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First with Financial Comment from Arabia

$274bn RBS overseas debt ten times bigger than Dubai

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The fantastic scale of overseas bad debt held by the Royal Bank of Scotland, and now guaranteed by the British taxpayer, emerges in The Daily Telegraph today citing a Treasury disclosure document.

British taxpayers are guaranteeing loans worth a staggering total of $274 billion in the US, Ireland, Middle East and elsewhere – more than ten times the loans being rescheduled by Dubai World subsidiaries Nakheel and Limitless. And when UK bad debt is included the total grows to $460 billion or around 25 per cent of British GDP.

UK debt burden

As The Telegraph says this ‘underlines the fact that at the peak of the banking crisis, RBS had become the world’s biggest bank in terms of assets, having expanded rapidly during the credit boom, swelling its size even further with the acquisition of ABN Amro.

‘… in almost all of the asset classes, the majority of loans now being supported by the taxpayer were made only very recently, some of them in 2008, only months before the bank was semi-nationalized’.

The Treasury predicts that overall net losses will not exceed $98 billion, although the Treasury has an option to appoint a ‘step-in manager’ if losses exceed $123 billion.

By any global measure these bad loan losses are absolutely staggering. You can immediately see why the UK Government had to take control, or the global banking system would have collapsed. It also explains the recent reluctance to pay bonuses to the staff who got the bank into such a massive black hole. You wonder how it could even be considered.

De-leveraging impact

But you also have to ask what sort of impact is the unwinding of a debt pool of this size going to have on the global economy over the next few years. How much stimulus can come from a zombie bank like RBS?

As in the case of Dubai the first step to solving a debt problem is to face up to the reality, and then talk to your creditors. RBS with its debts guaranteed by the UK government is in a different position from government-owned corporations in Dubai that do not have sovereign guarantees.

The British taxpayer most certainly will have to pick up this bill, and paying back this money is going to be a tax on future generations for years to come. It is also going to hobble the recovery of the UK and global economy going forward.

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Written by Peter Cooper

December 8, 2009 at 8:23 am

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