AIB flotation: getting the sale right

Two questions remain – whether now is the correct time and how the proceeds should be used

 

The planned float of AIB on the stock market is a key step in the gradual withdrawal of the State from the banking sector it entered after the 2008 crash, with vast amount of taxpayers’ money. The sale will raise some €3 billion for the exchequer. Slowly in recent years the State has been able to start turning the value of State bank shareholdings into cash, gradually recouping some of the bailout cost.

In time, when all the State shares in AIB are sold down, we may get back much of the €20 billion paid to rescue the bank. Although welcome, this would still be far from adequate payback for the terrible damage caused.

There is no compelling reason for the State to be a long-term shareholder in one of the main banks. There are appropriate State interventions in the financial sector – for example via providing funding and supports in areas where the market does not. And regulation of the sector remains key, particularly in the light of events such as the tracker mortgage scandal.

If the decision in principle to sell the State’s stake in AIB is accepted, two questions remain. The first is whether now is the correct time. The second is how the proceeds should be used.

Given the strength of the economy and the risks ahead – from Brexit in particular – it does seem a reasonable time to start the sale process. Bank sector shares have performed well over the past year on the markets.

The State will retain 75 per cent of the bank, giving it a large share in any further upturn in value. There are risks, of course, notably the uncertain outcome of the UK election which will come shortly before the float date.

A key issue will be pricing the shares correctly. The Government should expect the pricing advice from the lavishly rewarded investment banks advising it to be right – and the pricing should not be too favourable to big investors who will be buying in.

The use of the proceeds of the sale is the key issue being debated. Opponents of selling now – including Labour and the trade unions – argue that the money should not be used to pay down debt, as we are obliged to do by EU rules, and instead should be put into infrastructure.

There are valid points in this argument, notably the need for the State to invest more and for changes to the EU rules.

However, focusing solely on the proceeds of the AIB flotation to boost capital spending is not particularly useful. The State already has a cash pile and access to cheap lending. The problem is EU rules allow little flexibility. The AIB sale should go ahead but the Government needs to deliver on its promise of a new capital spending plan and must up its game in pressing for a green light from Europe to invest more as part of that plan.

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