Barclays and Royal Bank of Scotland (RBS) are in talks with European banks and the government for around USD 79 billion funding, reports CNBC-TV18, quoting reports. RBS CEO Fred Goodwin declined to comment on Government recapitalization, reports CNBC.

Amid talks, RBS fell 39% after ratings agency Standards & Poor’s cut the company's credit rating for the first time in almost a decade, the report said.

However, a Dow Jones report said Barclays has 'categorically not' requested capital infusion from the UK government.

Richard Morrish, Head of Research, MIG Investments said that the reason the two banks are considering recapitalization is because they have got a large number of short-term maturity bonds which they themselves had issued; will come into maturity up until the beginning of March. “And because of the credit crisis that is existing at the moment, it is very difficult to raise money in the corporate bond market,” he added. 

Here is a verbatim transcript of the exclusive interview with Richard Morrish on CNBC-TV18. Also watch the accompanying video.

Q: We are hearing some concerning noises about banks like Royal Bank of Scotland etc- what are you hearing there over there about recapitalization programmes?

A: Yes, the situation with Royal Bank of Scotland and Barclays Bank in the UK which are the two bigger high street clearing banks in the UK have approached the UK government asking for finance of 45 billion pounds, approximately USD 79 billion. The reason they had to do this is because they have got a large number of short-term maturity bonds which they themselves have issued which will come into maturity up until the beginning of March and because of the credit crisis that is existing at the moment it is very difficult to raise money in the corporate bond market.  Hence the Royal Bank of Scotland and Barclays Bank has gone to the UK government asking for a temporary facility to actually tide them through this process until the corporate bond markets upon up.

This is more of what the real issue of the credit crisis really. As the credit crisis has deepened and spread across from America into the European markets, it has tightened out the corporate bond market which thus makes it difficult for companies whether they are Barclays Bank or in fact any major company to actual be able raise financing. So the situation we are seeing is the banks which obviously we need to keep running, have found this closure of the corporate bond market as a bitterer pill for themselves as it is for all the major companies who are manufacturing companies and in the markets at the moment.

Q: What do you expect over the next couple of days in terms of news flow from Europe- do you think we will be presented with the kind of news flow that tumbled out of US a fortnight back, will things get as bad as that in Europe as well?

A: I think this is the thing people must bear in mind in the whole of the situation a lot of the European situation that have risen for European banks have actually had their root problems from the US subsidiaries of these banks. I think we are going to see a lot more tightening in the credit markets.

I have lived through three credit crisis and I can tell you that the current solutions that have been proposed from the US by cutting interest rate, is not the way you solve a fractured credit market. In fact you need interest rates to rise and it brings back savers and investment and that way you then stabilize the situation. So at the moment the Central Banks are going in the wrong direction. Having said that I think we are going to be in for a very turbulent equity markets over the course of this week and probably the next couple of months.

Certainly for the UK market in particular it could become a very-very pressured environment because they have to do something because UK has this big mortgage issue as the US has and in terms of debt per capita, the debt per capita is larger than that in the US. So UK could very much become a sharp focus for the markets ahead.

We have got the Bank of England meeting on Thursday; they are expected to cut interest rates. The market calls were for 25 bps, we believes they will cut at least a 100 bps and they may go in for a real ---cut of nearly 200 points but a 100 basis points is where we think they will go because they themselves are going to have to issue a lot of debt and obviously they want to do as cheaply as possible.

But I think what we will see is more flight to safety over the next week or so. The currencies that will benefit will obviously be the Swiss Franc to a degree and but the yen will be one of the major ones.