Gordon turns the screw on the Councils: Exclusive

Working on my theme of the week, unintended consequences, here is an exclusive to Capitalists@Work. No doubt the media will pick up on this later in the week.

The issue is the rapid interest rate cuts by the Bank of England. Rates have fallen from 4.5% to 2% in just a month; this huge change is said to be the cure to our recessionary problems

However, like in the Icesave case, Councils have been monitored by the Government to make the most of the money they collect. As part of doing this they have done all sorts of 'sensible' things, such as depositing money in high-yielding interest accounts like Icesave.

Now there is a new problem, Councils, Companies and all sorts of other organisations have 'hedged' their interest rate position through the use of interest rate swaps. However, these were hedged against rising rates. Falling rates means the loaning organisation (Banks) can call in the loans or charged penal rates.

This is very similar to the position Mitchells & Butler faced recently, which nearly bankrupted the company.

The net effect is lots of cash calls on Council's who have hedged against rising rates. Now they may have to sell assets in a tough market to raise the cash or borrow more to repay the loans - with Banks today charging very high rates, if offering any money at all. Banks desperately want the money to bolster their positions, they are not going to be lenient.

This is yet another example of what happens in a crash as Mr Drew pointed out so brilliantly a while ago. Actions are rapid and not thought through. What can seem like a good ides, like letting Lehman Brothers go bust, can turn out to be wrong very quickly.

Watch what the Government's does carefully, they don't know what they are doing....