U.K. Said to Prepare Bank-Stake Sales for Pre-Election Windfall
A sale of the British taxpayer’s 65.8 billion-pound ($107 billion) stake in Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc (RBS) is likely to start next year, creating a one-time budget windfall before the next election, according to four people familiar with the talks.
Lloyds, 41 percent government-owned, will probably be offered to investors first as the London-based bank is better prepared for a sale, said the people, who declined to be identified because the discussions are private and the plans may change. The coalition government would aim to return RBS, 83 percent taxpayer-owned, to majority private ownership by the end of 2014, three of the people said.
“That level of windfall would open the way for tax cuts in the run up to the next election,” said Mark Wickham-Jones, professor of politics at Bristol University. “That could be a remarkable opportunity for the coalition.”
By the time of Britain’s next election in 2015, the country’s budget deficit is slated to drop by more than two- thirds to 46 billion pounds, or 2.5 percent of gross domestic product, as spending cuts and tax rises take effect, according to the independent Office for Budget Responsibility. That will give Britain’s Conservative-Liberal Democrat coalition the freedom to spend privatization proceeds on alternatives.
“There’s nothing better than coming into an election with a message saying ‘We’re looking forward to a period beyond the age of austerity, and tax cuts signal the beginning of this,’” said Stephen Driver, author of Understanding British Political Parties. “If you’re a Conservative government wanting to make sure you mobilize the Conservative vote, how better to do that than through tax cuts?”
The windfall may also be used to exempt more of Britain’s poorest people from income tax and to fund extra social spending, which are priorities for Liberal Democrats, the smaller of the governing parties.
Potential proceeds from selling the entirety of taxpayer shareholdings in Lloyds and Edinburgh-based RBS are equivalent to more than 4 percent of annual GDP, estimated to be about 1.5 trillion pounds this year, according to the OBR, the agency monitoring government borrowing.
The sales will be an “important issue” for the current parliament, Chancellor of the Exchequer George Osborne told the House of Commons on Feb. 9. The time to sell will come, though “not right now,” Prime Minister David Cameron told the House of Commons yesterday. Deputy Prime Minister Nick Clegg said on Jan. 26 that any sale must recoup the taxpayer’s entire investment.
The Treasury and U.K. Financial Investments Ltd., which manages the taxpayer stakes, declined to comment on possible sale timetables. RBS and Lloyds also declined to comment.
The previous Labour government injected 20.3 billion pounds into Lloyds and 45.5 billion pounds into RBS to bolster the banks’ capital during the credit crisis. Lloyds traded at 60.24 pence at yesterday’s close in London, less than the average of 73.6 pence at which the government bought in. RBS trades at 41.42 pence, compared with the 50.2 pence price of the taxpayer investment. That puts the U.K.’s paper loss at about 11.7 billion pounds.
British taxpayers will get a “handsome return,” from the investment, Lloyds’s former Chief Executive Officer Eric Daniels told a House of Commons committee on March 16. “It looks like” the U.K. will profit from its bank investments, RBS CEO Stephen Hester told the same hearing.
The U.K. government’s preference will probably be to sell to institutional and individual investors rather than sovereign wealth funds, as the latter generally demand too big a discount to invest and the government needs to show a profit on the deal, two of the people said. While there’s a chance that the first sale may occur as early as November this year, it’s very unlikely before 2012, one of the people said.
Several hurdles remain which may derail or delay the sales, including a decline in RBS’s and Lloyds’s share prices and the outcome of the Independent Commission on Banking’s study into competition, which may force banks to sell assets or separate their investment and commercial banking units. ICB Chairman John Vickers, a former Bank of England chief economist, will present an interim report on April 11 and final conclusions in September.
“The timing has to await the Vickers report because you couldn’t sell the bank shares at the moment with the uncertainty hanging over them,” John Redwood, a former Conservative Cabinet minister who advised Margaret Thatcher on privatizations in the 1980s. “If Vickers has proposals that don’t make much difference to the state holdings, they’ve got the option of selling them earlier. If he’s got proposals to change them, it will delay it.”
A sale would also lower the cost of servicing the country’s national debt, estimated by the Office for National Statistics at 2.25 trillion pounds. Once taxpayer assistance to banks is excluded, net debt is 875.8 billion pounds, 61 percent lower.
Both banks are reducing their reliance on government and central bank support programs, like the Special Liquidity Scheme. Lloyds cut its dependence on taxpayer-funded programs by almost half to 83.6 billion pounds in February from the end of 2009, according to company filings. RBS lowered its support by 21 percent to 57.6 billion pounds last year from the end of 2009, filings show.
The SLS was introduced at the peak of the credit crisis in 2008 to improve liquidity by allowing banks to swap hard-to- trade mortgage-backed securities for government bonds. The banks have since reduced their reliance as access to bond markets has resumed.
Return to Profit
That process will need to be completed before sales can commence, said Joe Dickerson, a banking analyst at Espirito Santo Investment Bank.
“It provides an investor with a greater level of comfort in investing in the riskiest part of the capital structure,” said Dickerson. “That’s probably going to come after Lloyds and RBS have demonstrated a better profile of profitability.”
RBS, which received the biggest bank bailout in the world, expects to return to profit in 2011, according to CEO Hester. Lloyds may almost double pretax profit in 2011 to 4.1 billion pounds, according to the median estimate of 21 analysts surveyed by Bloomberg.
The lesson from Sweden, which nationalized two banks in the 1990s, is that it may take longer than expected to sell the stakes, Bo Lundgren, Sweden’s minister for fiscal and financial affairs in the 1990s, said last year. The government still owns 13.5 percent of Nordea AB almost two decades after taking over its predecessor, Nordbanken, which went on to merge with Gotabank, which was also nationalized.
Even so, the idea of starting a sale before the election would echo Thatcher’s tax-cutting and asset-sale programs of the 1980s, according to Tim Bale, professor of politics at Sussex University.
“It wouldn’t be the first time that a British government has tried something similar,” he said. “It would certainly fit with the pattern of Conservative governments in the 1980s, who similarly managed to synchronize the economic cycle with the electoral cycle.”
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