Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Britain's vote to leave the European Union means the government is going to be lumbered with its costly holdings in two bailed-out banks, Royal Bank of Scotland and Lloyds, for a lot longer than planned.

Blame the referendum. On the day of the vote, when markets were convinced the country would back EU membership, shares of Lloyds -- having enjoyed a successful turnaround since its 2008 taxpayer bailout -- were just 2 percent below the price the government paid for them.

On Friday, they slumped 21 percent to their lowest level since February, amid concern that as the country's biggest mortgage lender it will be heavily exposed to a Brexit-induced recession.

RBS -- still weighed down by an ongoing clean-up of its investment-banking operation -- is in an even worse state. The shares are trading at less than half the government's 407-pence break-even price.

Taxpayer Trouble
The Brexit banks sell-off makes a profitable sell-down of government stakes a distant prospect
Source: Bloomberg

All in all, that's a $5.5 billion total hit to the paper value of Her Majesty's shareholdings in both banks -- obviously not great news for the public purse. But the likely delay to any sell-down of these stakes also means that they will continue to be a drag on the public finances.

Lloyds would need a 27 percent rebound to get back to the 73.6 pence a share that would allow Chancellor of the Exchequer George Osborne to sell the government's remaining 9 percent stake without incurring losses.

That's not happening anytime soon. Brokers slashed their recommendations on U.K. banks including Lloyds on Friday, warning that earnings could be hit by as much as a quarter as loan growth slows and funding costs rise.

Profit Pain
Estimated earnings-per-share hit from Brexit, according to JPMorgan analysts
Source: JPMorgan research

So Osborne's plans to sell some 2 billion pounds ($2.7 billion) of Lloyds shares to individual investors -- already delayed back in January due to market turbulence -- looks more unlikely by the day.

This has bigger consequences than just the credibility of Osborne, one of Brexit's key opponents. The longer the government is saddled with stakes in Lloyds and RBS the worse the financial strain becomes.

The Office for Budget Responsibility in March revised up the U.K.'s net debt to GDP forecasts, citing a delay in the expected proceeds from selling bank shares. That pressure is only going to get worse: IHS Global Insight economist Howard Archer reckons GDP growth will be near zero in 2017, a function of evaporating confidence, investment and employment.

Even if the U.K. government clearly has bigger priorities than the management of its bank stakes, it's a factor that may prove crucial in determining how painful the next few years will be for the U.K. taxpayer. There won't be any relief from the sale of these banks.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net