First sale of government stake in Lloyds is a success

But can private investors cash in on the deal?

Just a few days ago the government formally announced the imminent stock market flotation of state-owned British postal stalwart Royal Mail, as discussed by Spear’s last week.

In a move reminiscent of the mass privatisation of the Thatcherite era, this week the sale of another major organisation – albeit only part-owned by the state – has begun. Earlier this morning it was announced that the initial sale of taxpayer-owned shares in Lloyds Banking Group to institutional investors has raised £3.2 billion for the Treasury, representing a small profit (but not after inflation).

However, unlike the case of Royal Mail’s whopping 378-year-long history of complete state ownership, the government has only owned just over a third (38.7 per cent) of Lloyds Banking Group for the past five years, following its £20bn bailout of the failing bank in 2008 as a result of the Lloyds’ disastrous acquisition of Halifax Bank of Scotland.

The government is selling a 6 per cent share of it stake, reducing its ownership of the bank to around 32.7 per cent. While this may appear to be a small chunk of its holding, the Coalition can hope to cash £3.3 bn for the benefit of taxpayers on breaking the deal.

In a statement the Treasury said: "We want to get the best value for the taxpayer, maximise support for the economy and restore them to private ownership. The Government will only conclude a sale if these objectives are met."

Shares in Lloyds closed at 77.36p on Monday, which is well above the price of 61p that Chancellor George Osborne regards as the break-even level. During Lloyds' bailout the government bought shares at an average price of 73.6p.

Since the average market price at the time was 61p, the government booked the difference as a loss and added it to the national debt. BBC business editor Robert Peston says that based on Monday's share price the taxpayer should "more-or-less" get its money back.

The sale of this banking giant, laid low by the credit crunch, has been hailed as the UK’s second biggest share placing ever. It is, according to the Financial Times, not only a milestone in Lloyds’ recovery but also the sign of a momentous turnaround in the UK’s fortunes in the wake of the financial crisis, which brought the banking industry to the brink of collapse in October 2008.

The FT also reports that Lloyds’ shares, which are expected to be sold at 75p, have soared more than 90 per cent in the past 12 months, racing past the government’s 73.6p "in-price" for the first time in three years last month. It came as no surprise, therefore, that the government set the wheels in motion for the reprivatisation process.

And, naturally, investors are keen to muscle in on the action. The Capital markets bankers involved in the transaction reported a swift take-up of Lloyds shares, with one US hedge fund said to have submitted a $1bn order.

"Investors are making a call on the UK," said one banker on the deal. 'This level of demand would not be there if people weren’t confident in the UK’s broader economic recovery.'

The good news is that individual investors could also soon get their hands on some Lloyds shares, since the initial placement is expected to be followed by a second sale – potentially involving retail investors – in the first half of 2014.

Royal Mail’s flotation has created some interesting private investment opportunities through publicly traded shares, so let’s hope we can bank on getting access to some Lloyds stocks, too.

This piece first appeared on Spear's Magazine.

Lloyds TSB. Photograph: Getty Images

This is a story from the team at Spears magazine.

Photo: Getty Images
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Cameron needs to decide what he thinks about Russia

David Cameron's words suggest one thing, his actions quite another.

David Cameron needs to decide whether he takes Russia seriously.

He certainly talks a good game, calling Vladimir Putin to account for crimes against Ukrainian sovereignty and for supporting the wrong side in Syria, claiming credit for bolstering the post-Crimea sanctions regime, and demanding that Moscow’s behaviour change. And the new Strategic Defence & Security Review, published last week, puts Russia front and centre among the threats Britain faces.

The problem is, his government’s foreign policy seems calculated to make no one happier than Putin himself.

At fault is not a failure of analysis. It has taken Whitehall 19 months since Moscow annexed Crimea to develop a new Russia policy, replacing the old aspirations of “strategic partnership based on common values”, but the conviction that Russia be treated as a significant threat to the U.K.’s security and prosperity is solid.

Five years ago, when the coalition government published the last Strategic Defence & Security Review, Russia was mentioned once, in the context of rising global powers with whom London could partner to help solve planetary problems, from nuclear proliferation to climate change. The new SDSR tells a very different story. Russia gets 28 mentions this time around, characterised as a “state threat” that “may feel tempted to act aggressively against NATO allies.” Russia’s annexation of Crimea and instigation of a separatist civil war in eastern Ukraine are mentioned in the same sentence with Assad’s chemical weapons attacks on Syrian civilians and the rise of the Islamic State as key examples of how the world is becoming a more dangerous place.

How that threat will be countered, however, is not a question Whitehall can answer: it is a question for Westminster, and it gets to the heart of where this government sees its place in the world, and in Europe in particular. What Whitehall cannot say – but what the politicians must recognise – is this: the best bulwark against the Kremlin is a strengthened European Union, with more integrated markets and the force to push a concerted foreign policy in the Eastern Neighbourhood. And that recognition requires Cameron to decide whether Putin poses a greater challenge than Nigel Farage.

The SDSR is right to note that the danger of a military confrontation with Russia is remote. Just in case, the Government has committed to bolstering aerial defences, contributing to NATO’s rapid reaction capabilities and maintaining the sanctions regime until a full settlement is reached that restores Ukrainian sovereignty. These are all reasonable measures, which will go some distance to ensuring that Moscow understands the risks of further escalation in the near term. But they do nothing to address the longer term problem.

From a hard-security perspective, Russia is a nuisance. The real danger is in the threat Moscow poses to what the SDSR calls the “rules-based order” – that system of institutions, agreements and understandings that underpin stability and prosperity on the European continent. That order is about more than respecting national borders, important as that is. It is also about accepting that markets are impartially regulated, that monopolies are disallowed and political and economic power reside in institutions, rather than in individuals. It is, in other words, about accepting rules that are almost the polar opposite of the system that Russia has built over the past 25 years, an order based on rents, clientelism and protected competitive positions.

Russia, after all, went to war over a trade treaty. It invaded Ukraine and annexed part of its territory to prevent the full implementation of a Deep and Comprehensive Free Trade Agreement that was designed to make Ukraine function more like Europe and less like Russia. From Moscow’s point of view, the European project is a very real geopolitical threat, one that promises to reduce the territory in which Russia can compete and, eventually, to increase the pressure on Russia itself to change. In somewhat less pernicious ways Moscow is seeking similarly to derail Moldova’s and Georgia’s European integration, while working hard to keep Belarus and Armenia from straying.

This is not a problem of vision or diplomacy, a failure to convince Putin of the value of the European way of doing things. For Putin and those on whose behalf he governs, the European way of doing things carries negative value. And unless the basic structure of politics and economics in Russia shifts, that calculation won’t change when Putin himself leaves the Kremlin. For the foreseeable future, Russia’s rulers will be willing to go to extraordinary lengths to prevent the widening of Europe, at the cost of instability and dysfunction in the region.

European willingness is another question. A chorus of euro=sceptics both left and right have demanded that Europe stop provoking the Russian bear, leaving the Eastern Neighbourhood countries to fend for themselves – sacrificing Kiev’s sovereignty to Moscow in order to bolster their own sovereignty from Brussels. Cracks, too, are emerging in the centre of the political spectrum: as French President Francois Hollande pledged to work with Moscow to fight ISIS in Syria, Prime Minister Manuel Valls declared that such an alliance would necessitate the lifting of sanctions on Russia, thus trading stability in Syria for instability in Ukraine.

As a member of the EU, London has a role to play. Together with Berlin, London could exert pressure on Paris and keep the margins of the political spectrum marginal. London could through its weight behind a common energy market, forcing Gazprom to play by EU competition rules. London could bolster anti-corruption systems and ensure that ill-gotten gains have no safe haven in Europe. London could insist on the legitimacy of the European project from one end of the continent to the other.

Instead, London is threatening Brexit, relinquishing any leverage over its European allies, and seeking EU reforms that would eviscerate the common energy market, common financial regulation, the common foreign and security policy and other key tools in the relationship with Russia.

In their February 2015 report on EU-Russian relations, the House of Lords raised the question of “whether Europe can be secure and prosperous if Russia continues to be governed as it is today.” To be sure, Europe can’t change Russia’s government and shouldn’t try. But by insisting on its own rules – both in how it governs its internal markets and in how it pursues its foreign policy – Europe can change the incentives Russia’s government faces.

The question, then, to Cameron is this: Whose rules would Westminster rather see prevail in the Eastern Neighbourhood, Europe’s or Russia’s?

Samuel A. Greene is Director of the King’s Russia Institute, King’s College London.