UK may sell bank stakes for pre-election windfall

A sale of the British taxpayer’s £65.8-billion ($107 billion) stake in Lloyds Banking Group and Royal Bank of Scotland Group (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 per cent 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 per cent 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, or 2.5 per cent 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 privatisation 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 mobilise the Conservative vote, how better to do that than through tax cuts?”

‘Important issue’
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 per cent of annual GDP, estimated to be about £1.5 trillion 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 February 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 January 26 that any sale must recoup the taxpayer’s entire investment.

‘Handsome return’
The Treasury and UK Financial Investments, 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 into Lloyds and £45.5 billion 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 UK’s paper loss at about £11.7 billion.

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 UK will profit from its bank investments, RBS CEO Stephen Hester told the same hearing.

Hurdles remain
The UK 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 (ICB’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 privatisations 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.