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Mervyn King: 鈥淏lame us all鈥

  • Robert Peston
  • 18 Dec 07, 02:18 PM

It鈥檚 moot whether the whole of the Granite bond-issuing programme should be included in an assessment of the incremental support provided by the Treasury to Northern Rock this morning.

The Granite programme would implode if the Treasury had refused to guarantee the Rock鈥檚 mortgage-repurchase obligations under that programme.

Which could lead to colossal redemptions of bonds.

To that extent, the Treasury has today underwritten Granite 鈥 which is why I calculated that taxpayer exposure to the Rock has escalated from 拢40bn to 拢100bn.

And, to be clear, that number has not been knocked down by the Treasury, the Rock or its advisors.

However, the Treasury is not promising holders of the Granite bonds that they would receive 100p in the pound, in the way that it has given such a promise to other retail and wholesale lenders.

So I think, on balance, it鈥檚 reasonable to cite a different number for total taxpayer exposure in the form of loans and guarantees.

Having looked at the accounts and spoken to bankers, it's clear that taxpayer exposure is now between 拢50bn and 拢60bn.

In fact I'm told by a banker involved in the Rock rescue that the precise exposure, as of this second, is 拢57bn.

It鈥檚 risen by almost 50% from 拢40bn odd.

So each of us as taxpayers is exposed to the Rock to the tune of two grand.

Now there鈥檚 no possibility of all that being wiped out.

But in any prolonged housing recession, even impairment charges of a few percent adds up to meaningful losses for the Treasury and all of us.

For the Treasury today there was at least some comfort to be taken by Mervyn King鈥檚 enthusiastic show of solidarity with it and the , the City watchdog.

He has made the rational decision that they should all sink or swim together.

But their collective hopes of paddling off into calmer waters weren鈥檛 helped by his disclosure that all three of them had identified in 2005 and 2006 an urgent need to reform the mechanism for rescuing troubled banks.

The importance of such reform was minuted in 2006. But we鈥檙e still waiting for it.

And that, according to Mervyn King, is why Northern Rock is in the mess it鈥檚 in.

We own the Rock

  • Robert Peston
  • 18 Dec 07, 09:30 AM

The Treasury has this morning massively it is providing for Northern Rock.

Northern Rock bank branchThe Rock feared that there would be demands for huge repayment of loans it has received from financial institutions, when they fall due on December 31 and January 1.

And there is a risk of further lumpy demands for cash from lenders and depositors in the coming weeks.

So today the Treasury has provided reassurance to those wholesale lenders, by saying that they will not suffer losses if they leave their cash in place.

It means that most of the Rock's balance sheet is now covered by government guarantees.

In a technical sense, it means that the gross exposure of the taxpayer is more than 拢100bn.

Or to put it another way, the public sector is now directly or indirectly funding all of the Rock's mortgage lending.

The important point is that there is no economic difference for the Treasury between providing a direct loan through the Bank of England or providing a guarantee against losses to someone else who has provided a loan.

So in order to calculate the financial exposure of the public sector to the Rock, you have to add together the 拢26bn of tax-payer backed loans actually made to the troubled bank and the commercial loans and deposits that are now subject to a Treasury guarantee.

And on the basis of the put out this morning by the Treasury, more-or-less the entirety of the Rock's business has been underwritten by all of us.

But don't be too alarmed.

It doesn't mean we're at risk of losing 拢100bn.

Most of the Rock's lending is underpinned by assets, in the form of the houses owned by its customers.

Even so, today's announcement by the Treasury shows how high the stakes have become.

To many it will look like nationalisation.

But funnily enough the Treasury has provided the additional guarantees to increase the chances that the Rock can avoid formal nationalisation.

Without the stability that this extension of the government protection should bring to the Rock's finances, the bank could have collapsed early in the New Year.

The chancellor is tiding the Rock over, to facilitate a last-ditch attempt in January to steer the bank into the embrace of one of its putative rescuers.

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