Following a deal brokered by the Bank of England and the Treasury over the weekend, the Government will transfer £1.6bn of state funds to Nationwide Building Society, which is taking £2.35bn of Dunfermline’s deposits and £250m of treasury investments in return for absorbing £1bn of its prime residential mortgages.

The transfer is being made because the assets Nationwide is assuming are £1.6bn less than the liabilities.

However, the cost will be split between the industry-backed deposit protection scheme and the taxpayer. Both the Treasury and the Financial Services Authority refused to reveal how much the Financial Services Compensation Scheme will cover, but insiders said it was “between £1bn and £1.5bn”.

In the worst case scenario, that would leave the taxpayer liable for £600m although any final loss is more likely to be in the tens of millions of pounds.

The labour Government’s reluctance to detail either the possible exposure or the potential loss drew criticism from the Conservatives. George Osborne, the shadow Chancellor, demanded to know: “What is the maximum possible loss for the taxpayer? What is the maximum exposure?”

Alistair Darling would only say there was “a small residual exposure for the Government”.

However, a further £650m of troubled commercial property loans as well as £150m of toxic self-certified mortgages bought from GMAC and Lehman Brothers has been placed with administrators KPMG.

The Government triggered the special resolution regime, which has been in place just a month, after the FSA judged that it needed £60m more capital to meet regulatory requirements and the authorities decided that “even with an injection of £60m, the society would need to come back for more”, Mr Darling said.

The authorities were prompted into action because a £250m floating rate note matured on Monday and the authorities did not want to risk a refinancing failure.

Nationwide is taking over Dunfermline’s 34 branches, head office and 534 employees. It has guaranteed there will be no job cuts at branches for three years but is expected to reduce staff numbers in the head office.

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The US and Britain have both backed away from spending proposals worth 2pc of global GDP, accepting that each country must find its own way. White House officials confess that there is no chance of a deal that entails further public debt.

“Nobody is coming to London to commit to do more right now. No single number is sacrosanct,” said Michael Froman, the US deputy national security advisor.

British Foreign Secretary David Miliband disowned a leaked draft retaining talk of a $2 trillion boost, insisting that it was an old document that merely lists spending packages already under way across the world. “This G20 summit was never about writing national budgets. Let us not hear that somehow the Anglo-Saxons are for fiscal policy and the other Europeans are somehow for regulation – you have got to do both,” he said.

The pledge to uphold free trade has already been cast into doubt by China, which announced a raft of export tax rebates on Friday to shore up exports.

The protectionist move is likely to irk Washington. There is grumbling on Capitol Hill that the US stimulus is leaking out to surplus states in east Asia and northern Europe which seem to be counting on American demand to rescue the world again.

But the two sides are so far apart in their diagnosis of this crisis that no real agreement seems possible. German Chancellor Angela Merkel said over the weekend that the “German economy is very reliant on exports, and this is not something you can change in two years. It is not something we even want to change”.

Czech premier Mirek Topolanek, holder of the EU presidency, attacked the US fiscal plan last week as the “road to Hell”. Europe’s leaders insist the region is already doing enough since generous unemployment payments – starting at 80pc of earnings in Germany – act as an automatic stabiliser.

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Britain’s economy slowed even more sharply than expected in the last three months of 2008 as construction output plunged, official data showed on Friday.

GDP contracted by 1.6pc in the fourth quarter of 2008, revised down from a contraction of 1.5pc, the Office for National Statistics reported. The quarterly fall of 1.6pc was the sharpest decline since 1980.

Construction output tumbled 4.9pc over the quarter, revised down from a fall of 1.1pc. The ONS said this was due to survey data replacing a forecast.

The decline is the biggest quarterly fall in construction output since the fourth quarter on 1980.

Output of the production industries fell 4.5pc compared with a fall of 1.8pc in the previous quarter, driven by the marked decline in manufacturing output.

Separate figures showed Britain’s current account deficit narrowed to £7.641bn in the fourth quarter of 2008 from an upwardly revised deficit of £8.162bn in the third quarter.

Sterling fell against the euro on Friday as it continued to suffer the fallout from Thursday’s weak retail sales figures. High street sales plunged by 1.9pc during February, taking annual growth down to just 0.4 percent, its weakest since 1995

Following that theme, John Lewis – the department store group whose sales are often seen as a barometer of British retail spending – reported on Friday sales dropped by 12.6pc in the week to March 21.

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This is the first time such an auction has failed since 2002 and identifies probable concern over the health of public finances.

The failure in the auction will concern the labour government and follows a warning from Mervyn King on additional fiscal stimulus for the UK economy.

Future such auctions will be watched closely to gauge if yesterday’s failure was a one off or more failures will follow.

US stocks rose yesterday and the US economy was helped with a glimmer of hope from new home sales and durable goods coming in better than expected.

The dollar fell sharply for a brief spell yesterday as treasury secretary Tim Geithners comments were misconstrued by the market.

The basis of the comments was the suggestion of the US exploring Chinese proposals to incorporate a global reserve currency and so reduce reliance on the USD as a reserve currency.

Naturally the dollar was sold on this suggestion before clarification had filtered through to the media though this really shows how fragile and reactive the markets are in the present economic climate.

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America’s Dow Jones index has also put in a good performance, posting one of its largest ever one-day rises following the announcement of a bail-out for banks’ toxic assets.

But British investors wondering whether to use this year’s Isa allowance before the deadline of April 5 have reason to be cautious: the markets have staged several apparent recoveries during the economic crisis, only to fall back again.

MARK HARRIS, FUND OF FUNDS MANAGER AT NEW STAR

“I think the lows in March may prove to be significant, but that a ‘test’ may occur in April. If we can make a higher low for equities in April, it will be positive for further gains. But I should reiterate that I still believe that we are in a very challenging environment, and that it will be a couple of years before we can say that this bear market is truly over.

“So, put simply, we will see the rally which is just unfolding, then a correction of about 15pc, and then a further rally to take the market up in total by about 40pc from the lows.”

JUSTIN URQUHART STEWART OF SEVEN INVESTMENT MANAGEMENT

“Shares on a five-year view may be OK, although prices could be highly erratic.

“I think it’s too risky putting all my money into one asset class so I’ve diversified my investments into a mix of commodities, property, international shares and fixed interest securities such as bonds.

“You can do this yourself in a self-select Isa but it could be expensive and time consuming. An easier way is to buy a multi-asset fund, which you can hold within an Isa.

MARK DAMPIER, HEAD OF RESEARCH, HARGREAVES LANSDOWN

“Come what may, do buy an Isa – use your whole allowance (£7,200, of which £3,600 can be cash).

“Unless you trust politicians – and I don’t – they are going to try to get more money out of you by raising taxes. So shelter as much as possible from tax while you can.

“Some people think the Isa allowance is so small that it’s not worth bothering. But the yearly sums accumulate: a couple who had used their full allowances for every year that Isas and their predecessors, Peps and Tessas, have existed could have built up £190,000 by now – and that’s discounting investment growth.

“I suspect this rally is more of a dead cat bounce; it comes from a very low position. There seems to be a base at about 3,500. Let’s be a bit careful but with the market about 50pc below its peak it has to be an interesting time to think about investing.

“With inflation of over 3pc on the CPI you would normally have interest rates at 5pc, not 0.5pc. So given the risk of inflation taking off I’d consider gold, via a fund such as BlackRock Gold & General.

“This rally is still more hope than anything else, the kind that has a habit of disappointing. I wouldn’t push a load of money in; I’d wait for bad days and drip-feed it in then. The markets are not about to race away but one of these days they will, so don’t wait for ever.

“Eventually, there will be the mother of all rallies.”

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The plan involves the government buying up toxic assets held by banks which will allow the banks to free up their balance sheets. At the moment the debt sits with the banks and they cannot sell it on or value it, therefore the scheme aims to remove this and hopefully by doing this remove the chains that are preventing lending.

President Obama noted that the plan was a vital step but also reaffirmed that there was a “long way to go”. Wall Street experienced a significant rally; the Dow Jones gained nearly 500 points in yesterdays session.

The low yielding currencies such as the USD and the YEN weakened on the news as investors sought higher yielding assets; the AUD and NZD continued to rally.

Interestingly EUR/USD has failed so far in its bid to extend towards 1.40 and the USD is at the moment gaining back towards 1.35 after failing to break 1.3730.

Sterling has moved higher against the dollar buoyed by the increase in the equity markets and GBP/EUR has also gained back to the 1.08 level.

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AIG has been especially irresponsible, both with its risk-taking during the credit boom and with its handling of its affairs since.

Agreeing to extra bonuses and then paying them to employees of its financial products unit after receiving $170bn-plus in government money – and failing to sufficiently forewarn Congress and others to boot – has rightly riled Americans and their elected representatives.

Plans to tax bonuses at financial institutions that have been bailed out by the US government are the knee-jerk result. The scheme passed on Thursday in the House would result in taxes of 90pc on bonuses at institutions that have received funds from the government; in the Senate, which now has to consider the measures, thinking seems to be 35pc levied on the employer, and an extra 35% on the employee.

The bonus tax idea is bad for a range of reasons that senators should consider calmly, even if the House didn’t do so. One is that it changes the rules – again – for recipients of government assistance.

Government initiatives to kick-start clogged financial markets depend on investors and institutions participating. If they think that the rules of the game are going to change continually, they’ll be reluctant.

The tax plans are also retroactive to the beginning of this year. Bankers awarded bonuses for 2008 – and some payouts were both relatively modest and legitimately earned – received them earlier this year, net of prevailing taxes.

They may in good faith have spent the cash, invested it or even given it away. Changing the rules now, and demanding a giant additional tax cheque, really isn’t fair.

Even more importantly, there’s the longer-term impact on the US financial industry. Wall Street’s finest, together with AIG – admittedly a different beast – are now in the doghouse together.

But the finance business is in fact one of America’s global strengths. The planned taxes are just the kind of thing that will give foreign firms and non-US bankers an edge.

In fact, US institutions may be motivated to pay back funds received under the Treasury’s Troubled Asset Relief Programme so as to escape the new taxes.

That sounds like a silver lining – except that administration officials don’t want that yet, for fear that firms will lose the capital cushion against further losses that Tarp was designed to provide.

That’s just one example of the crossed wires inherent in the latest tax plans. And with so many bigger issues at hand, it’s surely the kind of risk to credibility that Congress should make sure it avoids.

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The lying Prime Minister has been forced to lower expectations for the G20 summit, where leaders of the richest 20 countries will gather.

Mr Brown has stopped comparing his event on April 2 to the Bretton Woods meeting in 1944 which set up the postwar world financial system. He recognises that there is no appetite to create new global institutions in the face of reservations in the European Union and the US.

The London meeting risks being overshadowed by a dispute between Europe and the US over public spending.

A series of leaders at an EU summit led by Angela Merkel, the Germany Chancellor, refused yesterday to go along with American calls for greater borrowing and spending by Europe.

Amid scaled-down ambitions for the G20 Mr Brown is backing a doubling of resources for the International Monetary Fund (IMF), the lender of last resort to bankrupt governments that Bretton Woods set up.

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This has caused the US dollar to be sold off and we have broken through 1.40 again as the equity markets rally. $300 billion will be made available for longer term treasury securities and $850 billion for the ailing Fannie Mae and Freddie Mac.

The FX markets witnessed big swings with EUR/USD rallying to 1.35 and USD/YEN moving back down to 95.

The market is now looking for safe haven currencies outside the US dollar as currency risk is dissipated. Sterling gained against the USD but remained subdued in other areas and weakened against the EUR with a break of 1.05 now in reach.

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In a blizzard of terrible data, the number of people who began claiming jobless benefits in January was revised higher to 93,500 from 73,800. City economists had expected a jump of 84,800 for February and the month’s increase is the fastest since records began in 1971, and leaves the unemployment rate at 6.5pc.

“Horrendous,” George Buckley, an economist at Deutsche Bank, said of the numbers. “This is probably going to persist for a while as long as that kind of growth continues.”

The news sent sterling tumbling more than a cent against the dollar to to below $1.39 and left it weaker against the euro, down more than a penny at 94p.

The UK is likely to lose more than a million more jobs over the next 12 months, according to a report from consultancy company Oxford Economics, with the north and the Midlands hit hard. Economists are worried that rising unemployment will sharpen the recession as those still in work cut their spending.

The Bank of England’s David Blanchflower, the most prominent economist to deliver an early warning about the threat of recession, said last month that unemployment could top 3 million, or 10pc in 2010. He recommends the government spends billions of pounds on public works to create jobs.

Rising unemployment is being mirrored across the world’s major economies, with an unemployment rate of 7.9pc in France, 7.2pc in Germany, 6.7pc in Italy and 7.6pc in the United States.

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