Northern Rock and Euro bonds

 

         I support the sale of Northern Rock. I will write tomorrow about why, and how we need much more action to cut the financial risks of the state. This is an important small first step in reducing the massive inherited liabilities of the government.

          Meanwhile, bond yields for Spain and France are rising, showing the Euro crisis is getting worse.

Today’s 10 year government bond yields:

 

Greece   28.9%         15.4x Germany

Portugal   11.3%         6x

Ireland   8.2%            4.4x

Spain    6.97 %              3.7x

Italy    6.86%                3.66x

Belgium   4.9%             2.6x

France      3.6%            1.94x

Austria     3.6%           1.9x

Germany 1.87%          1x

44 Comments

  1. Paul Fald
    November 17, 2011

    I fully support the sale of Northern Rock too !

    1. Jan Mac
      November 17, 2011

      Agree as well.

  2. Paul Danon
    November 17, 2011

    Yet we got a bad price and are still lumbered with NR’s toxic debt. Should we sell Lloyds and RBS at a loss too?

    1. Mark
      November 18, 2011

      You mean Brown and Darling paid too high a price. There again, they had some seats to try to win in an election.

  3. Nick
    November 17, 2011

    This is an important small first step in reducing the massive inherited liabilities of the government.

    ==========

    Really. Deficit 150 bn a year

    Daily deficit 411 million

    Northern Rock sale 747m

    Time taken until the money is gone. 43 hours.

    So I think the money will have gone around Saturday lunchtime.

    What’s the next trick to delay the inevitable crash?

    When are you going to list all the debts, pensions as promised prior to the election?

    Replty: I have often done so

  4. Tim
    November 17, 2011

    My worry is the coalition Government giving away more borrowed money, our future taxes, via tha IMF whilst pretending they’re not!! Please advise them against that Mr Redwood. I feel like I’m in a car being driven towards a cliff with idiots at the wheel!

    Reply: I spoke and voted against IMF bail out money

    1. Ziggy
      November 17, 2011

      Sir,
      Your country is not in the Eurozone (thank God) so why is this important and
      arrogant man named John Redwood MP (nobody knows him in Germany) so
      belligerent about the our Euro? Please mind your own business and do remember the IMF bailout 197

      Reply: I am not belligerent about your Euro. I wish you every success with it. I helped my country do the Euro a great service by keeping the UK out of it. How do you think the Euro would have fared if the UK with her large banks and large debts had been in it?
      I do however need to keep my readers and constituents informed about the progress of the Euro as we have economic dealings with the Euro zone. I see that many Germans are not happy with the current Euro.

      1. Brian Tomkinson
        November 17, 2011

        Ziggy,
        Why don’t you mind your own business and stop being offensive to our esteemed host!

      2. lojolondon
        November 17, 2011

        Because, Ziggy, we are being asked by your president to pay for YOUR foolishness and your politicians dishonesty. That is why.

      3. Tedgo
        November 17, 2011

        Having twice saved Europe from the Germans in the last century, we do not relish having to do it a third time. Hopefully we can do it without the bloodshed, although Mrs Merkel is already talking about war.

    2. Disaffected
      November 17, 2011

      Cameron will be pulled into line tomorrow from Kaiser Merkel.

    3. Steven Whitfield
      November 18, 2011

      I feel like I‚Äôm in a car being driven towards a cliff by Call me Dave and the boy george… just after the brake pipes have been cut!

      1. Steven Whitfield
        November 18, 2011

        …..with William Hague sat on the back seat asleep

  5. uanime5
    November 17, 2011

    Will you also cover what the increases in unemployment and slowdown in growth means for the Government’s borrowing and deficit reduction plans?

    Reply: Yes

  6. James Matthews
    November 17, 2011

    I look forward to further explanation. On the face of it selling at a loss isn’t a very good idea, unless you think you will make an even bigger loss by selling later.

  7. lifelogic
    November 17, 2011

    Well Northern sounds very cheap but I have not seen the details and anyone is probably better than the government at running it – even Virgin.

    The only positive is we are not in the EURO despite Major and Bliar’s best efforts -what a mess Brussels have deliberately created to enlarge their power base.

    How is the county council government of Italy getting on – now they are under the direct rule from Brussels and Germany? I cannot see the Italians putting up with it for long myself knowing my Italian wife and all her many relatives.

  8. norman
    November 17, 2011

    If these bonds were safe then I could take out a loan in Germany at, say 5.5%, invest it in any bonds above Belgium sit back and collect.

    Maybe we should print off a couple of hundred extra billion and buy Spanish debt at 7%?

    Easy come, easy go.

  9. Bernard Otway
    November 17, 2011

    Read Peter Oborne in the telegraph,”Osbourne’s LAST chance” threatened by Clegg and co
    ,if it’s not done right ie the way the libdem idiots are against then Cameron is a in Oborne’s words a” one term PM who never WON an election outright ” he is compared to Brown,as opposed to Bliar.I agree with Oborne for this to be the state of things precisely 18 months
    after May 6th 2010 is the fault of giving in to the libdems,any fool knows they are going back to about a dozen MP’s at the next GE so they are DOMINATABLE in the extreme,I would tell the top of the libdem team it is MY way or an election with the libdems getting the blame for causing an election,with the upside that IF they go along they will get cudos for doing so,THeir Red libs are gone to LIEBOUR anyway,and all LIEBOUR propose is MORE borrowing ,and look where that has got the PIGS.Also if we have 2.6 million unemployed IF we had had only 10% of the immigrants of the last 15 years that would be 2 million LESS unemployed,WHO (relaxed the b orders-ed) LIEBOUR and MRS Balls had the cheek to have a go at MRS May.

    1. A.Sedgwick
      November 17, 2011

      Re: Peter Oborne’s article – read best rated comment.

  10. Mike Stallard
    November 17, 2011

    Fair dos: our host has always suggested, often quite cogently, that the nationalised banks should be sold off.
    We all agreed. So, in the words of a famous PM:

    “REJOICE!”

    1. APL
      November 17, 2011

      Mike Stallard: ‚ÄúREJOICE!‚ÄĚ

      I don’t think this sale is the whole of Northern Rock. Doesn’t the tax payer still own the smoking black hole that used to be the asset management arm of Northern Rock?

      1. Mike Stallard
        November 17, 2011

        I didn’t know about NRAM which seems to be making a small profit in a sort of kind of way. Thank you for pointing it out.
        Maybe a half Rejoice?

        “REJo” ?

      2. Kevin Ronald Lohse
        November 17, 2011

        I believe you are right, though this material fact has been completely ignored by the BBC, including Mr Peston.

  11. forthurst
    November 17, 2011

    As the listed countries are in the EZ, the differences in government bond yields relative to Germany, might appear to calibrate the perceived risk of haircut/default or ejection. I do not understand why bondholders then would buy CDOs to protect themselves from default risk if the risk would already be priced in. Politicians can engineer a non-default (haircut) which is actually a default (Greece); so are the bond yields simply pricing in haircut risk, not default risk?

    Sovereign debt was supposed to be riskless (apart from inflation), but it looks as though Germany only (probably) is risk free. It is pretty disgraceful that the Europhiliacs have engineered a situation where their sovereigns’ debts look unsuitable for pensions or (statutary) bank reserves.

    1. Gary
      November 17, 2011

      The CDOs are supposed to OFFSET the risk. In fact, when everyone buys the same insurance, and then the default event, when it occurs, becomes systemic and so the insurance fails. No free lunch.

      1. forthurst
        November 17, 2011

        I understand what they are purportedly for. I’m simply not clear why anyone bothers with them. I would have thought AIG would have been a fair warning.

        1. forthurst
          November 17, 2011

          I mean how can you assess risk if you’ve no idea what politicians are going to do next to change the rules of the game? In the USA, the Congress apparently permitted the private secret Fed to purchase worthless CDOs from all and sundry at face value as well as allowing the payouts of CDSs at par by the insolvent AIG. How can you have a viable functional international financial system with that kind of nonsense going on? We have sunk into a quagmire of disingenuity and corruption.

          1. Dan H.
            November 17, 2011

            The safest way to play things now is to watch how the markets as a whole are assessing the situation. They know that for all the loud rhetoric about “we’re all in this together”, the individual nations are still that: individual nations currently bound by treaties into one fractitious whole. When push comes to shove, as it inevitably will, nationalism will overcome Europeanism and the whole will fragment.

            So, go with the markets. German debt is safe-ish, UK debt a little less so, and Club Med debt bonds really ought to be printed on soft paper, so at least one use could be found for them before they are recycled. On the other hand, gold is rather popular these days…

        2. Mark
          November 18, 2011

          CDS are tradable, and their prices move as perceptions of risk alter. Because they are not precisely aligned with the real risks faced by bondholders (your example of haircuts not triggering CDS payout is relevant, but is not the only difference), the risk priced into bonds differs. That provides an accentuated market in the differential risks.

          You are however right that such a market is small. Net outstanding CDS positions on Greek government debt were under $4bn when I last looked, although there are many more positions that have been bought and sold that have not been formally netted out – A might have bought from B, and sold to C, who sold to D, which would leave a precise profit or loss for A and C, and outstanding net position of a “sale” by B (via A and C) to D.

          The chain of transactions (which might often be much longer than this simple example) can only be reduced if either the deals are via a central counterparty, or there is an offset agreement that cashes out the profit/loss for A and C, and leaves B with a direct trade to D. Such agreements require a base price to be set that effectively determines who pays/is paid by A and C, and what is the price on the new direct trade between B and D against which profit exposure remains. Matters can be complicated by counterparty credit and market risk exposure limits, even with margining that in theory provides collateral (imagine finding that D is Lehmans just before it collapsed), or by a chain that leads to parties who won’t deal (imagine an Israeli entity faced with say an Iranian one when the intermediaries drop out of the chain).

  12. George Stewart
    November 17, 2011

    Dear John;

    Right now we have a government in Italy in which the PM and members of the cabinet have not been elected by the People. In Greece it is almost similar. “Some” may question the very legitimacy of the said governments.

    History tells us that the Italian and Greek people are not likely to react well to austerity in general and tax compliance is more likely to drop than improve.

    What happens when/if the people start taking to the street more and more regularly and government income drops lower and lower?

    I do pray that our Government has considered this.

    1. Bob
      November 17, 2011

      @George
      “I do pray that our Government has considered this.”

      What do you mean, like prepping the Chunnel with demolition charges?

    2. Tedgo
      November 17, 2011

      Well reading in the Telegraph tonight, what Germany and Mrs Merkel have in mind about taking over failed EU countries, I think the answer is clear.

      The new technocratic prime ministers will, in the event of serious resistance to their austerity measures, declare a state of emergency, dissolve the parliaments and bring in the army.

      It won’t work of course, but the Germans and EU bureaucrats don’t understand that.

  13. Andrew Gateley
    November 17, 2011

    Hi John I also support the return of NR to private ownership but really wish that they had never nationalised it in the first place.

    I look forward to reading your thoughts tomorrow but I would be really grateful if you would mention the 1.7 billion of capital that was owned by former shareholders at the date of nationalisation.

    This figure has been airbrushed out of the equation to produce a loss on sale of the good bank of 0.7 billion. However if you take this 1.7 billion into account which is still shown on the bad banks balance sheet then the government has made a profit of 1 billion.

    Further as well as having 1.7 billion of capital the bad bank is making annual profits of 0.4 billion and 90% of its loans are being paid on time.

  14. Brian Tomkinson
    November 17, 2011

    What are the bond rates for the other 9 members of the ill-fated eurozone?

    1. Brian Tomkinson
      November 17, 2011

      Sorry,
      I should have said “the other 8 members.”

  15. Single Acts
    November 17, 2011

    Can anyone recall what NR cost to take over? I seem to recall Mr Darling talking about making a profit on the banks the government bought out.

    Reply: £1.4 bn Рand its been loss making since purchase.

    1. Single Acts
      November 17, 2011

      The Beeb report it was sold for $747M so circa half the capital gone plus ongoing running losses.

      The former chancellor thought we might make a profit but for me, if you lose between two-thirds and three quarters of a billion on a deal, it dents your credibility somewhat.

  16. E
    November 17, 2011

    What are the UK’s 10 year government bond yields by comparison?

    A high “bond yield” sounds like a good thing to me but then I am a bit of an ignoramous on matters economic. Can someone explain why having a yield of nearly 30% is not a good thing, for investors at any rate.

    Reply: UK yield is around 2.2%
    High bond yields are crippling for the borrowers and may lead to default, so the investor does not get all their money back.

  17. stred
    November 17, 2011

    Following Brown’s bottom. it will be interesting to see into the future. Perhaps, selling a bank at the bottom of the market will become known as ‘ Ozies Orifice’.

    Reply: Why do you think this is the bottom of that particular market? Continued public ownership of banks can damage their value rather than enhance it. The state banks have been loss making, which means their capital value shrinks.

  18. Sue
    November 17, 2011

    I’m furious, I don’t mind telling you!

    Germany’s secret plans to derail a British referendum on the EU

    http://tgr.ph/tST9xZ

  19. outsider
    November 18, 2011

    Agreed. Selling Northern Rock to a complementary British company that will be able to compete more effectively for business seems like a great conceptual solution all round.

    As a private shareholder, however, I would expect a public document outlining the current financial condition, trading a prospects of Northern Rock so that I could judge whether this is a reasonable financial deal. I have been unable to find such a document but maybe I have missed it or it is on its way.

    Is a proper, uptodate offer document available to you as an MP so that you can make a proper judgement?

    Reply: Not to my knowledge, but I will look next week when we are allowed back to Parliament. We are having a “break” again.

  20. Stephen O
    November 18, 2011

    Do you support the calls to set up up an industrial bank to support British business?

    Would it not make sense to utilise the infrastructure of one on the current government control banks to provide this lending. Save the start up costs and be far, far quicker to implement when time is of the essence. If it does not make sense to tie this activity in the long run to existing business it could be spun off later once propoerly established.

    Reply: I do not want them to set up a public sector bank – it would take too long and doubtless saddle taxpayers with lots of dubious debts. As they go ahead with credit easing they will need to use existing banks and markets, and find a way to avoid the public sector ending up with the bad loans.

  21. Lindsay McDougall
    November 18, 2011

    Does anybody know the equivalent rate for Iceland government bonds? Iceland, you may recall, let its private banks collapse rather than bail them. There was a big default. They seem to be doing all right, don’t they?

  22. Javelin
    November 18, 2011

    Bond yields were ALWAYS these for EU countries before joining the Euro. They started dropping in 1996 and fell to around 1% for 10 years. This is because the markets stopped pricing risk into bond prices because the thought (1) Governments would stick within EU fiscal rules like 60% GDP (2) the ECB would back up any default (3) Credit Default Swaps would act as optional insurance.

    Now ALL 3 reasons for low yields have been destroyed by the EU yields are returning to their natural levels. Unless the nature of these Governments fundamentally changes we will be living with these bond yields.

    Fundamentally the PIIGS economies need to change drastically. If it does then there will have to be a jump to the right in their politics, until the central EZ (ie Germany) is ready to support them politically. If the EZ Governments can make drastic cuts work and “internal devaluation” (ie massive job cuts and salary reductions) then the EZ may survive. It will be the first time in history that massive wage deflation will support a political party. I think the EZ is against human nature – like communism killed ambition so the EZ kills betterment.

    If the EZ can last long enough to either persuade the Germans to politically change enough to transfer wealth OR be coerced I to paying through threat of eurogeddon then we wil see Gilts no longer being a safe haven and interest rates rising here too.

    Like I said I don’t think the EZ is politically natural. I’ll repeat what I’ve been saying for years. The EU worries me because it is a fortress against democracy that could be hijacked. That is my main concern. I’ll also repeat that I believe huge political change is on the way starting with the youth. I dont see either left or right wing satisfying the anti democratic nature of the EU, over spending Governments, over paid executives, over indebted young people, under taxed companies. I don’t expect one if the Labour or Conservative parties to outlive me.
    If it

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