£100bn Northern Rock Debt Moves On Balance Sheet
Yesterday the Office for National Statistics formally moved the Crock onto the public sector balance sheet. So for the first time we have official recognition that the bulk of its debt is hanging round taxpayers' necks.
The ONS hasn't yet crunched the exact numbers, claiming that "it was not possible to collect the relevant data from Northern Rock plc in advance of this announcement and it would have involved disclosing commercially sensitive information. However, the reclassification will be reflected in the Public Sector Finances dataset as soon as possible."
Translation: the Treasury has threatened us with exile to Tyneside if we publish the new Fiscal Rule busting debt total ahead of the March Budget.
But the spin from the statisticians is that the total addition will be "around £100 billion". Which is very interesting. Because, although that's always been BOM's figure (eg see this blog), until now, the official line- relayed by the BBC's Robert Peston et al- is that the figure is "only" £55bn. What's more, the ONS dates the liability from "9 October 2007, when the support arrangements provided by the Bank of England were amended". BOM readers will recall that's when a panicking Mr Darling extended HMG's guarantee to cover pretty well all deposits (see this blog).
The other fascinating aspect of the ONS announcement is the reason they've brought NR's debt into the public sector. It's not- as you or I might have imagined- because we taxpayers are now on the hook for servicing and repaying it. No, it's because post-9 October:
"the public sector has the power to control Northern Rock plc’s general corporate policy. This is largely due to powers that the Bank of England has taken as part of its secured lending facility arrangements through covenants in the loan agreements. While amounts are outstanding under this loan, Northern Rock plc requires permission from the Bank of England before undertaking certain activities – for example, entering into any corporate restructuring; making substantial changes to the general nature of the business; making dividend payments; and acquiring or disposing of certain types of assets."
To which one immediate response is to ask why on earth are these shares still trading? If the government's control is officially recognised as being this complete, it's surely a classic false market. And this goes way beyond loan covenants: virtually all debt finance has covenants attached, limiting the corporate actions of borrowing companies, but HSBC doesn't have to take Widget PLC onto its balance sheet just because it extends it a covenanted loan. Bond holders aren't responsible for the debts of the companies whose covenanted bonds they buy.
Another question- what happens if and when the Virgin take-over goes through? Will the Crock move back into the private sector?
As we've blogged many times, the reality of such a take-over will be continued taxpayer support, both through loans and deposit guarantees. At the very least, taxpayers should demand any such deals are heavily covenanted. But then, on ONS logic, the Crock would remain on the public balance sheet, blowing the Treasury argument that this is "temporary", so shouldn't count for fiscal rules puposes.
Unless that is... unless... oh no... surely even those naive bunglers Mssrs Brown and Darling aren't intending to give Sir Richard huge uncovenanted dollops of our money. Are they?
There's one final point. A large chunk of our exposure to the Crock is in the form of guarantees rather than outright loans. In the real world, that makes no difference whatsoever in terms of the economic risk we're bearing. But in the arcane world of public sector accounting, contingent liabilities don't count.
It's a nonsense very familiar to BOM readers. Just a few days ago we blogged the £73bn of taxpayer liability for decommissioning Britain's nuclear power stations- nowhere does that appear in the official public debt figures. Likewise, Network Rail's £20 odd billion of debt, fully guaranteed by taxpayers, does not appear in the National Debt. Even though we're on the hook for payment: they are "contingent liabilities".
We're currently reworking our figures for the real national debt. Last time we did the sums it came out at £1.7 trillion (eg see here). We'll post our updated total next week.