Wrecked on Granite
As already blogged, yesterday's Treasury statement on the extended Northern Rock guarantee suggested taxpayers are now on the hook for all of the Crock's borrowings, except for a few billion of subordinated debt: ie we are guaranteeing around £100bn.
Yet most of today's headlines say the guarantee "only" covers around £56bn. So what's going on?
The HMT press release yesterday morning said the guarantee covers retail deposits, wholesale deposits, unsecured borrowing, secured borrowing where the security actually turns out to be insufficient, collateralised and uncollaterised derivatives, onshore and offshore. Which is pretty well everything- hence the £100bn.
But when, a little later in the morning, the Bank of England Governor and Deputy Governor appeared before the Treasury Select Committee, they told a slightly different story:
"Essentially, this does widen the scope of the guarantee to pretty much the whole balance sheet excluding the capital and the Granite securitisation. All that guarantee is secured against the asset value of the company."
Mervyn King, governor of the Bank of England, said about 40 per cent of Northern Rock's £114bn ($229bn) balance sheet related to the Granite programme, with a third covered by the extended guarantee.
A further 25 per cent was Bank of England and Treasury loans, "leaving a very small residual that is essentially capital".
So in terms of money, that means we've now lent c £29bn directly to NR (equals 25% of £114bn), and guaranteed a further c £38bn (equals 33% of £114bn). Which totals c £67bn.
So the origin of that quoted £56bn is mysterious.
And taxpayers should also remember that while the c £45bn of NR's now notorious offshore Granite securitised borrowing is supposedly excluded from the guarantee, without it, Granite would soon unravel. That's because although the Granite borrowings are secured against specific pools of NR mortgages, the Rock has continuing obligations to maintain those pools- the programme is not "fire and forget".
What's more, Granite's borrowings are essentially short-term. It is constantly needing to "roll-over" its maturing debt- ie redeeming existing borrowings and replacing them with new. Once Granite's investors take fright at NR's capacity to perform, roll-overs get very difficult, and the whole programme could collapse. And what gives it urgency is that the Granite borrowings are maturing fast, with £1.5bn due in January alone.
We stick to our view: the reality is that taxpayers are on the hook for the whole lot. Which according to the BoE is well over £100bn.