Disposing of Royal Bank of Scotland: It's the only way the chancellor can cut borrowing

David Buik
Chancellor of the Exchequer, George Osborne Visits Cardiff Royal Mint
It is hoped RBS' bosses will have tidied up its balance sheet by 2020/21 (Source: Getty)

Whilst George Osborne was sipping some Chateau Lynch Bages 2000 as HM Government was entertaining President Obama, he surely must have been ruminating as to how he can get the UK'S borrowing requirement down from the unacceptable level of 83.5 per cent of GDP.

He has tried desperately hard in recent years to achieve this goal, with less success than hoped for. The Chancellor and chief secretary to the Treasury Greg Hands will have regularly burnt the midnight oil with senior Treasury mandarins, racking their brains to find solutions.

One very painful thorn wedged in the side of the Treasury has been the stewardship by UK Financial Investments (UKFI), the government's asset management arm, of the taxpayers' £45bn interest in Royal Bank of Scotland. How good it will feel to alleviate that agonising liability from the Treasury's balance sheet.

Read more: RBS is axing 600 jobs and shuttering 32 NatWest branches

Having seen Morgan Stanley do such an efficient and deft job dribbling Lloyds stock out on the market, the decision to pay a special dividend in February precipitated a significant disposal of UKFI'S holding in the 'Black Horse', taking its stake down to less than 10 per cent. Meanwhile, the Chancellor's allocation of five per cent of the taxpayers' stake was to be offered at a five per cent discount to retail investors, once market conditions improve.

Lloyds Banking Group is a domestically based bank, with no international investment banking. The only major carbuncle it is currently nursing is PPI liabilities. So far Lloyds has paid out £16bn settling claims - but one fears there is more to come. Lloyds' share price is currently 68p - still 5p below break even.

Selling RBS will prove to be a challenge of Herculean proportions in comparison to Lloyds. Is this bank fit for purpose? Many investors will have noticed RBS' share price has rattled up from 207p on 7 April this year to 251p today - up 21.2 per cent.

However, its share price is still a country mile away from the taxpayer/UKFI from getting its £45bn back - 504p being the break-even price. In recent months the banking sector has not exactly been in vogue. To add to the gloom, European banks are in a dire state of disrepair and probably need capital injections across the region to the tune of €300bn (£234bn).

There is still another four years for this parliament to run, but chancellor Osborne will be exuberantly demonstrative in encouraging the sale of RBS shares before the next election.

Indeed, the Office for Budget responsibility has estimated the Treasury will receive upwards of £30bn by the end of 2020/21. It will be hoped RBS chief executive Ross McEwan and his colleagues will have succeeded in tidying up RBS' balance sheet, whilst continuing to dispose of non-core assets.

Assuming that the management's efforts have achieved that goal, few would be surprised if, after the disposal of Williams & Glyn Bank (the branches that were supposed to be bought by Santander), UKFI will be under instruction to sell off RBS' shares.

The bank may well be ordered to pay a special dividend, thus precipitating the disposal of this gargantuan sale. But the challenge will be met by Goldman Sachs and NM Rothschild with relish, and hopefully with smaller British brokers. Remember: the darkest hour is just ahead of the dawn.