Northern Rock “defers payments” on bonds

We learn today that the nationalised Northern Rock needs more capital from taxpayers. Pending its further financial reconstruction, it is deferring payments on interest on money it has borrowed by issuing bonds. I would be interested to hear Ministerial comments on how much they are going to put in, over what time scale, and what bondholders should expect in the future from this nationalised company.


  1. oldrightie
    August 18, 2009

    They have no money left other than printed wallpaper. The scorched earth policy might just bite before they wanted. Mind you, they seem to be happy to supply arms funding for The Taliban.

  2. Demetrius
    August 18, 2009

    My guess is that the government intend to sell it to the Bank of England, on the Lloyds/HBOS model.

  3. alan jutson
    August 18, 2009

    Surely it would have more working capital if it had not paid back the Government (taxpayer) some of the money it already had borrowed, but instead kept the money it had generated for a while longer.

    Then again perhaps it was forced to pay the Government back before it really could afford to do so, So the Government could bask in the headlines, that the Bank was now working correctly, and was paying back its debt, so Government policy at the time to Nationalise it was right.

  4. Lola
    August 18, 2009

    Well, there’s a suprise. Not. Some of us have been predicting a Sovereign default by a major Western economy and my betting was on the UK. As NR is a state owned bank this is by association a Sovereign default. I would love to be a bond trader right now.

    It really beggars belief just how epically useless New Labour has been / is being.

    Well, Mr R, I do not envy you winning the next election. If I was Osborne and he was allowed to become Chancellor I would go to the commons for my first speech and policy announcements, with a Power Point presentation showing just how we have got into this mess. Hand round the hard copies for the whole Chamber to refer to as I pointed out in detail, with accurate and true numbers and without spin, just how the previous administration had cocked up, and what it was going to cost to sort it out.

    Then I’d slash public spending and cut taxes, but that’s another story.

    1. Mike Stallard
      August 18, 2009

      “Well, there’s a suprise. Not. Some of us have been predicting a Sovereign default by a major Western economy and my betting was on the UK. As NR is a state owned bank this is by association a Sovereign default. I would love to be a bond trader right now.”
      Fascinating! (No, I am not being sarcastic, I really mean it.)
      Please can you tell me, a person who knows nothing about economic theory, what it means?

      reply: It means that a state owned bank is not paying its bills on time, and we await further news on whether and when they might pay them. Ministers presumably will tell us there was no pledge to underwrite all this and ensure prompt payment – it’s another reason why a Parliament that met would be helpful so we could ask them in person what their plans are.

      1. Lola
        August 18, 2009

        JR has set out what it MEANS, but it is the IMPLICATIONS that are really interesting/frightening depending upon your point of view.

        Over to you Mr R – you are blessed with a much more elegant and erudite turn of phrase than I.

        1. APL
          August 19, 2009

          One of the things it means is, order to support its flagging electoral fortunes in Newcastle, the Labour party bet the financial welfare of the UK on the fortunes of a failed bank, it upped the ante when HBOS and RBS failed too. The problem is the Labour party makes the bet, but the population of the UK lose the bet.

          The labour party is toast. It has taken the UK economy with it, what will rise from the ashes …..

          My bet? People like Jack Straw, John Prescott and David Millibrain telling us that capitalism has failed and now its time to try another philosophy. No prizes for guessing which they will plump for!

      2. Mike Stallard
        August 20, 2009

        Thank you. The usual clear dissection!

  5. APL
    August 18, 2009

    JR: “We learn today that the nationalised Northern Rock needs more capital from taxpayers.”

    Wind it up dismantle it and sell it off, Granite and all. It is, if I recall what many advocated when NR first ‘blew up’.

  6. Matthew Reynolds
    August 18, 2009

    Can’t we just sell off stakes in Banks ASAP to fund repaying some public debt ? Can’t we just force banks to hoard more capital during economic booms to ensure sufficient lending during a recession ? Can’t we just ax the FSA and get banking supervision back to the expert old lady of Threadneedle Street ? They have been keeping an eye on the banks since 1697 and so might just have the experience needed to do a good job. Scrapping a QUANGO and streamlining the system is hardly a bad idea is it ? If banks are so big that they threaten economic stability then can’t the Bank of England just split them up ? Why not have MPC members that serve seven year fixed non-renewable terms so stop politicians holding out the promise of reappointment in return for interest rate cuts at election time ? Lets have real central bank independence & greater economic stability. Why not have the Bank of England impose temporary bank lending curbs if asset prices are rising too fast and yes let it print money & buy assets should deflation & depression rear become a real danger ? How about an inflation target that is relevant to the real world and is thus an accurate measure of prices – RPI-x meets the criteria handsomely in my view. Just set it at 2% two years hence and have the MPC set the price of money with that in mind. Northern Rock was a fiasco because the lines of responsibility & accountability where not clear enough and the authorities lacked the power to sort things out. These proposals would address those problems head on.

    All these measures if implemented could make for a more stable , low inflation economy. You could slash public spending by say £25 billion and raise VAT to 22.5% to raise £25 billion thus cutting the fiscal deficit by £50 billion in one go. With another £50 billion in QE in 2010-11 you could stop that fiscal tightening producing a double dip recession while getting the public finances en-route to solvency. Don’t knock QE – it could come in handy in the way that I suggest. As for finding £25 billion in cuts – a decent accountancy firm could probably find them in a day if that….

    1. DominicJ
      August 19, 2009

      “Can’t we just sell off stakes in Banks ASAP to fund repaying some public debt ? ”

      To who?
      At this point, we would have to pay people to take Northern Rock or Lloyds Group off our hands.

      Would you buy some of Northern Rock?
      How much would you pay for what share?

      1. APL
        August 19, 2009

        DominicJ: “To who?”

        Good question.

        Bank of China?

        The alternative is to call in the official reciever, should have been done a year ago.

  7. Michael Lewis
    August 18, 2009

    Highlights the mistake of rescuing Northern Rock. A government should protect deposits – I think thats the correct thing to do. But debt (bonds, perpetuals, pibs) and stock holders shouldn’t expect a handout. If people want greater than cash rate returns – they have to assume some risk and not expect taxpayers to bail them out if it doesn’t work out as they hoped. Its crazy, the country is racking up huge debt needlessly. I’d rather we were looking at Bank of Tesco-Sainsbury or whatever, than propping up a few zombies…

    1. Lola
      August 18, 2009

      No, I don’t think the Gov’t should protect depositors. It leads to irresponsibility by both the depositor and the bank. What I think should be implemented is an explicit commercial arrangement to insure deposits run by commercial insurers and paid for by a levy on the average deposits over say a year.

      The insurers would have an incentive only to offer cover to sound banks. Sound banks would have lower premiums and attract more deposits, even though they’d be a lower rate, as they were less risky.

      People could then make sensible market judgements on rate versus security as to where they put their cash.

      Banks should be prevented by law from co-owning the deposit insurers and should smilarly be prevented from subsidising the premiums, since price is a signal to the depositor.

  8. Mike Stallard
    August 18, 2009

    Forget the theory.
    Northern Rock is in the North.
    So are most of the remaining Labour supporters. They have vital votes.
    Nothing will be done except for pouring more money in without comment or discussion or questions from our host until the last possible moment.
    And that probably means May 2nd 2010.

  9. Brian E.
    August 18, 2009

    I think that Ill buy some more US dollars and put them in the safe!

    1. Stuart Fairney
      August 19, 2009

      SF does not give financial advice, but I really, really wouldn’t buy dollars

  10. Acorn
    August 18, 2009

    Look on the bright side guys and think dirty. You can pick up the NR’s 8% perp’ subs’ paper, for 20 pence in the pound, worth a punt surely. Make your money and then get the (hell-ed) out of here. Australia or Canada look nice.

    Reply: As you know , this site does not offer investment advice, so this one better have a wealth warning attached. Anyone considering buying government banks paper should clearly consult some kind of expert! According to the rules it should be a financial adviser.

    1. StevenL
      August 18, 2009

      The only NR paper I can see quoted on bondscape is the 2015 5.625% bond at 34.5p in the £. When you take into account the risks of:

      a) it being wound up by a future government after the next election
      b) even if it is not wound up it ending up long term as a nationalised loss-making zombie bank that uses the get-out clauses to keep on defaulting

      this strikes me as a pretty big gamble. You can get 4/1 on England to win at the Oval, which strikes me as a better bet now Freddy is back in the fold.

      Seriously, I tried to read the prospectus for one of these bank bonds a few months ago when I was making my mind up what sort of corporate bond to buy. It was hundreds of pages long and written in gobbledegook. So I emailed someone who knows more about this kind of thing than me and he reckoned they are full of get-out clauses.

      The spreads are a mile wide and highly unpredictable too.

      1. Acorn
        August 19, 2009

        Steven, there is a typo in my original post, the 8% should have posted as 12 5/8%. (12 5/8% Perpetual Subordinated Notes: ISIN GB0001524957)

        See following which has not caught up with the dip in price yet:-

        The bond you mention is here (PIBS, list):-

        I agree, 4:1 England to win, is a much better, and patriotic, bet. All the best.

  11. Brian Tomkinson
    August 18, 2009

    I wonder if the BBC will ask Darling and their favourite economics guru, Vince Cable, for their opinions about this development. After all they were both enthusiasts for nationalisation of Northern Rock.

  12. Andrew Gately
    August 18, 2009

    NR capital of 2 billion belonged to the shareholders.

    Now down to the nationalisation of the bank that money was stolen by HMG from the shareholders.

    The rationale for this theft was that HMG gave Northern Rock a loan but the reward for giving a loan is interest not the right to share capital.

    Since NR was nationalised it is no longer run to make profits and it already on plan C as plans A and B have failed.

    Now down to the FSA requirement for banks to hold more capital and the fact that they have lost most of the share capital that they stole, HMG will have to put approx. 3 billion of there own money into share capital and to fund any future losses, currently running at 1.5 billion per year.

    Given that the likely sale price is going to be 1 billion, I reckon that the eventual loss will be 2 billion + 1.5 billion for each year that the bank is nationalised.

  13. True belle
    August 18, 2009

    Are gold tooth fillings regarded as a wholesome investment still?

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