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Taxpayer's £100bn Rock exposure

• Robert Peston
• 7 Feb 08, 11:15 AM

As I wrote on January 14, the has been expecting for some weeks that the would force it to include all or a big chunk of the Rock’s borrowings on the public sector balance sheet.

That’s one of the reasons why the Chancellor agreed to provide up to £40bn of new Government-guaranteed bonds to the Rock: he knew that the troubled bank was about to bust Gordon Brown’s cherished fiscal rules, the belt that is supposed to keep the public finances looking trim.

The flab would be hanging out, whatever he did.

But what the ONS has ultimately decided looks odd.

Its statement this morning implies that around £25bn of direct loans to the Rock will come on to the public sector balance sheet, together with about £50bn of liabilities from the Rock’s so-called Granite bond-issuing programme.

So that’s £75bn added to the national debt. Yikes.

Gordon Brown’s sustainable investment rule, which limits the national debt to 40 per cent of GDP, is smashed to bits.

But a further £30bn odd of guarantees given by the Government to other lenders to the Rock seems to be treated as a contingent liability – and would therefore not be included in the public sector balance sheet.

Bankers and accountants tell me this is economically illiterate.

If we as taxpayers are guaranteeing loans, that’s as good as making the loans ourselves – because if the loans were withdrawn, we would have to divvy up the cash.

That said, the ONS insists that international standards prevent it from including the contingent liabilities on the public-sector balance sheet, which means that common sense cannot prevail.

On the other hand, the Treasury thinks that ALL the Rock's liabilities, net of its liquid assets, would be included in the national debt.

So that would be the full £100bn or so, including the contingent liabilities, as an addition to the nation's liabilities.

Clearly I need to get to the bottom of this.

But there's no escaping that the numbers are big.

And the ONS has dropped a further bombshell.

It says the whole of the balance sheet needs to be included within the public sector finances.

But the ONS thinks that would actually reduce the national debt, perhaps by a few billion, presumably because it nets out the Bank of England's holdings of gilts.

Here’s the big question.

When assessing the fundamental health of the nation’s finances, would be it right to regard the Rock and Bank of England as special cases?

Should they be excluded as special items when making a health check on the public-sector balance sheet?

Or does the ONS’s accounting treatment imply that the financial health of the public sector has in reality been a lot worse than the official figures have been showing.

Well my view would be that the Bank of England should be stripped out as a special case. It doesn’t seem to me that it is any more or less of a risk to taxpayers than it ever was.

But the Rock is different.

The liabilities there are new and real liabilities, so it would be foolish to dismiss the £100bn Rock increment to the national debt as irrelevant.

Most of that £100bn is secured against assets, the mortgages of the Rock’s customers.

Even so, a portion of that £100bn is genuinely taxpayers’ money at real risk of loss, because the value of those assets could turn out to be less than the Government hopes.

However, here’s the grisly truth: it’s impossible to assess that risk of loss with scientific precision.

Update 12.45pm: An that the addition to the national debt would be around £100bn. It says that, as of the last published annual accounts dated December 31 2006, the increment would have been £90.7bn.

If Northern Rock had been part of the public sector at that point, there would have been a 6.7 percentage point increase in the ratio of national debt to GDP, to not far off 45 per cent.

But Northern Rock issued about £10bn of new bonds in 2007, which would lift the public sector liability to the horribly round £100bn.

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