When the global financial crisis started, world governments had to step in and rescue their respective economies from collapse.
This was initially done by ‘bailing out’ the banks.
US and UK governments, with others, took control and ownership of the most troubled banks who had the largest exposures to failed firms and worthless loans.
This financial rescue process has rumbled on over the past few years, more recently morphing into the eurozone sovereign debt crisis and bailing out banks and governments in the PIIGS economies.
Whilst this bail out process is not finished, it is worth considering what it might look like when the process starts to be unwind.
The US government has announced it will sell a substantial part of its remaining stake in the insurer AIG. As a result, it will become a minority shareholder for the first time since it was forced to bail out the company in 2008.
It is selling $18bn of shares, resulting in its shareholding reducing from 53% to 20%. They might even turn a small profit.
Closer to home, the UK government has sold its stake in Northern Rock plc to Virgin Money. Unlike the US government, it made a substantial loss as a result of this sale.
The bit of Northern Rock still owned by the UK government (the ‘bad bank’) owes the Treasury over £21bn.
Once the UK government manages to offload its remaining ownership of Northern Rock, as well as its stake in Lloyds Banking Group and Royal Bank of Scotland, managed by UK Financial Investments Limited, the focus will then turn towards unwinding the process of quantitative easing.
MPs in the Treasury Select Committee have already expressed their concerns about this process, worried that it will dramatically push up gilt yields.
Whilst the selling of bonds once QE needs to be reversed is unlikely to happen for some time, when it does happen the impact on gilt yields could be as dramatic as it has been in pushing them down by the Bank buying bonds from the secondary market over the past three years.
This could potentially result in good news for those reaching retirement, when it occurs, as higher gilt yields should be reflected in higher annuity rates.
In the meantime, the length of continued government support for banks and the wider economy will all depend on how quickly the economy can recover. If reports from over the weekend are correct, we could see more QE and a further interest rate cut before current monetary policy is paused and then eventually reversed.
Photo credit: Flickr/Squid Ink
