Sunday, January 20, 2008

Public Finances gutted to support Northern Rock

So, for all of the tough talk the government have caved in and have now offered an absurd level of public financial support for a private sector bailout of Northern Rock. Let us not forget that an offer by Lloyds TSB when the crisis first broke was rejected out of hand, even though it entailed a much lower level of public risk than what it is now on offer. Now they are going to guarantee all of the Rock's exposure to the Bank of England as some sort of long-term bond issue, which drops it neatly on top of Britain's existing public debt. This was already running perilously close to the limits set by the government and this breaks it completely. So what? Well, it will affect Britain's sovereign debt position, because the cost to our country of borrowing money is very much dependent on the UK's existing level of indebtedness. That means a bottom-line cost to our taxpayers, and for years. More public debt also reduces the government's room for manoeuvre in the short-term, and let us not forget that we have a real danger of either reduced growth or outright recession in 2008. Basically, the government position means that of all of the other potential commitments for public money, it has decided that Northern Rock is the most important. That is patently absurd. What is really going on is that Gordon Brown has bottled it again. This time he is too scared to take on Northern Rock and shut it down, which is the only way the public's financial position can be safeguarded. What they are proposing makes no sense in business or public policy terms, unless you want to avoid short-term political pain. Once again the country's interests are sacrificed to manage tomorrow's headlines. And Brown was meant to be different.

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