Tuesday, 20 October 2009

Second Bailout Repaid

A branch of Barclays

In October 2008 the Qatari Sovereign Wealth Fund took an equity stake in Barclays as part of a more general bailout package. Barclays looked to private overseas funding rather than seeking funds from the UK monetary authorities. This was questioned at the time, but it has meant that Barclays’ response to the financial crisis has been purely commercial, and that the strategies followed by the bank lack the political tinge that is now colouring the UK banks that did take public funds.

And now the issue of payback arises. The Qatari stake was acquired when Barclays was trading at under £2.00 per share. In recent weeks, Barclays has been trading in the range of £3.60 to £3.80 per share. The share have fallen back to about £3.60 on the news of the Qatari sale. However, if the BBC is right that 379 million shares are to be sold, if the stake was acquired at around £2.00 per share, and if the striking price is in the region of £3.60 per share, then the Qatari fund is likely to make a profit (i.e. net gain, not just sale proceeds) of £600 million.

This need not exercise us too much. The important question is – if the Qatari fund can make this much money out of a relatively small bailout (they only put in three quarters of a billion to begin with), then how much can UK Financial Investments Ltd make with the UK bailout of £37 billion? Very little futures work concerning the future PSBR is adequately factoring in the extent of the possible proceeds from asset sales. By 2018, when things become a bit more acute, there is still a very real prospect of assets sales being used to size down the National Debt.

On a separate note, this is the second bailout repayment that we have come across (click here for details of the first). Both stories have a happy ending for the institutions providing the bailout funds, and both bode well for the future of the UK debt.

BBC NEWS Business Qatar sale hits Barclays shares


Hervé Musseau said...

As a comparison, in France the public bailout will be repaid at loan + interest, not share value. Thus, France is not likely to lower its soaring budget deficits this way. This will likely prove a problem for France's place in the EU and the Euro (not to mention future generations of taxpayers).

Stephen Aguilar-Millan said...

Dear Herve,
The beauty of the British bailout is that the Bank of England is being paid a Preference Dividend (similar to interest payments) of 12% p.a. This is making the banks' eyes water with base rates at 0.5%. And so, RBS and Lloyds are repaying the bailout as quickly as possible.
Thanks for your note.