Back to square one? A victory for banking, politics or common sense?
November 29, 2013
Perhaps it is a little premature to suggest that privatisation fever is back to 1980s’ levels. But the unexpectedly enthusiastic reception to the Royal Mail share offer will have given the Treasury some timely good heart as it ponders what to do with the public stakes in Lloyds and RBS.
The ongoing rumblings that the Royal Mail shares were sold at a substantially lower price than necessary is unlikely to bother the Treasury too much. In fairness, it was difficult to gauge market interest in the first privatisation for over a decade, which is why privatisation pricing is such an inexact science. If there is a lasting lesson to be learned from the recent share offer, it is that smaller shareholders and individual investors must in future get a proper slice of the action, even when they are seeking large numbers of shares. The Government should in any future sell-offs consider reducing the allocation set aside for large, institutional investors.
Amidst all the euphoria, it is also well worth remembering that while enthusiasm from everyday retail investors is clearly back with a vengeance, the vesting of public stakes in the part-nationalised banks will be of a different magnitude to the £2 billion Royal Mail deal.
Nevertheless, the fact that Royal Mail was seven times oversubscribed will encourage the cash-strapped Treasury to pursue a programme of share sales in the run-up to the May 2015 General Election. We still own 33 per cent of Lloyds Banking Group (valued at just over £18 billion on today’s share price). I reckon that by the time of next week’s Autumn Statement, George Osborne will be in a position to set out a fairly detailed timetable, stretching towards the end of the decade, for selling off taxpayers’ stake. Some of its discrete divisions will be divested in public offerings; others in deals directly with sovereign wealth funds. I suspect that at least half of what the taxpayer currently holds will have been flogged off this side of the significant date of May 2015.
Understandably, the Chancellor will be keen to keep up the momentum of dependable growth and economic good news right until election day. Nevertheless, even he implicitly accepts that a sustainable recovery cannot be built upon yet more cheap credit (expect no rise in interest rates this side of May 2015) and a new boost to the housing market, which has seen an upturn in mortgage approvals, transactions and prices – even before “Help to Buy” was fully up and running. Indeed, Osborne’s trip to China should also be seen as having lasting significance. His focus on exports and inward investment from China to the UK provides a much better foundation to a medium-term economic recovery than ultra-low interest rates and a fillip to one confidence-boosting private asset class.
It is also interesting to note Mark Carney’s foray into this area in his high-profile October speech widely endorsing the City of London and reinforcing the Central Bank’s plans to underwrite the UK’s retail banks. Amidst all the talk about creating “good” and “bad” banks, it is worth observing that the £375bn QE experiment, coupled with Carney’s call for banks to pass on their unwanted toxic assets into this pool has, in all but name, reduced the Bank of England to the UK banking system’s own “bad bank”. What is not yet clear is either how or when policymakers intend to unwind this position. This, however, is exactly what Carney did as Bank Governor in Canada. It is something of a myth that Canadian banks were unaffected by the financial crisis – it is rather the case that their trading/real estate losses were mopped up by their central bank. Carney has departed from Ottawa, but his legacy remains tied up on the Canadian Central Bank’s balance sheet.
That brings us to RBS, in which we retain an 81 per cent stake. Here, in spite of the decision not to institute a strict split, we are probably back to square one. I was surprised that the Chancellor opted for a “last chance saloon” option, rather than echo the Parliamentary Commission on Banking’s recommendation that RBS be split into a “good” and “bad” bank. I worry that this will ensure that uncertainty lingers over RBS; better, probably, to have written off Stephen Hester’s work over the past few years whilst recognising any foreseeable prospect of the taxpayer being able to exit RBS.
I guess that if we knew at the end of 2008 what we know now, the temptation would have been to impose full nationalisation on RBS. Then, rather than taking Vince Cable’s tortuous path towards the creation of a separate Business Bank, we might have used RBS as the vehicle for an aggressive industrial policy, not least Since it has 40 per cent of the struggling SME market. The execution and delivery skills contained in RBS would have allowed for an aggressive road to economic growth.
But that is what might have been. Whilst an outbreak of political consensus may be the order of the day as the new management at RBS stagger on with a “ringfenced bad bank” in their midst, I reckon the Chancellor will be eager to make continual political capital over the fate of RBS over the next twelve months or so. He will contrast rapid progress in exiting public ownership of Lloyds with the residual RBS mess (“still clearing up after the people who crashed the car”).
It will be politics, not economics, that will underpin the government’s programme of privatisation in our banks. On the one hand “getting back” the taxpayers’ money from Lloyds…on the other reminding the public of how deep-seated the UK’s economic problems remain as RBS continues to languish under a public guarantee.