Watch Out For Your Wallets!

Now who would have guessed it?

Potential bidders for Northern Rock are pressing the government to waive a £2bn* interest bill on the stricken bank\’s outstanding £20bn loan. Their representations to the Treasury mark the opening skirmish of what could prove to be a politically damaging battle for control of the bank.

Bidders are arguing for more lenient lending conditions to Northern Rock in return for safeguarding valuable jobs in the north-east of England. One bidder has already highlighted the benefits of its bid for the job prospects of the bank\’s 5,500 workers in Newcastle and Sunderland.

Note that currently Northern Rock isn\’t actually paying interest on  that loan, although it is accumulating. So what hte bidders are asking is that the accumulated bill not be called in. Nice work if you can get it, certainly, and I certainly would blame anyone for trying it on. However, I would hope that the Government tells them to bugger off.

Either Northern Rock has a value while accruing that interest or it doesn\’t. If it does then someone will buy it. If it doesn\’t then no one will and it should be gradually shut down. By writing off the interest the Govt (or Bank, or Treasury, to taste) is simply moving money to the current shareholders, increasing the value of NR to their benefit.

As it\’s the shareholders who should be losing money in this affair this isn\’t in fact what we ought to be doing.

But pressure is likely to fall on the chancellor Alistair Darling, who is well aware that Labour has a majority of seats in the north- east and needs to protect them ahead of a general election. Accusations that the government, far from losing money on lending to Northern Rock, was guilty of profiteering are unlikely to play well with MPs in affected constituencies.

Unions in the region, already agitated at delays in the bidding process, could also exert pressure on the government to relax lending rules to allow a bid to go through.

But if the interest is foregone, it\’ll be for that reason. Politics. For, as we know, politicians do things that benefit politicians, not things that benefit you and me.

* One question though. How does borrowing £20 billion for three months at 7% give you a £2 billion interest bill? £350 million, surely?

6 comments on “Watch Out For Your Wallets!

  1. “One question though. How does borrowing £20 billion for three months at 7% give you a £2 billion interest bill? £350 million, surely?”

    And how does securing 5,500 jobs come anywhere close to being worth £2B? Unless they are in a marginal constituency..

  2. To answer your question. I think the telling phrase is “bank’s outstanding £20bn loan”. In other words they have paid back part of the loan already but no interest charges.
    The rejected Lloyds Bank deal is starting to look very cheap.

  3. The interest on 30 billion for 3 months at 7% is 350 million.
    I did a calculation that I expect a 12 year old to be able to do. However I doubt that many 15 year olds could do it now.

    Where does this 2 billion figure come from?

    Probably it is what Northern Rock want knocked off the loan bill.

  4. What’s new? Does no one here now recall what happened to the British shipbuilding industry?

    Around 1950, the British shipbuilding industry – most of it located in the North East, the Clyde and Birkenhead – amounted to about a quarter of total world capacity.

    “Perhaps surprisingly the Thatcher government continued to pour money into the shipyards during its first term, but after re-election in 1983 privatisation of the yards became the order of the day. The profit-making warship yards could survive on their own, but the end of government support led to the swift disappearance of most merchant shipbuilding capacity in Britain.”
    http://www.jmr.nmm.ac.uk/server/show/conJmrBookReview.30

  5. I don’t really see why the government shouldn’t let the market value fall to zero, nationalise it, and then gradually sell off various bits to various bidders. There’s always a risk with a government owning a company (unless its a foreign government, of course) but this is simply a question of collecting money so it can’t be that hard.

  6. Governments of any colour get subject to intense pressures from “our friends in the North” to pour more ever more subsidies from taxpayers into the north and that would only intensify if Northern Rock is taken into public ownership.

    Just consider the outcry whenever a Northern Rock in public ownership was put into the position of starting repossession proceedings as any of its many home mortgage holders failed to make repayments according to contract. The whole point of making the Bank of England independent in setting interest rates in 1997 was to de-politicise those policy decisions and thereby, hopefully, get better policy in the public interest – curiously, it was the Attlee government in the first place which, in 1946, nationalised the Bank of England complaining that in private ownership the Bank was too independent of political control.

    Taxpayers resident in London and the South East region are already bankrolling most of the rest of Britain and that can only get worse if Northern Rock is nationalised:
    http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2007/10/12/nbudget312.xml

    Remember that recent news in the Guardian:

    “People living in northern England are more likely than their southern neighbours to smoke and drink to excess.”
    http://www.guardian.co.uk/uk_news/story/0,,2196975,00.html

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