Government intervention in different countries to shore up ailing financial institutions is having mixed success in reviving their respective economies and real estate markets, according to ‘Too Big to Fail’, a new report from the Urban Land Institute’s (ULI) Europe. A common sentiment is that an industry recovery will hinge on the extent to which any immediate boost from the aid ultimately results in steady, predictable flows of private capital to real estate.
The report assesses different forms of government intervention implemented since the fall of 2008 in the UK, Ireland, Germany, Italy, The Netherlands, France, Spain, the US and Japan, including the impact on the real estate market in those countries.
The need for such massive, near-simultaneous aid by so many governments to stave off financial industry collapse shows how globalised and interconnected capital markets have become over the past two decades, said ULI Europe president William Kistler. “The global financial crisis demonstrated that not only is no financial firm too big or too resilient to fail, but that financial firms have become so big that failure would be catastrophic for the world economy. Banks are not too big to fail, but they are too big to be allowed to fail,” Kistler said.
The intervention schemes examined by the report generally fall into three categories:
- Recapitalisations – government injections of cash into banks in return for common shares, preferred shares, warrants, subordinated debt, mandatory convertible notes or silent participations.
- Debt guarantees – formal guarantees provided by governments against default on bank debt.
- Asset purchase/insurance – governments assume part or all the risk of a portfolio of illiquid assets. Transferring the risk from the banks improves liquidity, and can in some cases provide capital relief.
Key findings from the comparisons by country: The cumulative government support provided to financial institutions as a percentage of the 2008 gross domestic product (GDP) ranged from 3.3% for Italy to 81.0% for the US and 81.6% for the UK. The total government debt as a percentage of 2008 GDP ranged from 39.4% in Spain to 196.3% in Japan, with the UK at 51.9% and the US at 70.5%.
- UK – £50bn for recapitalisations; £250bn for debt guarantees and £282bn for asset purchase/insurance. “While government support has ensured the short-term stabilisation of banks, the fear among investors and developers is that we will witness a ‘double dip’ rather than a steady recovery; the concern is over a secondary bubble relating to the price of assets, rather than a sign of long term recovery and economic growth,” commented the report.
- US – US$700bn for recapitalisations and US$1.45 trillion for asset purchase/insurance. “From a microeconomic level, banks will certainly impose more restrictive commercial real estate lending standards on new loan originations. These will include lower leverage ratios, more simple debt structures with fewer multi-tiered financings, and smaller lending syndicates. However, before confidence is fully restored to the real estate market, the greater uncertainties at the macroeconomic level (impact of reduction of federal aid, a possible increase in interest rates) still need to be addressed.”
- Ireland – €77bn provided through an asset purchase scheme, the National Asset Management Agency (NAMA). “Some investors are sceptical about the ability of NAMA to manage the (high volume) of assets. Overall, however, the scheme has received positive feedback. General opinion is that Ireland will start to recover when the government intervention is reduced and there is a return of the credit markets.”
- Germany – €80bn for recapitalisations and €400bn for debt guarantees and asset purchase/insurance. “Banks’ business models are now under long-term scrutiny by the German government and the European Commission. Many German investors believe this is what the industry needs; they predict that the banking industry will need to prepare for further restructuring.”
- Italy – €10 to €12bn for recapitalisations, plus a tax amnesty scheme. “With its low private debt and implementation of schemes that do not impact greatly on the public debt, Italy’s relative economic situation should remain similar to what it was before the crisis.”
- The Netherlands – €20bn for recapitalisations; €200bn for debt guarantees and €27.7bn to ING for asset purchase/insurance. The European Commission’s action forcing ING to split its banking and insurance businesses and sell the insurance portion reflects a plan to “break down large conglomerates so if another crisis occurs, it will be easier to manage. Investors in The Netherlands believe the next few years are crucial for witnessing this type of action.”
- France – €10.5bn for recapitalisations and €265bn for debt guarantees. “It is clear from the interventions employed by the French government that the property industry is not a high priority. The government has agreed to support the refinancing of banks on the condition that banks lend to the corporate sector to ensure the prevention of a financial crisis there, rather than the real estate sector. While many agree there is no imminent real estate crisis in France, they suggest that there is the possibility of one between 2010 and 2014 and their concern is that the government will not be prepared.”
- Spain – €200bn for debt guarantees and €50bn for asset purchase/insurance, plus €9bn for a bank restructuring scheme. “The feeling shared by developers, investors and a majority of the public is that private consumption will support long-term economic recovery, not political measures. The fear is that extremely high public debt due to government intervention will negatively affect private consumption, stunting Spain’s economic recovery.”
- Japan – ¥13 trillion for recapitalisations, plus ¥2 trillion for commercial paper purchases and assets backed by commercial paper. “While funds and new real estate firms have suffered, Japanese-established companies with longer investment horizons are playing the group card in an attempt to hold on until times get better. Japan will muddle its way through the downturn, waiting for the US to turn around.”