Sunday 7 December 2008

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....


Mark Wadsworth said...

Does not compute.

Councils are either net borrowers or net depositors.

Let's say that some are net borrowers. If they hedge against rising interest rates, then their real life losses are reduced by their speculative gains, and vice versa.

The problem is thus the timing of the payments, it's a cash flow thing. Margin calls are payable today, interest rate savings only accrue in the future.

Furthermore, who says that the interest rate at which councils can borrow has changed much? Is there are market for local council bonds?

CityUnslicker said...

MW - Your third para is exactly what I said. Cash calls on positions that are out of the money.

JPT said...

Here in my part of Wales the council has turned two out of three street lights off to save money.
And things will get worse.
Surreal times are a comin'.

Anonymous said...

JPT: "Here in my part of Wales"

Powys by any chance?

A couple of years ago I took a holiday in New Mexico, there they had instigated a restriction on night lights - as part of a 'clean sky' initiative.

The Milky Way WAS spectacular!

JPT said...

Powys it is.
Apparantly the council will save about £230,000 by doing this!
Most people are complaining about it but I say 'embrace the dark!'

CityUnslicker said...

Appropriate for these dark times JPT?!

Anonymous said...

Councils will further be caught by a smaller council tax population base as lay-offs/part-time working pushes more public into the position of paying reduced/zero council taxes.

The central gov. contribution will come under pressure. Will superman increase it? Will councils reduce headcounts? Will councils reduce services?

Or all of above?

Hey ho, a downward spiral guaranteed to demand political change!

And when will reduced house valuations lead to migrations across the valuation bands ABCDEF, etc, and reduce council tax charges?
I notice HIPS got more complex today, and more expensive.
Incidently, the economics that justified all the nonesense re-cycling and numerous lorry visits where one was good enough previously, were calculated on the scrap value of glass, metals, paper, cardboard, etc, far in excess of todays valuations.
They are running at BIG losses, folks.

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