Financial markets hate uncertainty and, with Britain’s vote to leave the EU and political turmoil in the UK, it is hardly surprising that bank shares have taken the biggest hit on stock markets.
The banking sector is often seen as a barometer of the health of an economy. But with reduced economic activity likely in the UK as companies delay investment decisions and await clarity on Britain’s intentions in negotiating the terms of its EU departure, that also means lower economic growth and a reduced tax take there.
British chancellor George Osborne has warned that tax rises and spending cuts may be required later this year to pay for the cost of Brexit. His Irish counterpart Michael Noonan has said economic growth here could be 0.5 per cent lower than forecast next year. Nevertheless, he maintains the Government's room for manoeuvre in the October budget is unlikely to change.
However, the sharp deterioration in financial markets now forces the Government to reassess its plans for recovering some of the cost of the taxpayers' bailout of the banks – notably AIB in which €20.8 billion was invested seven years ago. Already a planned share sale via public flotation, which was deferred until after this year's general election, has been further delayed because of the weak state of equity markets.
It may be the second half of next year before that initial public offering (IPO) can be made. But the timing of the flotation will depend on prevailing market conditions and whether an adequate return for taxpayers can be reasonably assured from a sale.
For now, at a time of continuing political uncertainty over who leads the British government and heightened financial risk given the lack of clarity about its post-Brexit negotiating stance and when it will trigger Article 50 to start talks, the medium term outlook remains clouded.
The likelihood of the UK economy entering recession cannot be disregarded and, given Ireland’s strong trade links with Britain, that would impact AIB and make the timing of its IPO more problematic. The ultimate financial return to the Government as it reverses out of the banking sector is as unclear as ever.