Treasury has agreed a similar deal with Royal Bank of Scotland and Lloyds has been forced to go to the Treasury due to the heavy losses at HBOS.

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