Uncharted Territory

March 7, 2009

UK government debt vs UK government profiteering

Filed under: Credit crisis, Economics — Tim Joslin @ 10:32 am

I thought the Independent might have fixed their problem with LiveJournal, but I got the Bad Unicode Input error again posting on a scare article by a Sean O’Grady. The rest of this post is what I tried to post as an Indy comment (and typed in directly rather than copied from Word):

Should the UK taxpayer have to assume these debts it will represent, in relation to GDP, about double the national debt the nation bore at the end of the Second World War, a near unsustainable burden.

This is nonsense. At the end of WWII we simply had debts – we’d spent the money on rations and war materiel. If the UK took on all the banks’ liabilities the debts would be matched by the banks’ assets. OK, the overall total might be negative, but we’re only talking 10-20% GDP worst case. Further, this would be offset by the £billions of accrued shareholders’ capital in the banks.

So far, the current UK Government has used the power of the state to acquire a large proportion of several banks’ shareholders’ capital in a series of deals that time is likely to prove will be highly favourable to the taxpayer. For example, the preference shares the Lloyds Group was forced to take during the autumn recapitalisation were so expensive (far more than in other jurisdictions) that the Group is now having to convert them into ordinaries. But this is being done at a share price that is not only lower than in the autumn but also depressed due to the impending dilution of existing shareholders, and indeed, the perceived possibility of future full nationalisation!

The Government is taking advantage of the fact that the future is always uncertain and that at the moment everyone is worried about the doomsday scenario, whereas, in reality, the recession will at some point come to an end. Journalists blathering about “a near unsustainable burden” help provide a smokescreen for what will likely turn out to be the mother of all stealth taxes.

The true risk to the UK is the heightened perception around the world of the political risk here due to unfair treatment of shareholders. We complain about this sort of thing in other countries (such as Russia). Perhaps we should strengthen our moral argument by ensuring that our Government is striking an appropriate balance between public and private interests, and not simply stacking the deck in its own favour.

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1 Comment »

  1. […] over, and any company would only dilute its shareholders in such a way as a last resort. This is on top of the simultaneous dilution caused by the conversion of the extortionate prefs the shareholders were forced to take in October. The purpose of the insurance is to ensure the bank […]

    Pingback by Who Watches the Watchmen?: A Letter from a Lloyds Shareholder « Uncharted Territory — March 8, 2009 @ 7:59 pm


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