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Virus Leaves Thatcher’s Children with Bigger Nightmare Than 2008

(Bloomberg) -- Twelve years ago, politicians saved the world’s banking system from collapse by providing billions of dollars in bailouts. The coronavirus is confronting them with an even bigger and more complicated task.

This time, it’s not the financial industry that needs government intervention to survive. Whole swathes of the rest of the U.K. economy have been brought to a standstill by the pandemic, and businesses as varied as airlines, carmakers and real estate developers are all looking to dip their hand into the public purse.

“There’s going to be government money going into all sorts of places that would have been unthinkable just weeks ago,” said Philip Hampton, former chairman of Royal Bank of Scotland Group Plc, which in 2008 received the biggest bailout of any lender in the world.

For U.K. Chancellor of the Exchequer Rishi Sunak, the crisis means tearing up four decades of economic orthodoxy in a country that more than any other in Europe has pulled the state out of the sphere of business. The 39-year-old former Goldman Sachs Group Inc. banker has pledged to do everything necessary to put the world’s fifth largest economy back on its feet -- at the risk of leaving himself vulnerable to a future political and financial reckoning.

In a sign of how preparations are advancing, U.K. Government Investments, the 120-strong arm of the Treasury that oversees the state’s remaining holding in RBS, is preparing to draft in staff from other arms of the government, according to a person with knowledge of the unit’s workings.

Political Decisions

As he grapples with what is likely to be the biggest bailout of private business since the collapse of Lehman Brothers Holdings Inc., Sunak will have to deal with some of the same controversial questions but on a far broader scale: Which companies should be helped? What losses should the government inflict on private shareholders, some of whom had until very recently been receiving dividends? And how will the government get its money back?

“This is obviously an exceptional time, with exceptional measures called for,” said Robert Colvile, co-author of the most recent Conservative Party election manifesto and director of the Centre for Policy Studies, the London-based think tank co-founded by the late U.K. Prime Minister Margaret Thatcher.

“But there’s a crucial difference between helping companies with a short term cash-flow or liquidity problem, caused by a crisis outside of their control, and taking on responsibility for those whose business models were already running into trouble,” he added. “Bailouts should very definitely be an option of last resort, once all others have been exhausted.”

Fred Goodwin

Then there’s the complication of whether to punish existing managers and shareholders financially by wiping out their stakes in any bailout. Unlike 2008, when bankers such as RBS’s former CEO Fred Goodwin and Lehman’s Richard Fuld became the targets of public anger, few in Westminster blame today’s executives for the situation they find themselves in.

“I make a clear distinction between bailouts that are due to errors and management from something that is an act of God,” said Paul Myners, who as City minister under the last Labour government helped direct the bailout of RBS.

Rather than rescuing companies by injecting fresh equity, one option the government is considering is the use of convertible debt, where the state provides support in the form of loans that can be exchanged for shares in a company subject to ensure taxpayers’ money is protected as far as possible.

“Government should never be an attractive place for companies to come for capital,” said Myners. “Businesses must make the maximum effort to find the best possible solution on their own and use their existing capital before they come to the government.”

Virgin Atlantic Airways Ltd., the airline partly owned by billionaire Richard Branson, has already called on the government to provide 7.5 billion pounds ($9.3 billion) of support for an industry that has been effectively shut down by international restrictions on travel brought in by many countries to fight the spread of coronavirus.

Hands in Pockets

On Tuesday, Transport Secretary Grant Shapps told the BBC shareholders would have to “put their hands in their pockets to rescue their businesses as well,” adding that any aid would be more likely to take the form a loan than an injection of fresh equity.

“I’m not terribly sympathetic to airlines,” said Myners. “As a whole, they have carried too much debt, paid massive amounts in executive compensation, and bought back massive amounts of stock.”

EasyJet Plc, which this week grounded much of its 318-aircraft fleet, paid shareholders 174 million pounds in dividends as recently as last month. British Airways parent International Consolidated Airlines Group has returned a total of 4.4 billion euros ($4.8 billion) to its owners through dividends and buybacks since 2015.

In any bailout, there is always the question of exactly why a government is supporting one company or industry over another. This calculation becomes even more complicated given the international nature of many large U.K. businesses. Take British Airways and its owner. London-based and with a little more than half of its staff in the U.K., IAG is a seemingly strong candidate for British government support. However, only about a fifth of its shareholders are U.K. institutions, while more than a third of its stock is held by the U.S. investors. Indeed, its largest individual shareholder with a 25% stake is Qatar Airways. For Sunak, the question then is: Should these foreign holders be compensated with U.K. taxpayers’ money?

How Long?

For the Treasury and its advisers, the other big issue to shape their level of support will be how long the crisis lasts. If the lockdown of large parts of the economy where to be brought to an end within weeks, firms could likely survive on temporary bridging loans, avoiding the need for bailouts. But if the disruption stretches on for much of the rest of the year, that line may not hold.

The last financial crisis shows the inherent risk for a government when it takes a stake in a business. When the state bailed out RBS, the expectation was that its 84% holding would be sold off within a few years. More than a decade later, the government still owns a little over 60% of the bank, highlighting just how hard it can be to get back money injected during a moment of crisis.

“In normal times, I’d be against bailing out companies altogether,” said Julian Jessop, an economics fellow at the Institute of Economic Affairs, a free-market think tank. “It’s clearly different though, on this occasion, because it’s a completely un-anticipatable external shock, also one the government itself has caused.”

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