ANALYSIS-European taxpayers face a decade of bank exposure

By Nadine Jakobs

LONDON, Dec 1 (Reuters) - European governments should brace themselves for being involved in large parts of their national banking industries for up to a decade to come, exposing billions in taxpayer funds to huge commercial risks.

Crumbling financial markets will make it hard to offload newly acquired stakes, while the sluggish economy means banks are unlikely to recover quickly, frustrating government plans to pull out of the financial sector quickly.

"It could take them up to 10 years to sell their shares," said Tom Kirchmaier of the Financial Markets Group at the London School of Economics & Manchester Business School.

"In the worst case, the recession will last as long as four years. Then it would take the markets and the real economy a while to fully recover," he said.

After decades of selling down ownership of utilities, rail and real estate companies after political thinking turned friendlier towards business in the early 1980s, governments are now suddenly major bank shareholders.

If all goes well, taxpayers should gain from the deals. Governments scooped up banking shares that have sagged 60 percent so far this year and prices compared to book values are at multi-year lows.

But the amounts of money that were spent -- and thus the risks involved -- are huge.

The United Kingdom and Germany are among the countries with the biggest rescue packages on offer. Under the UK scheme, the government will own or part-own lenders controlling nearly 3 trillion pounds in assets.

The country on Friday became the owner of a 58-percent stake in Royal Bank of Scotland, investing up to 37 billion pounds ($57.09 billion) in a trio of banks, and could spend hundreds of billions more on other measures.

Germany has bought shares in three banks to the tune of 8.2 billion euros ($10.61 billion) and might spend 85 billion euros as a guarantee to cover their losses. Another 14 German banks are queueing up for state support, according to a spokeswoman at the country's newly established watchdog, SoFFin.

CRY FOR HELP

On top of that, other industries are also crying for help, with Germany's Opel -- a unit of embattled General Motors -- becoming the first European automaker to seek a state bailout, sparking fierce public debate.

But the trend towards privatisation remains intact, experts say, if only because debt-ridden governments cannot afford to own stakes in these companies for very long.

The British government has already said it will operate at arm's length from its newly acquired banks and will not seek a boardroom seat or have a say in strategy.

"We expect them to be a value-oriented shareholder. In terms of day-to-day involvement, they will only be involved in the appointment of two non-executive directors," said Leigh Calder, a spokesman for Lloyds TSB.

The German government will have a slightly bigger say, as it has the right to influence business through SoFFin, and can for example force banks to reduce risky businesses.

But like Britain, the German government has little interest in being a permanent owner of its banks.

"The involvement will not be indefinite," said Stefan Olbermann at the German finance ministry.

The costly rescue operations in both Germany and the United Kingdom come at a time when the sluggish economy is reducing the tax take and swelling already-large budget deficits.

"Pressure on the public finances will be high. Every government will try to make good money out of the shares and assets they still own. Every euro, dollar or pound will count," said Kirchmaier.

But financial markets are providing little indication that the credit crunch will end any time soon, with stock markets in trouble, corporate debt markets unlikely to ease up quickly and a surge in bankruptcies widely expected. Britain's FTSE 100 recently hit its lowest level in five and a half years and Germany's Dax its lowest level in four years.

British public finances are on course to record the largest deficit since the 1970s, while Germany estimates a 24 billion euros ($30.96 billion) budget deficit in the first nine months of 2008, already twice a previous forecast for the full year.

In the UK, public sector net borrowing stood at 37 billion pounds in the first seven months of the fiscal year compared with 20 billion for the same period a year ago.

Governments have also been forced to hold on to stakes in other companies longer than they had planned to, with German plans to sell its real estate company TLG and the flotation of Deutsche Bahn AG put on ice.

Detractors argue that the government bailouts of the banks are the wrong use of taxpayers' money and will make it hard to wean industries off support once things improve.

"By rescuing the banks the government set the wrong example. Every possible effort should be made to prevent nationalisation or bailout of the non-financial sector," said Kirchmaier. (Editing by Douwe Miedema and Chris Wickham)