There is another way

Lola drew my attention to this on Robert Peston's 'blog. Assuming it's factually correct, the salient bits are as follows:

...about $1000bn of "old world" companies' borrowings in the form of tradable debt has to be paid back during the next 12 months - with something like $800bn of this owed by financial companies and $200bn by non-financial companies. That would be a colossal sum to pay off at the best of times, and is equal to about five times what's been repaid in 2008...

Their desperate plight - their almost complete inability to raise vital finance - is shown by another Bank of England chart. It plots the market price of European leveraged loans - banker-speak for the debt of companies with big borrowings - which has collapsed to 65 cents in the dollar on average.

To translate: companies with large debts are only expected to pay back two thirds of what they owe, which doesn't make them a sound banking proposition in our harsh new world of tighter-than-tight credit...

The trick for government, therefore, would be to rescue fundamentally viable businesses, while somehow leaving feckless management to swing in the wind.

Ahem, why is this "the government's", i.e. the taxpayers' problem in the first place? These banks have a few options:

1. Do nothing, bury heads in sand. If I were earnings millions as a director of a bank, I'd be sorely tempted to hang on as long as possible and damn the investors.

2. Do the decent thing and approach bondholders now, offering to exchange each £1 of nominal bond due next year with a new 65p bond due a few years hence, plus shares with a nominal value of 35p (to keep the books tidy). Commercially, this merely crystallises the latent loss that bondholders have suffered so far. Quite what the market value of those shares is and the extent to which existing shareholders are diluted is up to negotiation between the parties concerned. If bondholders refuse to co-operate, the bank can always point out that a few well-placed rumours will see ordinary depositors rushing to withdraw their money. This is what is known in the trade as a debt-for-equity-swap.

3. Hope against hope that various governments find another couple of hundred billion of taxpayer's finest to cover the one-third shortfall when repayment is due. There is always the possibility that no such money will be forthcoming, in which case bondholders and other creditors will end up taking over the bank anyway.