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Suppose the UK government promises to partially guarantee the debt of a large UK bank. That is, it promises that if the bank cant pay

Suppose the UK government promises to partially guarantee the debt of a large UK bank. That is, it promises that if the bank can’t pay back its debtholders, the government will pay each debtholder 90% of what they’re owed. 


How would this affect the bank’s financing decisions, its investment decisions, and its likelihood of default? 


How will this depend on how credible investors 1 believe the UK government to be? 


Explain your answers clearly and concisely

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