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?