Lloyds Banking Group has had a major bust up with the Government over the terms of the insurance scheme for toxic assets and is fighting to keep the state's stake in Lloyds below 50pc.

By Katherine Griffiths, Financial Services Editor
Last Updated: 6:24AM GMT 04 Mar 2009

Individuals close to Lloyds have warned Treasury officials that Eric Daniels, the bank's chief executive, feels so strongly about the issue that he could quit.

Lloyds' shares fell a further 3.9 – 8pc – to 45½p on Tuesday and have slid 25pc in the past two weeks. This fall is on top of the 32pc collapse in Lloyds' shares when it revealed on Feb 13 that losses within HBOS, which it bought in a rescue deal in September, had escalated to about £10bn.

The bank, now the largest lender in the UK, was expected to announce details of its plan to use the Government's asset protection scheme on Friday alongside its annual results.

As each day passes, investors are becoming increasingly nervous about terms that the Government will impose on Lloyds. The bank is under intense pressure to make an announcement in the next few days.

Sir Victor Blank, the bank's chairman, on Friday expressed "optimism" that a deal would get done. He attributed the delay to the fact that Treasury officials had been "completely knackered" from negotiating the terms of the agreement with Royal Bank of Scotland (RBS), which were announced last Thursday.

However, behind the scenes the negotiations have been acrimonious and Lloyds' team "stormed out" of meetings with the Treasury on both Wednesday and Thursday, according to sources, who say that serious disagreements remain between the two camps.

Lloyds, which is 43pc state owned, has strongly resisted the conversion of the Government's £4bn of preference shares into ordinary equity, as it would push public ownership of Lloyds over 50pc.

Mr Daniels is understood still to be trying to cap Government ownership at 50pc. His position reflects the pressure he is under from Lloyds shareholders who are furious at impact buying HBOS has had on Lloyds' share price.

Analysts believe Mr Daniels will not succeed and point to RBS as a guide.

The Government is pumping £19.5bn into RBS in new "B shares". Some £13bn of that is additional capital to bolster RBS's balance sheet.

The Government's stake in RBS will rise from 70pc to over 90pc, though its voting rights will be capped at 70pc.

Lloyds' team is trying to keep the Government's capital injection to a minimum, and is arguing that at the very least its voting rights should not rise above 50pc.

Lloyds has resisted taking B shares, though bankers believe it will have to cave in.

A spokesman for Lloyds said Mr Daniels was "very committed" to the negotiations with the Treasury and that Lloyds was making "good progress".

"This is very important work which is top of mind for our senior management team," the spokesman said.

Some believe Mr Daniels was less enthusiastic about buying HBOS than Sir Victor and that he is very unhappy with the rising level of Government interference over issues such as bonuses.

On top of failing to reach an agreement with the Government over the Asset Protection Scheme, gossip was doing the rounds on Tuesday that Lloyds is looking to demerge and float all of its private equity interests to restore the health of its balance sheet.