May 17, 2017 / 12:30 PM / 3 months ago

Lloyds bailout bill still isn’t paid in full

A woman uses a cash machine at a Lloyds Bank branch in central London, Britain February 25, 2016.Paul Hackett/File Photo

LONDON (Reuters Breakingviews) - Britain has recouped its 20.3 billion pound investment in Lloyds Banking Group. This is a victory – made more pronounced because it comes a day after a fund of Singapore’s government said it sold shares in Swiss lender UBS at a big loss. There is a big difference, though: Lloyds’ bailout bill isn’t just financial. And, despite appearances, it is nowhere near repaid in full.

The UK government rescued Lloyds and HBOS, the rival with which it fatefully merged, in 2009 as a matter of national stability. It invested 20.3 billion pounds, took out a bit more than 2.5 billion pounds in fees, and sold the rest down slowly, winding the whole affair up this week with a small profit.

Factor in the time value of money, and the deal was still a dud. In total, the British taxpayer has made an annual rate of return of only around 2 percent, according to a Breakingviews analysis factoring in dividends, assuming the government sold shares at market prices and grouping payments by year for simplicity. That doesn’t matter too much, of course, because the purpose of the bailout was to rescue Britain’s financial system. The government can accept that as payback, unlike a purely financial investor such as Singapore’s GIC.

This line of reasoning cuts both ways, though. The cost of the bailout for the UK government is, in reality, much bigger than that 20.3 billion suggests. For starters, there’s the long-term effect of bank bailouts blowing out the national debt, which led to a prolonged period of austerity under the previous government. Britain’s borrowings were 35 percent of GDP in 2006, but 65 percent by 2009, and are now even higher. Public services have been slashed, and unhappiness has mounted.

Debt can be brought down. Harder to erase is the residual mistrust of the financial sector among the wider British population. One result of that is that it is nearly impossible for any politician to energetically defend the role of financial services in the UK economy, despite its provision of 1 million jobs. That puts a big question mark over Britain’s prosperity, and over the idea that Lloyds’ payback moment deserves much celebration.

Breakingviews

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