Concern over governments £500M bonds for Royal Mail

Confusion reigned yesterday over an official statement by the Department of Trade & Industry that it planned to issue pounds 500m of its own bonds to bail out the Royal Mail. Traditionally, only the Treasury is allowed to borrow money by issuing gilts, or government bonds. The system stops all the different arms of government wildly running up liabilities and ensures the Treasury keeps a tight grip on the finances. Consolidating public debt also makes certain the best possible rate of interest is obtained from the market. This process requires the approval of Parliament. Yesterday, in a written statement to the House of Commons, the junior DTI minister Stephen Timms announced the terms of a pounds 1.8 billion bail-out for the Royal Mail, which desperately needs the money as it is losing pounds 1m a day. The statement said “two DTI bonds, one of pounds 200m and one of pounds 300m”, will be issued after Parliamentary approval. There will then be a pounds 550m cash injection from the Government and the Royal Mail will be allowed to borrow up to pounds 1 billion of bank debt. The Treasury reacted with anger to the announcement, saying: “The DTI is not issuing bonds and there are no plans to allow individual departments to borrow on financial markets. Only the Treasury can issue gilts.” A spokesman for the DTI said: “They are not DTI bonds as such. They will actually be issued by the Royal Mail and we will buy them. I don’t think they will be tradeable.” The possibility of DTI bonds being issued was greeted with surprise in the City, where Mr Brown has been dubbed “The Enron Chancellor” for the sophisticated devices being used by the Government to keep its borrowing down. Steve Warburton, head of fixed income at Williams de Broe, said: “This is quite a sly move by the Treasury. I expect we will have to watch out for more of this sort of thing.” Mr Timms and Patricia Hewitt, the Trade Secretary, were condemned by Liberal Democrat spokesman Vince Cable for refusing to come to the Commons to explain the complex package.”It’s mere sticking plaster,” he said.