I have been reading Robert Peston's blog, a BBC's business editor, for a while. He has some good stuffs on explaining what's happening in the economy. Anyways, picking on the news I read yesterday, the Treasury and UK Financial Investments have been preparing an offer to convert £9bn of preference shares that they own in RBS and Lloyds/HBOS into ordinary shares. It's obviously to ease the 12% dividends on those preference shares, which amount to £600m and £480m for RBS and Lloyds respectively. This offer is another way to relieve the pain of the current tight credit condition. Theoritically, it's believed that every year about £27bn more should be lent if the total amount of £1080m is retained within the banks.
However, RBS whose 57.9% is currently owned by the public sector, would be more likely to accept the offer eventhough it means the state's holding will rise to 70%. We can see there is a trend for nationalisation including both fully and partially. Nationalisation is one of the common ways to rescue banks, supported by the case of Northern Rock last year and AIG more recently, but is it all good? From my point of view, it'd place a considerable burden on the Government's finance in terms of money spent to encourage lendings and what is left for the rest of the community. The economic difficulties have brought about a shrink in almost other sectors' activities. Not only have bankers lost their jobs but also teachers and employees from Mark&Spencer are facing the same problem. Would the Government be able to subsidise across industries if a major of their spendings is poured into the banking system? Moreover, the taxpayers are forced to put their money to partly protect banks against their high-risk loans (£37bn has already been injected into the banking system). If it does not show any positive sign in increasing lendings from banks in a very near future, how long would taxpayers be willing to do this?
It's interesting to see if Lloyds, who is of less interest, will agree upon the offer or not. After huge losses announced by City Group and others, will we have more and more fully-nationalised banks soon?
Hello Huong Anh!
ReplyDeleteNice blog entry! I definitely learned a few things after reading your article. As I am quite unfamiliar with UK systems, the Treasury and UK Financial Investments are functions similar to be found in the United States central bank, correct me if I am mistaken.
Your entry touches upon some very serious issues at hand. I would love to get your opinion on some the stuff you talked about, maybe you can blog about it some more next week.
Considering the weakness in the financial sector, do you think this is a wise move on the part of the goverment? By converting their preference shares they would be at risk to price flucations.
I would like you to consider the scenario of the US financial sector: http://www.ritholtz.com/blog/2009/01/horror-story/ looking at citigroup alone they lost 10times their value from may 2007. Whose to say they won't just go bankrupt!? Perhaps RBS and Lloyds have yet to see their worst, especially with earnings seasons coming up! What do you think?
I would like to also point out that the US Federal Reserve owns 79.9% of AIG, and is answerable to congress though technically not a part of the government (though might as well consider it so these days -_-). Your point on northern rock is well taken in regards to nationalization.
You talk a little bit about the affects of an increase on government spending in terms of encouraging lending. What do you think are the effects of such large spendings... (i just remember we had to model something similar this in my macro class the other day). This may be very interesting to explore as taxation may become a huge issue political. Considering large increases in government spending, the US faces challenging situation if Obama wants to continue with tax cuts. What do you think about the UK case?
Also you mention teacher job loses? How badly does this affect the UK economy? I'm not sure what % of teachers make up the labor market, but your point on job loses in retail is taken as seen by M&S. What about other sectors in the labor market?
I think in part that the idea of Government trying to encourage lending has not worked all the way from 2007 to 2008 as conditioned continued to worsen. Lending is still driven by fear and uncertainty in the economy and markets. Sentiment is really a big issue that needs to be resolved in my opinion. In order for that to happen some fundamental changes to the system need to be made. However, i do not believe that nationalization is the solution to our problems!
Do you think the financial sector should be nationalized?