Lloyds Banking Group is expected to repay about £2.3 billion to the Government this week, becoming the first lender in Europe to return bailout money to the taxpayer.

The £2.3 billion cheque addressed to the Treasury could not have come at a better time for Gordon Brown.

The repayment is being made far sooner than either the City or the Government could have expected, just eight months after the Treasury had to bail out Lloyds. The early repayment will help to justify the billions of pounds of taxpayers’ money pumped into the banks in the past year.

In October, the Treasury spent £17 billion taking a 43 per cent stake in Lloyds Banking Group to prevent it from going bust. The Government has always insisted that its long-term goal was to sell the banking shares it had acquired back to the private sector and to make a decent profit on its investment on behalf of the taxpayer in the process.

Under the initial terms of the bailout of Lloyds Banking Group, the Treasury spent £13 billion buying ordinary shares, and another £4 billion acquiring so-called preference shares, which gave the Government more rights over the bank.

Over the past few months, the bank has said that it wanted to raise £4 billion in new money to pay down some of its higher-interest debt. When the bank announced its intentions, Lloyds was forced to offer shareholders the right to buy new shares at their value then of about 38p. But since then, the stock market has rebounded on hopes that the worst of the recession might be over.

On Friday — the closing day for shareholders to decide whether to buy the new Lloyds shares — the stock was trading at about 60p. The immediate profit has made the prospect of buying Lloyds shares so cheaply very attractive and has helped the fundraising to be so successful.

Lloyds Banking Group, whose chairman, Sir Victor Blank, is a friend of the Prime Minister, is expected to tell the stock market in the next few days that it had persuaded shareholders to buy back all of the £4 billion worth of new stock.

After the fundraising, the Treasury will keep hold of its 43 per cent stake in the bank.

The Treasury holds its investments in Lloyds, as well as in Bradford & Bingley, Northern Rock, and Royal Bank of Scotland, in a new agency called UK Financial Investments.

The organisation, which is headed by the Treasury mandarin John Kingman, has been forced to try to appease big City shareholders to ensure that they will be amenable to buying the Government’s banking stakes back over the next few years. This year, some City shareholders told Mr Kingman that they wanted both Sir Victor and Eric Daniels, the company’s chief executive, to resign. They were angry about the decision by Lloyds to buy HBOS, the deeply troubled mortgage group.

Last month, Sir Victor agreed that he would step down from the board next year. It is not yet clear whether Mr Daniels’s long-term future at the bank is assured.

Despite Sir Victor’s agreement to quit, he received a hostile reception from shareholders on Friday, some of whom demanded that he leave his post immediately.

Lloyds and HBOS agreed to their merger in October, as the banking system fell deeper into trouble.

Since then, losses at the combined group have ballooned — HBOS alone lost £9.6 billion, more than the board had expected. Shareholders in Lloyds have accused the board of failing to conduct enough due diligence on HBOS before buying it.

There has also been a row over the extent to which Sir Victor was encouraged by Gordon Brown to buy the troubled mortgage lender. The Government waived aside competition concerns to allow Lloyds to go ahead with the deal.

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