<blockquote>
"The public finances are already under strain even before today’s announcements. The government’s budget deficit was forecast to reach 175 billion pounds in the year ending March 2010, or 12.4 percent of gross domestic product, the most in the Group of 20, according to figures from the U.K. Treasury in April."</blockquote>
RBS Surpasses Citigroup as World’s Costliest Banking BailoutBy Andrew MacAskill
November 2, 2009
SourceNov. 3 (Bloomberg) -- The U.K. government’s plan to inject a further 25.5 billion pounds ($42 billion) into Royal Bank of Scotland Group Plc will make it the most expensive bank bailout in the world, surpassing Citigroup Inc.
Prime Minister Gordon Brown’s government may today announce the additional funding for RBS and an extra 5.6 billion pounds for Lloyds Banking Group Plc, the two largest U.K. banks that received government money, a person familiar with the matter said. That will increase the amount received by Edinburgh-based RBS to about 45.5 billion pounds, more than the $45 billion pumped into Citigroup and Bank of America Corp.
The government is providing more cash for the banks even as the Bank of England says the country’s recession is nearly over. Today’s 31 billion pounds of additional funding is eight times greater than expenditure this year on Britain’s war effort in Afghanistan, according to the House of Commons Defence Committee figures. The decision is likely to be unpopular with voters angered by the return of bonuses. Bonuses for workers in the financial services industry may rise 50 percent this year, the Centre for Economics & Business Research Ltd. said on Oct. 21.
“The public are reaching the limit of how much government support for the banks they will tolerate,” said Vicky Redwood, U.K. economist at Capital Economics Ltd. in London and a former Bank of England official. “People are getting fed up with reports of a return to high bonuses and banks not lending.”
Lloyds is planning to raise about 13 billion pounds in a rights offering so it can exit the government’s program insuring risky assets, said the person, who declined to be identified because the talks are private. The government, which owns 43 percent of the bank, will take up its rights to buy about 5.6 billion pounds of stock.
Asset Protection Scheme
RBS will insure 280 billion pounds of assets with the Asset Protection Scheme, the person said. The government may buy 25.5 billion pounds of ‘B’ shares in the bank. The bank will use about 13 billion pounds of that money to lift core Tier 1 capital, 6.5 billion pounds to pay the fee for using the APS, and may use the remaining cash to bolster capital.
Linda Harper, a spokeswoman for RBS, declined to comment.
Citigroup, based in New York, came so close to a funding shortfall last year it had to get $45 billion under a federal bailout program. Citigroup is 34 percent government owned, and RBS 70 percent. Bank of America, which is based in Charlotte, North Carolina, took $45 billion in U.S. aid.
‘More Money’
Britain’s 68 billion-pound bailout for RBS and Lloyds may need to be increased still further, said Colin Ellis, European economist at Daiwa Securities SMBC Europe Ltd. in London.
“It’s not inconceivable that we will need to put more money into the banks,” Ellis said in an interview. “One of the lessons from previous crisis is that you just don’t know how much the final bill for the bailout is going to be.”
In return for taxpayer assistance, the two banks have pledged to provide 78 billion pounds of increased lending over this year and next. Britain’s economy should return to growth by the end of the year, Bank of England Governor Mervyn King said in a speech on Oct. 20.
Trailing in the opinion polls for almost two years, the ruling Labour Party is attempting to regain credibility with voters on the economy. While the opposition Conservative Party says the biggest threat to the U.K. economy is the deficit, Brown says expenditure must remain high until economic recovery is assured.
The public finances are already under strain even before today’s announcements. The government’s budget deficit was forecast to reach 175 billion pounds in the year ending March 2010, or 12.4 percent of gross domestic product, the most in the Group of 20, according to figures from the U.K. Treasury in April.
‘Extremely Severe’
“The problems are extremely severe,” said Jamie Dannhauser, an economist at Lombard Street Research Ltd. in London. “Given the sheer scale of the mess that the U.K. banking system got itself into, it would be absurd to think that we could sort these things out quickly.”
Before today’s announcement, each household in the U.K. had about 3,000 pounds invested in the banks. The government’s paper loss on its stakes in RBS and Lloyds dropped to 10.9 billion pounds in June from 18 billion pounds in February as the banks’ shares advanced, according to government figures.
The International Monetary Fund has estimated the final cost of the bailout to British taxpayers may climb to 9.1 percent of GDP, or about 132 billion pounds.
To contact the reporters on this story: Andrew MacAskill in London at
amacaskill@bloomberg.netJon Menon in London at
jmenon1@bloomberg.netLast Updated: November 2, 2009 19:01 EST