With taxpayers facing big increases in their payments to the government, no wonder the cost of the intervention to prop up banks is such a sensitive political issue.
The last 24 hours have witnessed a fight about the IMF’s estimates of the cost of the financial sector bailout in the UK. Initially put at £200 billion, or 13.4% of GDP, the figure was last night revised down to £140 billion, or 9.1% of GDP, by the IMF, apparently after some vocal complaints by the UK Treasury.
Here are the original IMF estimates of the financial stabilisation costs, showing the UK in second place after Ireland, and with the US close behind in third.
|
Gross Government Debt |
|
|||
|
2008 |
2010 |
2008-2010 |
Stabilization Costs |
|
| Country |
(% of GDP) |
(% of GDP) |
(% change) |
(% of GDP) |
| Australia |
8 |
7 |
-1 |
0.3 |
| Austria |
62 |
73 |
10 |
7.4 |
| Canada |
64 |
77 |
13 |
2.8 |
| Denmark |
22 |
30 |
7 |
… |
| Finland |
33 |
46 |
13 |
… |
| France |
67 |
80 |
13 |
1.8 |
| Germany |
67 |
87 |
19 |
3.1 |
| Greece |
95 |
109 |
13 |
4.1 |
| Ireland |
43 |
84 |
41 |
13.9 |
| Italy |
106 |
121 |
15 |
0.9 |
| Japan |
196 |
227 |
30 |
1.7 |
| Netherlands |
53 |
61 |
9 |
8 |
| New Zealand |
19 |
30 |
11 |
… |
| Norway |
67 |
67 |
0 |
0.3 |
| Portugal |
65 |
78 |
14 |
2.3 |
| Spain |
39 |
59 |
20 |
3.7 |
| Sweden |
36 |
44 |
8 |
7.7 |
| United Kingdom |
52 |
73 |
21 |
13.4 |
| United States |
71 |
98 |
27 |
12.1 |
Apart from the mind-boggling scale of the costs of the financial sector bailout in the US, UK and Ireland, there are some other standouts in the table. France, Germany and Italy are relatively little-affected, if the IMF forecasts are correct (though Italy’s debts are still huge in absolute terms); the worst-hit European countries apart from the UK and Ireland are the Netherlands, Sweden and Austria, which are all to a degree being hit by eastern-European loan exposure within the banking sector; Japan is relatively unscathed from this particular financial fallout, though its huge gross debt reflects the cost of its own largely ineffective interventions in the 1990s.
Meanwhile, my rough and ready estimate of the total bonuses paid out to employees of the UK financial sector in the 10-year period from 1999-2008 is £87 billion. In other words, even at the lower IMF estimate of the UK’s bailout cost (£140 billion), over 100% of all the last ten years’ bonuses are effectively being funded by the taxpayer.
This is the classic Ponzi scheme structure – no wealth creation, just a transfer of money from the late entrants (in this case, taxpayers) to the financial sector insiders. Redistributions of wealth on this scale have occurred many times in history, but usually only in times of war and revolution.
Last night’s spat between the UK government and the IMF reveals how sensitive this issue is. UK government officials, incredibly, were only a few months ago still talking of the possibility of making a profit from their bank stakes, rather than a 12-figure loss. With this afternoon’s UK budget likely to reveal large-scale tax rises for many in the UK, it’s becoming ever clearer that there are massive long-term costs to be met by all of us as a result of the financial sector intervention.
But whatever the political fallout following the financial sector collapse – and I sense that the average UK citizen is still only vaguely aware of how much this is going to cost him or her – the scale of the increase in government borrowing requirements is surely going to crowd out private sector investment. Savings rates in the most indebted countries will rise rapidly as well, as individuals and corporations realise they need to maintain much larger cushions of liquid assets in times of such economic uncertainty. Neither of these trends can be bullish for these countries’ equity markets in the short term.
