Forex Investment and Currency Trading

The various bail out plans typically encompass up to four elements:

• 1. The purchase of distressed assets that should rise in value over time.
• 2. The procurement of equity stakes that should also appreciate in value over the medium to long term.
• 3. Loans that are made against collateral significantly exceeding the size of the advance and which earn interest set at a relatively high level.
• 4. Loan guarantees that are unlikely to be called in full. And indeed may not be called at all.

Various governments are in effect making a series of investments, some cash in nature, others contingent, and with what appear to be relatively high yields. And the money will also be applied in tranches, depending on how future events develop.

The risks involved in these investments and the precise impact the policy initiatives exert on a country’s fiscal position will depend on how they have been structured and how future macroeconomic performance interacts with this structure. Historically, while some bail outs of this kind have proved costly, others have actually over time become budget neutral or even generated a considerable surplus for taxpayers. The Swedish bank bail out of the early 1990s provides just one example of how considerable initial outlays were subsequently recouped. The preliminary costs of the recapitalisation included in the bail out were in the region of 4% of GDP and attendant guarantees employed also exposed the government to significant risk. However, none of these guarantees were called upon and the government recovered much of the cost of the capital investment it had made through the disposal of non-performing assets held by the “Bad Banks” it set up. The final tally for the taxpayer remains unclear because the Swedish government retains some of its equity shareholdings, but it is likely that the state will enjoy a net profit at the end of the day.

It is impossible to predict in advance precisely what the ultimate cost to governments of these recent initiatives will be, but two things are clear: The bill will be spread out over a number of years and it is unlikely remotely to approach the exaggerated and emotive figures bandied about by so much of the world’s press at the height of the recent crisis.