The Government will have to cover a £1.7bn bill to cover the loans made to the failed Tube maintenance operator Metronet. Metronet collapsed last summer and was placed into administration leaving its five shareholders with a total of £350 million in losses.
Under the terms of the deal, the Government effectively provided a guarantee against 95% of Metronet’s lending. The terms of the guarantee are enforceable six months after any administration order is made and it was exercised on Tuesday of this week.
Finance for the scheme was provided by RBS, European Investment Bank. Ambac and FSA were among the bondholders for the scheme.
The Government has also set aside £300 million to cover the cost of the administration with Ernst and Young estimating costs to March 31st at £180 million.
So what happened to "risk transfer to the private sector"? And how did the Government get away with recording their guarantee as an off-balance sheet liability? A liability that wasn't there suddenly turns into a £1.7 guarantee, with the government then undertaking to fund the administration costs - currently £180 million.
There is a precedent. It was called Enron. Jeff Skilling is serving at least 20 years in prison, Ken Lay faced 45 years but died before sentancing.
What happens in the UK? SFA.