July 6, 2020

DealBook: Pressure in Britain Over What to Do With Bailed-Out Banks

Justin Welby, the archbishop of Canterbury, urged a bank split.Pool photo by Jack HillJustin Welby, the archbishop of Canterbury, urged a bank split.

The archbishop of Canterbury, a former chancellor of the Exchequer and the outgoing governor of the Bank of England are unusual comrades in arms.

Yet, the three stalwarts of the British establishment — Justin Welby, Nigel Lawson and Mervyn King — are all calling for the breakup of the part-nationalized Royal Bank of Scotland.

They are part of a growing debate in Britain about what to do with the bank and its rival, the Lloyds Banking Group, which received more than $103 billion combined in rescue bailouts during the financial crisis.

Now, nearly five years after British taxpayers first took stakes in the lenders, the government is preparing to reduce its holdings before the next general election, which is expected in early 2015. The government owns 81 percent of R.B.S. and 39 percent of Lloyds.

Yet, unlike the share sales in financial giants like Citigroup that allowed the United States government to make a profit, the prospective offerings in Britain may be more difficult.

The two banks are still cleaning up their balance sheets and selling off unwanted assets that could put off new investors. Both continue to come under political pressure to increase potentially risky lending to the struggling British economy. And the timing of any share sale, which could come as early as next year, may lead to losses for British taxpayers — potentially angering voters.

“As we move closer to an election, the share prices of R.B.S. and Lloyds will become more scrutinized,” said Peter Hahn, a banking professor at the Cass Business School in London. “Whoever is in government, selling shares in these banks will be a top priority.”

Liz Morley, a representative for UKFI, the government agency that is in charge of managing the bank holdings, declined to comment for this article.

The British government’s quandary over the banks stands in contrast with the experience of the United States Treasury Department, which reduced the government’s stakes in the big banks more quickly.

Elisabeth Rudman, an analyst with the credit rating firm DBRS, said the two British banks were in much worse shape because of the financial crisis than their American counterparts. R.B.S. was not only burdened by its participation in the acquisition of the Dutch lender ABN Amro, but it had large exposure to imploding real estate markets like Ireland.

Nigel Lawson, left, the former chancellor of the Exchequer, and Mervyn King, the former Bank of England governor.Clive Brunskill/Getty Images and Issei Kato/ReutersNigel Lawson, left, the former chancellor of the Exchequer, and Mervyn King, the former Bank of England governor.

The critical element in the British government’s effort to shed its banks stakes is timing. Later this month, George Osborne, the current chancellor of the Exchequer, will present his strategy to return the two banks to the private sector. His plan will come soon after the findings of a British parliamentary committee in the middle of June that will outline how the firms could be privatized. Lawmakers remain divided over how the banks’ should be privatized, with many of the committee members calling for the breakup of R.B.S. to carve out the most risky assets.

Those in favor of a split say that freeing R.B.S. from its worst-performing assets would allow the bank to lend more, strengthen the banking system and help Britain’s economic recovery. Those against the breakup argue that it would cost both time and money that would be better spent letting the bank continue with its planned overhaul.

To connect banks with local communities could involve “recapitalizing at least one of our major banks and breaking it up into regional banks,” Archbishop Welby, a former oil executive who sits on the parliamentary committee, said in a speech on April 21.

For Mr. Osborne, planning the offerings will be precarious.

If the British government sells its stakes too soon, it could book a loss that might not sit well with voters. But if the government waits too long to sell, it could deter potential investors from buying the shares. It also may reverse the firms’ recent share price rise that have made the banks’ stocks some of the best performers in the FTSE 100-stock index over the last 12 months.

“I get confused by all the talk about waiting,” said Ian Gordon, a banking analyst with Investec in London, adding that the British government should sell the stakes tomorrow. “Can we sell the shares now? Of course we can.”

The fortunes of the two British banks have certainly improved since they received multibillion-dollar bailouts.

R.B.S. has been gradually digging itself out of its ill-judged ABN Amro acquisition in 2007. The bank, based in Edinburgh, has shed billions of dollars from its balance sheet and cut around 40,000 jobs over the last five years. The firm has also trimmed its investment banking operations, which came under scrutiny this year after R.B.S. was forced to pay a $612 million fine connected to a rate-rigging scandal.

Lloyds, which already is Britain’s largest mortgage lender, has refocused its efforts on the British retail banking sector. The bank’s chief executive, António Horta-Osório, announced a £1.5 billion net profit in the first quarter of 2013, compared with a £5 million loss in the same period last year.

Analysts say the rise in earnings is mostly driven by cost reductions, a fall in delinquent loans and fast-tracked asset sales like the disposal of a portfolio of real estate-backed securities in the United States for £3.3 billion last month to a number of American investors, including Goldman Sachs.

Market participants are now centering their attention on when the British government will start to reduce it stakes.

R.B.S.’s chairman, Philip Hampton, has said the bank would like the British government to start selling shares from the middle of next year, though the firm’s current share price is around 35 percent below what British taxpayers paid for their holding. Lloyds’ stock price is slightly above the government’s so-called break-even point, though bankers caution that any offering will be dependent on the health of the broader financial markets.

“Bringing too many shares to market could easily scare off investors,” said a prominent investment banker at a rival firm in London, who spoke on the condition of anonymity because he was not authorized to speak publicly. “When it comes to reducing the government’s stake, timing will be everything.”

Some leading voices in Britain are also calling for restraint.

Alistair Darling, the former chancellor of the Exchequer who led the bailouts of R.B.S. and Lloyds, said the government would make a mistake if it were to rush a sale of shares before the next election. Mr. Darling, a Labour politician who opposes the breakup of R.B.S., said the current government could wait at least another 18 months before selling off its stakes, but must clarify its plans to avoid creating confusion with potential investors.

“A clear statement is needed,” Mr. Darling said. “The longer this drags on, the worse this is going to get.”

For any prospective share sale in the two banks to be a success, the British government must convince voters that the offerings would benefit the economy after taxpayers spent billions of dollars to rescue the two lenders.

Just outside an R.B.S. branch in central London on Thursday, many seemed unconvinced that privatizing the bank would help to jump-start Britain’s recovery.

“I can’t see it making much difference,” said Sarah Mulligan, an I.T. consultant on her way to a meeting in London’s financial district. “Changing who owns the banks won’t necessarily get them lending again.”

A version of this article appeared in print on 06/07/2013, on page B7 of the NewYork edition with the headline: Pressure in Britain Over What to Do With Bailed-Out Banks.

Article source: http://dealbook.nytimes.com/2013/06/06/pressure-in-britain-over-what-to-do-with-bailed-out-banks/?partner=rss&emc=rss

Bank of England Leaves Interest Rate Unchanged

LONDON — The Bank of England decided to keep its benchmark interest rate unchanged on Thursday amid doubts about the strength of Britain’s economic recovery.

The central bank left its interest rate at 0.5 percent, a record low, and also held its program of economic stimulus at £375 billion, or about $580 billion. Some economists expect the Bank of England to expand its bond-buying program later this year to help the recovery, while others said recent economic data was encouraging and further stimulus might not be necessary.

“There are broad improvements in business sentiment and with equity markets heading to new high, we are not expecting anything” until Mark Carney takes over as governor of the Bank of England in July, said James Knightley, an economist at ING Bank in London, before the rate announcement.

The British economy narrowly avoided falling back into a recession for a third time in five years at the beginning of this year. The 0.3 percent growth in the first three months of this year was hardly a sign of a robust recovery, but it allowed George Osborne, the chancellor of the Exchequer, to dispel critics of his austerity measures, who had argued that spending cuts and tax increases would pull Britain back into a recession.

While still in decline, the manufacturing and construction industries shrank less than some economists had expected in April and the services sector also strengthened last month. Economic confidence is improving and house prices increased to the highest in almost three years in April, according to Halifax, a mortgage lender.

Under pressure to show his austerity program was indeed repairing Britain’s economy by reducing the budget deficit without choking off growth, Mr. Osborne in March gave the Bank of England more flexibility in supporting the economy without the need to lower inflation in the short term.

Consumer price inflation is at 2.8 percent, above the Bank of England’s 2 percent target. Prices have been climbing faster in Britain than in the euro zone or the United States, squeezing households as salaries remain broadly unchanged.

The European Central Bank cut its benchmark interest rate to a record low of 0.5 percent from 0.75 percent last week. The move was widely expected and seen as mostly symbolic, to show that the E.C.B. president, Mario Draghi, was willing to act to bolster the euro zone as recession threatens to engulf countries that were previously spared, like Germany.

The troubles in the euro zone also weighed on Britain, which is a member of the European Union but not part of the euro zone. The region is Britain’s largest single export market. Mr. Osborne repeatedly pointed to weak demand for goods and services from the euro zone as a reason for the slow recovery of the British economy.

Mr. Knightley is among the economists who expect the arrival of Mr. Carney at the helm of the Bank of England in two months to bring some change to the London institution. Mr. Carney, currently the governor of the Bank of Canada, might be more specific about what to expect from interest rates in the future, Mr. Knightley said. Few economists currently expect interest rates to increase before the end of next year.

Article source: http://www.nytimes.com/2013/05/10/business/global/Bank-of-England-leaves-rate-unchanged.html?partner=rss&emc=rss

Economix Blog: Former Bank of England Official Criticizes British Policies

LONDON – Adam S. Posen, the former Bank of England policy maker, is breaking his silence to criticize the British government’s austerity plan, and he is not mincing words.

The government’s economic policies have “eaten away at British economic capabilities,” are “misguided” and left Britain’s economy “malnourished,” Mr. Posen wrote in the January edition of Prospect magazine.

Mr. Posen, who left the Bank of England’s monetary policy committee in August and is expected to take over as president of the Peterson Institute for International Economics in January, said he kept his opinions about Prime Minister David Cameron’s austerity plan to himself while he was a central banker. But now, it was “past time” for him to speak up.

In the article, Mr. Posen admonished the government for stubbornly sticking to deficit reduction as a priority while failing to address a shortfall in investments.

“For two-and-a-half years, the coalition government’s economic policies have focused on the wrong narrow goal, been self-defeating in pursuit of that goal, and in so doing have eaten away at British economic capabilities and confidence,” Mr. Posen wrote.

He added that it was not enough for Mr. Cameron and George Osborne, the chancellor of the Exchequer, “to claim that they have done what they promised to do. Their policies have left the British economy malnourished, and indeed made parts of it quite ill.”

Mr. Posen proposed five steps to help the British economy. The government, he said, should find ways to encourage companies to invest the large cash piles they accumulated during the crisis.

He also suggested increasing competition in the domestic banking sector by selling parts of the stakes the government continued to hold in banks like the Royal Bank of Scotland and Lloyds Banking Group. And the government should create a public bank especially for lending to small businesses, he said.

“There are alternatives available, and the British government should switch to these now,” Mr. Posen said.

Article source: http://economix.blogs.nytimes.com/2012/12/12/former-bank-of-england-official-criticizes-british-policies/?partner=rss&emc=rss

British Lawmakers Accuse Multinationals of ‘Immorally’ Avoiding Taxes

George Osborne, the chancellor of the Exchequer, said he had earmarked an additional £77 million, or $124 million, for a campaign against “offshore evasion and avoidance by wealthy individuals and multinationals.” The push, the Treasury said in a statement, was expected to yield £2 billion in additional annual revenue.

The drive comes amid growing criticism in Britain and elsewhere in Europe of the fiscal policies of several American companies that pay little tax on the billions of pounds and euros in sales that they generate in the region.

“Global companies with huge operations in the U.K., generating significant amounts of income, are getting away with paying little or no corporation tax here,” said Margaret Hodge, chairwoman of the Public Accounts Committee of Parliament, in a report published Monday. “This is outrageous and an insult to British businesses and individuals who pay their fair share.”

The report focused on the tax practices of Starbucks, Amazon and Google, criticizing their policy of using lower-tax jurisdictions within Europe, like Ireland, Luxembourg and Switzerland, to record much of the revenue they generate in higher-tax countries like Britain, France and Germany. Companies like Google then transfer money they earn in Europe to Bermuda or other locations, thereby deferring or avoiding U.S. taxes as well.

At parliamentary hearings last month, executives of Google, Amazon and Starbucks maintained that their tax policies were perfectly legal, because European Union law lets companies based in one member state operate across the 27-country bloc.

But tax investigators in several countries, including France, are looking into whether the practice, which is also employed by European companies, is legal. Amazon recently disclosed that it had received a bill from the French fiscal authorities for $252 million in back taxes, adding that it was contesting the claim.

Starbucks said Monday that it was reviewing its British tax practices, after the company disclosed recently that it had paid no corporate tax in Britain last year, despite generating £398 million in sales.

“To maintain and further build public trust we need to do more,” Starbucks said in a statement. “The company has been in discussions with H.M.R.C. for some time” — a reference to Her Majesty’s Revenue Customs, the British tax collection agency — “and is also in talks with the Treasury.”

Google declined to comment Monday but has previously insisted that its tax practices comply with British law.

Amazon did not respond to repeated requests for comment.

The British parliamentary report stopped short of accusing the companies of tax fraud but said their explanations had been “unconvincing and, in some cases, evasive.”

“The inescapable conclusion is that multinationals are using structures and exploiting current tax legislation to move offshore profits that are clearly generated from economic activity in the U.K.,” Ms. Hodge said.

The committee also criticized Her Majesty’s Revenue Customs, saying it had been “too lenient.”

The government said it would hire experts to investigate “transfer pricing arrangements,” which multinational companies use to reduce their tax liability in higher-tax jurisdictions.

“The Government is clear that while most taxpayers are doing their bit to help us balance the books, it is unacceptable for a minority to avoid paying their fair share, sometimes by breaking the law,” Mr. Osborne said in a statement.

Article source: http://www.nytimes.com/2012/12/04/business/global/british-lawmakers-accuse-mulitnationals-of-immorally-avoiding-taxes.html?partner=rss&emc=rss

Britons Strike as Government Extends Austerity Measures

Courts, schools, hospitals, airports and government offices could all be hit by the strike, which has come to be seen as an emblem of resistance to government plans to squeeze public-sector pensions and cut government spending to reduce debt.

Education authorities across Britain said thousands of schools had closed because teachers were on strike, and many parents had taken a day off from work to look after children.

The stoppage was billed as the most extensive in decades, mirroring the turmoil in the debt-plagued euro zone across the English Channel and offering a reminder of the potential social and political impact of the financial crisis seizing much of Europe. While Britain is not part of the single European currency, it is a member of the European Union and relies on the continent for much of its trade.

The chancellor of the Exchequer, George Osborne, said on Tuesday that because of the slowdown in the euro zone, British economic growth this year and next would be slower than forecast in March and “debt will not fall as fast as we’d hoped.”

He added that Britain could avoid a recession next year only if the euro zone found a solution to its crisis.

“We’ll do whatever we can to protect Britain from this debt storm,” Mr. Osborne told a packed Parliament. “If the rest of Europe heads into a recession, it may be hard to avoid one here in the U.K.”

News reports on Wednesday spoke of picket lines being set up outside public buildings while workers planned rallies and demonstrations across Britain. Some of the first workers to strike were in Liverpool, where tunnels under the River Mersey were closed. But the overall level of participation remained unclear.

Some routes into London, normally clogged with commuter traffic and cars ferrying children to school, were virtually deserted as the strike began.

Medical officials said up to 60,000 nonurgent hospital procedures — from surgery to outpatient visits — were postponed because of the strike. But airport operators said that two Britain’s two biggest airports — Heathrow and Gatwick near London — were functioning with relatively little delay because many border service personnel had not joined the strike and were being assisted by other government officials to inspect the passports of arriving passengers.

The airports had been an early focus of worries that travelers could be delayed by up to 12 hours.

Immigration queues are currently at normal levels,” BAA, the leading airport operator, said. In addition to drafting in support staff, the operator had also asked airlines to restrict the number of passengers booked on flights.

“However, there still remains a possibility for delays for arriving passengers later in the day,” BAA said.

The company operating Eurostar, the high-speed train using the Channel tunnel, had urged passengers to be prepared for delays. But, by midmorning, a Eurostar spokeswoman said, “everything is fine, with no delays or cancellations.”

At the weekly parliamentary session devoted to questions to the prime minister, the strike provoked fierce exchanges between Prime Minister David Cameron and the Labour opposition leader, Ed Miliband, who accused the government of secretly welcoming the walkout.

“I don’t want to see any strikes,” Mr. Cameron said. “I don’t want to see our schools closed. I don’t want to see problems on our borders.”

He called the strike “something of a damp squib,” but acknowledged that it had forced the closure of 60 percent of British schools. He also said that “less than a third” of civil service employees were on strike.

Article source: http://feeds.nytimes.com/click.phdo?i=6b45846e58d39f5d7b29fbaae1cdace2