This really is a bad idea

Canging the rules in mid game….or, if you prefer, violating the law of contract.

Bondholders, who have £12bn in Northern Rock, have been spooked because the Government tore up the rule book on traded debt on Friday by unilaterally rewriting creditor contracts with Bradford & Bingley to delay payment of both interest and capital. Following the B&B intervention, spreads in the sub-debt market jumped 100 basis points to 3.3pc.

One senior credit market analyst said: "Changing the documentation on a whim is not a good sign … It has thrown the whole sub-debt market into disarray."

The analyst added that Northern Rock\’s bondholders are now worried that the Government will "amend the terms of the bonds so it can miss coupon payments or link payments to bad assets".

If it does: "The Government could kill confidence in the bond market as well as the equity market, which would be disastrous for fundraisings."

Now yes, we all know that those bondholders would be losing money if Northern Rock or B&B had been allowed to go bust rather than being nationalised. But that is already part of the rules of the game.

If you decide to unilaterally change the contracts, well, OK, so you\’ve changed it just for one certain group of people. But you\’ve shown that you\’re willing to do it to anyone, anytime. Which means that all transactions now become more expensive as everyone has to price that risk in.

So, as in this case, all borrowing by all banks has just become more expensive. Pretty good for a day\’s work, eh?

3 comments on “This really is a bad idea

  1. So what? The government in their stupidity rewrote the rules once (at huge benefit to bondholders) and they are now cackhandedly un-re-writing that rule so that bondholders now take more of the loss on the chin that they would otherwise have suffered.

    As a net saver, I’m quite happy for interest rates to go up.

    What’s worst of all is when people start canging spelling in mid-word.

  2. I thought these particular bonds had a coupon deferral clause which the Government decided to trigger? Yes, still undermines confidence in similar bonds, but it’s not the repudiation of the legal system.

  3. Yes. The Telegraph article is about as misleading a piece as has ever been published (note the fact that they haven’t been able to get anyone in the market to put their name to the assertions the ‘unnamed source’ is making, because they’re lies). I wonder if Messyrs Barclay & Barclay hold NR bonds…?

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