Tuesday, 22 January 2008

More questions over Northern Rock

OK, back down to earth. Vince Cable's reaction to the government's announcement over Northern Rock's debts to the taxpayer being converted into a form of bonds is well worth reading and asks some of the many questions which need to be asked about the proposed rescue strategy.

But there are some more questions which need to be asked. For a start, Vince refers to the profit sharing scheme proposed by the government as being of the order of 5-10%. As the Rock's profits in 2006 were £627m, it's quite clear that even if the bank does manage to achieve that sort of level of profits again in the future (a highly questionable assumption, given its recent history), that is certainly going to make very little dent in the £25bn or so which the government will be guaranteeing through the bonds scheme.

Therefore Northern Rock will have to sell off a substantial chunk of its £100bn+ mortgage and loan assets in order that the bonds can eventually be repaid. But given the difficulties in the housing market and the fact this whole mess was caused by the downturn in the mortgage market in America, I suspect that won't be the easiest task in the world, in the short term at least. The taxpayer is therefore still going to be exposed to substantial risk in the short to medium term, but without the security that full ownership of Northern Rock's assets would bring. It's significant that Alistair Darling was unable to give any indication as to when he thought the government's liability towards Northern Rock would come to an end.

But as well as questions about the implications for the bank itself, there are wider questions that need to be asked. An injection of £25bn into the gilts market is significant and it's worth asking whether there's likely to be any inflationary effect as a result. And it also has to be asked what implications it has for public borrowing and public spending over the next few years, neither of which are particularly healthy at the moment.

All in all, there are more questions than answers for Gordon Brown and Alistair Darling.

1 comment:

The Troll said...

The selling of the £25 billion of gilts won't in itself be inflationary as it is potentially takes cash out of circulation (i.e. the cash is at large at the moment but would be held by the government once the gilts have been sold).

While the economic downturn can be blamed in part on the US (and the high spend policies of the current administration), the UK is suffering on account of similar causes as well - very easy credit, cheap imports and the fact that more money has been entered into the economy by the government through above-growth spending than the economy has use for.

Bottom line: the government has been spending beyond its means but any proposal to reign in spending by any party is electoral suicide.

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