Between the Lines: How Darling can pay off his debt – but don't bank on it

Published on Thursday 23 April 2009 21:38

EVEN so soon after the Budget, the numbers associated with the debt that Chancellor Alistair Darling is prepared to pile up are still jaw-droppingly mind-numbing.

Borrowings this year of 175 billion, next year of 173bn, and an Everest-sized national debt of 1,400bn by 2013-14 … good grief!

Well, here's a couple of numbers that are a lot smaller, a lot easier to understand, and which are just as important: 52p and 132p.

Before I explain them, let me reassure you that you are not alone in having had your mind thoroughly boggled by the Budget.

My esteemed colleague Bill Jamieson has been scarred by more panics, crashes, manias, booms, bubbles and busts than most of us have even read about. Even today, he utterly refuses to have tulips in his garden. But even his fully stress-tested flabber was utterly gasted by what he heard in Wednesday's Budget.

Only the application of oxygen and soothing cold compresses by nice nurses were able to restore him to (near) normal adjectival productivity.

I tell this tale out of school just to underline the enormity of what was announced.

This was the setting out of the bill for fixing the biggest financial and economic crisis the country has known since the 1930s. The shock was in discovering that we are all going to be paying this bill for perhaps the next 30 years.

Or maybe not. I say this because as I lay sleeplessly fretting about looming tax bills and worrying about disappearing public services on Wednesday night, a thought suddenly occurred to me. Did Darling tell us the whole story about how this money is going to be paid back?

I don't think he did, mainly because he probably feared that hysteria would have broken out. But yesterday, I did some digging through the Budget report. And I think I see a way in which the debt mountain might not be so forbidding.

Let's remember why it has come about. The mess that our banks got themselves into compelled the government to leap in with billions and billions of emergency financial injections. The banking imbroglio then led on to recession for the rest of the economy and the government to decide to borrow even more in the hope of stimulating it back into action.

This divides the debt into two types: money for mending the banks, and cash to keep public services going and reviving the economy.

We will be stuck with the latter for a long time and only the traditional routes of cutting spending and raising taxes will fix it.

But the bank money is different. It has bought things which were assets, now look like liabilities, but should eventually be assets again. Things like bank shares, securities, and loan portfolios.

Let's tot up the bill. The government spent 15bn on buying RBS shares at 65p a share and a further 5bn at 31p a share. It also spent a further 17bn on buying Lloyds TSB shares at 173.3p and HBOS shares at 113.6p. Then there's about 50bn in loans and guarantees to the nationalised Northern Rock while about 4bn was put into the Bradford & Bingley.

Under the Bank of England's liquidity scheme, 185bn has been spent acquiring what are described as "high-quality private-sector assets" allegedly worth 287bn.

Under the asset protection scheme – the government's insurance of dodgy bank loans – the government is also acquiring up to 25.5bn of RBS "B" shares and 15.6bn of Lloyds' "B" shares.

That's a total of 317bn spent on acquiring shares and other stuff which is theoretically worth 420bn.

I say "theoretical" because, right now, with bank shares trading at dismal lows (RBS at 31.5p and Lloyds at 96p), and nobody interested in buying dodgy loan books, it is not worth very much at all.

But suppose that the banks and the economy do start to right themselves in 2010. It is the government's stated intention that it wants to get rid of its bank shareholdings as soon as possible and offload all the other securities etc as well.

How fast it can do that, depends on how quickly the RBS and Lloyds managements can take their banks off the sick list. I rather doubt that will happen by 2010, but it certainly should happen within the next four years.

And if the government, which most probably will be a Conservative one led by David Cameron, can sell all those shares and assets at par value, they will be able to wipe out nearly a third of the national debt.

Which is where those small numbers are important, for 52p is the RBS share price, and 132p the Lloyds share price, at which the government would break even on its shareholdings.

Whether we are shareholders or not, we all have reason to pray for a rise in the banks' share prices.

&#149 Comments, criticisms welcomed at: [e-mail]