King holds court

Mervyn King got another grilling from the Treasury Select Committee this morning, on the day the Bank of England promised to guarantee another swathe of Northern Rock's debts.

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Last Updated: 31 Aug 2010

The Bank has already guaranteed the savings of all the Rock’s customers – which it was forced to do to stop the run on the bank – plus its asset-backed wholesale deposits. This morning it said it would also guarantee some of the Rock’s other liabilities – so it will now cover things like the bank’s exposure to derivative contracts (which aren’t secured against anything at all).

The Governor is attempting to prop up the bank’s battered credit rating – because if it sinks any further it will make it even harder for the two remaining bidders, Virgin and Olivant, to raise the money necessary to fund their bids. They’re already having trouble persuading the banks to cough up, which is why the Treasury promised yesterday to make its adviser Goldman Sachs available for financing purposes.

The statement came on the day of the Governor and his deputy Sir John Gieve’s latest appearance before the Select Committee, where they were again baited about their actions (or lack of them) during the recent crisis. Merv denied the need for ‘drastic surgery’ to the Tripartite Agreement between the Bank, the Treasury and the FSA. But he refused to rule out nationalisation, saying only that ‘nothing is inevitable’.

You might think that since the taxpayer is now in hock for more than £100bn of the Rock's debt, the Treasury might as well go the whole hog and take it over. But actually it's only doing this to avert that very possibility, tiding the Rock over until January in the hope that the market might pick up again sufficiently to fund a private bid.

But it's going to be a busy day for the Governor – the Bank will also be running the first of two auctions designed to inject some cash into the banking system, as part of a concerted effort by five central banks to get the money markets moving again. There’s £11.35bn up for grabs today, assuming the banks are prepared to risk the stigma if their name slips out – which they weren’t back in September, the last time the Bank tried this. Admittedly the punitive rate of interest probably didn’t help – so this time the Bank will be offering its money at a cheaper rate (though it’s unlikely to match the ECB, which is offering unlimited funds at below the market rate).

Given that Merv wants to be re-appointed as governor when his current term extends next year, according to today’s Times (you’d have thought he’d be glad to get away), he’ll need to get through today without further damage to his reputation. Otherwise by this time next year, the only thing he’ll be governing is his garden.

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