Errmm, Explain This To Me Again?

Richard Murphy tells us this about Northern Rock and the new guarantees on its debt:

And now, to get to the nub of the issue, the new press release says that all the remaining covered, securitised and wholesale bond holders are all guaranteed to get their money back in the event that either Northern Rock or Granite cannot sell replacement debt to repay obligations in the open market. Nut Northern Rock will not of course be able to sell any debt in the market now. The ultimate moral hazard has now been created: there is no incentive for anyone to lend to Northern Rock or Granite anymore, especially when in a desperately tight credit market there will be any number of better opportunities. That means that there is only an incentive to ditch Northern Rock debt.

I\’ll admit that finance does indeed make my brain hurt but…but…doesn\’t a 100% cast iron guarantee by HMG to stand behind Northern Rock debt, of whatever form, actually make holding such debt more attractive? With the odd quibble about how long it will take them to honour such guarantees, doesn\’t it essentially convert, say, bonds issued by Granite, into Gilts? And ones carrying the same (almost) guarantee as a Gilt, but with a higher interest rate?

Now if I\’m right about that, where in a desperately tight credit market are you going to get a better deal than that? So people will buy Northern Rock debt, not ditch it, surely?

Either I\’ve missed something here (in which case please inform me) or, well, what is Richard Murphy talking about?

As a  bonus point, any financial market types want to tell us whether N Rock debt rose or fell today?

2 thoughts on “Errmm, Explain This To Me Again?”

  1. The current credit market is tight precisely because there aren’t a lot of better opportunities; nobody wants to lend for fear of not getting their money back, which is pretty much the definition of “no opportunities”.

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