Friday, 24 October 2008

Nikkei tests historic low - a warning on the UK government's bank share purchase plan

Socialist Economic Bulletin has pointed out the danger to the taxpayer, in the proposed government bank bail out plans, of any assumption that share prices have reached a low.
SEB wrote: 'One of the erroneous aspects of media coverage of the government’s plan for the banks is that it frequently implicitly assumes that bank share prices in the future must rise... This leads to wrong evaluation of risk. If bank shares must inevitably rise, after a period of falls that has already taken place, then there is evidently no significant risk for the taxpayer in buying them. If, however, bank shares may fall further, and remain depressed for a prolonged period, then the risk is very great... the assumption of considerable risk... by the government in purchasing shares in RBS [Royal Bank of Scotland], HBOS and Lloyds TSB, rather than standing entirely willing to take over the orderly and guaranteed running of these companies if they prove unviable, is therefore not justified.'
This warning was strongly confirmed by events on the Japanese stockmarket today as these demonstrate the risk of further falls and potential depression in share prices.
The Nikkei fell by a further 9.6 per cent, moving down towards the lowest level since the Japanese stockmarket crash started at the beginning of trading in 1990 - see the graph below.
The Nikkei's previous low, since the share market crash of 1989, was on 28 April 2003 at 7606.88. The Nikkei closed on 24 October at 8749.08 - only 0.5 per cent above the April 2003 figure.
If the Nikkei were to fall below its 28 April 2003 level it would be at a 26 year low. Already the Nikkei has been below its peak for almost 18 years.
As SEB has warned any assumption that shares are being bought in RBS, HBOS and Lloyd TSB 'at the bottom of the market' is therefore not justified. At lunch time today the claim of the Radio 4 lunch time news was that if the government had bought shares in RBS, HBOS, and Lloyds TSB at the agreed prices, respectively, of 65.5p, 113.6p and 173.3p the loss to the taxpayer would already have been £5.5 billion.

1 comment:

Alun Griffiths said...