by Calculated Risk on 3/07/2009 07:47:00 PM

From The Times: Lloyds primed for 1980s slump

[T]he worst-case scenario envisaged by the Financial Services Authority and the Treasury is a 1980s recession, when there was a 6% drop in GDP from peak to trough. This led to a fifth of UK manufacturing shutting down, a legacy of unemployment and an economic hangover well into the latter part of the decade.

The government wants to ensure Lloyds is equipped to cope with such an outcome and that is why it was forced to take part in the government’s asset-protection scheme – an insurance policy to protect the banks from further losses. Lloyds will place £260 billion of loans into this scheme and in return the government will see its stake in the bank rise from 43% to as much as 77%.

The "more severe" U.S. scenario is for a 3.3% decline in real GDP in 2009 following the 1.7% decline in real GDP the 2nd half of 2008 (from the peak in Q2 2008).

These two scenarios are somewhat close for 2009.

The U.K. economy contracted 0.7% in Q3 and 1.5% in Q4, so a decline of 3.3% in 2009 (assuming no recovery later in the year) would put the peak to trough in the U.K. around 5.5%.