Tuesday 18 August 2009

Outbreak of commonsense at HM Treasury!

CityUnslicker linked to this article, Northern Rock Defers Payment of Subordinated Debt Coupons (which does what it says on the tin).

I did a bit of digging and uncovered this even better article of two weeks ago, UK government plans a great escape from Northern Rock, the upshot of which is that, as I have been saying since NR first went *pop*, the government can sort out the banks out at nil or negligible cost to the taxpayer by applying the logic of "debt for equity swaps". What these boil down to is that losses are first offset against shareholders' funds, and once these are used up, the next wave of losses is borne by bond-holders.

Happily, there is a pre-ordained, contractually agreed heirarchy as between bondholders, so there's not much to wrangle about. The losses are therefore shared out between 'reckless borrowers' (via higher interest rates, repossessions) and the 'reckless lenders', i.e. those who were willing to accept the highest risks in return for the highest possible rewards (being shareholders and 'junior' bondholders).

3 comments:

James Higham said...

Don't understand. You have a debt and buy equity with it or lose equity?

Lola said...

Or, to suspend interest payments on bonds of a government owned entity is akin to an off balance sheet Sovereign default?

WV = de-fook-em - hahahahahahah

AntiCitizenOne said...

Hell,

The government can even print the money to repay depositors from, as bond defaults are very deflationary.