Daily Mail gets it wrong…again

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HER Majesty’s Daily Mail got hot under the collar about the First Minister’s speech to the Scottish Parliament outlining the SNP Government’s legislative programme. In its leader column (May 27) the Mail accused Mr Salmond of “a barely disguised appeal to anti-English sentiment from the man who wants to eliminate sectarianism.”

After a long rant, the paper’s leader writer concluded: “Economically, independence is impractical: the UK-funded bailout of RBS and HBOS cost £470 billion, more than three times Scottish GDP inclusive of North Sea oil and gas. Salmond is delaying an independence referendum in the hope that rhetoric will brainwash Scots into sharing his delusion.”

The real delusion, however, lies with the Mail’s grasp of economics. Let’s examine that figure of £470 billion and whether or not an independent Scotland could have bailed out RBS and HBOS. Expect that £470 billion figure to reappear often during the referendum campaign.        

The £470 billion comes from a briefing document published by the Scottish Parliament Information Centre (SPICe) in February 2010. In turn, SPICe drew its information from figures published by the UK National Audit Bureau (NAO).

The original NAO report shows that the total amount provided by the UK Treasury to bailout the British banking system was £753 billion. Of this, SPICe estimated that £470 billion relates to RBS and HBOS – but it is only an educated guess because the Treasury has provided no detailed breakdown. However, this does not – repeat, not – mean that the Treasury actually spent £470 billion in cash, paid for by the taxpayer.

First, the Labour Government took an 83 per cent stake in RBS, paying £45.5 billion in cash, and agreed to insure its riskiest assets for an annual fee. But it charged the bank for the insurance, making a profit on the deal. Again, Brown and Darling injected £20 billion into Lloyds Banking Group, which had acquired HBOS at their urging, in exchange for a 41 per cent stake. The Treasury also provided additional guarantees to insure Lloyd’s liquidity. And again, it charged for the priviledge.

So that makes an upfront payment of only £65.5 billion in cash and the rest in “guarantees” which the banks pay for. But where did the £65.5 billion in cash come from? The taxpayer? No – it was borrowed especially to fund the deal. However, as this borrowing was set against the bank shares acquired, it does not count as part of the Treasury’s net debt. In other words, it is merely a book-keeping transaction (though interest is paid). Any country of any size could do it. According to JPMorgan Chase, the annual cost of servicing that loan is around £3.2 billion. So the actual cost of rescuing RBS and Loyds was…er, £3.2 billion per year minus the charge to the banks for insuring them.

It is also true that the Bank of England provided both banks with liquidity because interbank lending had collapsed during the credit crunch. Essentially, the Bank of England invents this cash electronically.  It also gets it back, squaring the circle. All central banks do this.

When the UK Government rescued the banks, it paid per share 50.2p for RBS and and 73.6p Lloyds. As of Friday (May 27) the share price stood at 42.34p for RBS and 52.98p for Lloyds, leaving the Government about £10 billion out of pocket if it sold out now.  By comparison, this year’s North Sea oil tax revenues will be around £15 billion.

So the true cost to an independent Scottish Government of bailing out RBS and HBOS would have been containable. An independent Scottish Government might even make a profit, if the banks can be sold off at a higher price than they were bought at.

The £470 billion figure has been twisted out of all context by the Daily Mail. Final proof comes at the end of the 2010 SPICe report which is at pains to quote the Treasury’s Pre-Budget Report of 2009. This Pre-Budget Report (Box 4, page 199) attempts to put a net figure on the total cost of the entire UK bank rescue programme – not just RBS and HBOS. Remember that most of the so-called bailout funds were actually guarantees, not cash up front. And guarantees the banks had to pay for.

The net figure the Treasury thinks it will cost the UK Government to finance the entire bailout programme is…£10 billion, assuming RBS and Lloyds’ shares are finally sold off.  Repeat, that’s £10 billion, not £470 billion or £753 billion. Beware of Unionists who invent factoids.