Greensill Capital case damages the UK’s credit standing on the world stage

Introduction

The UK government has cancelled its guarantees to a private lender – Greensill Capital – under the UK’s coronavirus support, without the obligation that was guaranteed having been discharged. This puts a major question mark against the UK’s good faith in its financial dealings: if the UK can do this, what does it say about the reliability of other countries’ guarantees?

Background

The now-defunct Greensill Capital, after considerable lobbying, was granted access to the UK government’s Coronavirus Large Business Interruption Loan Scheme, or ‘CLBILS’. The lender extends credit to qualifying borrowers, and benefits from guarantees for 80% of each loan, extended through a public agency (the British Business Bank) and underwritten by the UK government. Greensill was granted a lending limit of £400 million, with a £50 million ceiling on individual loans. Greensill could thus benefit from £335 million of guarantees if it lent up to its £400 million limit. It quickly did so, in the form of 8 loans of £50 million, each to a different company associated with the Gupta empire.¹

Indeed, The Guardian wrote that the Gupta empire was restructured in order that it could present 8 different qualifying borrowers, a manoeuvre whose outcome was that the group could be the sole user of Greensill’s £400 million CLBILS limit.²

Unilateral cancellation of guarantees

The Guardian further noted that the UK government had cancelled its guarantees in Greensill’s favour in April 2022. Normally a guarantor does this when:

1. The obligation being covered by the guarantee has been discharged – e.g. the Gupta companies have repaid the CLBILS loans;
2. The guarantee’s beneficiary has either returned the physical guarantee or sent a release to the guarantor.

Neither has occurred, so the UK’s reasoning is that the case has been referred to the UK’s Serious Fraud Office. This is insufficient to justify cancellation but would merit the proceeds of a call on the guarantee being held by a court for a limited period.

Blocking the call itself should require there to be legal proceedings ongoing, and brought by the guarantor against the beneficiary. A block would be time-limited, and the guarantee is not automatically cancelled, because a guarantee is sacrosanct: it is irrevocable and unconditional.

A guarantor cannot normally contest the validity of its guarantee, once issued

Instead the UK government has cut through due process, reneged on its undertaking, and in doing so imperilled the guarantee as a financial instrument. Why would any beneficiary accept a paper guarantee if its issuer could cancel it at their discretion? Beneficiaries would revert to demanding cash or tangible security.

What is the guarantor’s risk and on whom?

Under normal circumstances, the guarantor’s risk is that its account party – the customer that asked it to issue the guarantee – fails to reimburse the guarantor when a call on the guarantee is made. The requirement to reimburse is the key obligation within the counter-indemnity that the account party is made to sign at the time the guarantee is issued. The guarantor’s risk is credit risk on its account party, not on the guarantee’s beneficiary.

Thus, under normal circumstances, the customer would have been Greensill. The anomaly with CLBILS, however, is that there is no customer, and that Greensill is the guarantee’s beneficiary. Thus, the UK government appears to have no account party except itself, or rather the taxpayer, so it has no counter-indemnity either and no customer to claim on. The European Investment Bank Group’s InvestEU programme appears to be the same: the European Investment Fund has issued guarantees without an account party or a counter-indemnity.³ In both cases this shows incompetence on the part of public sector actors when engaging in banking business. The loser is each case is the taxpayer when a guarantee is called.

What happens when a guarantor tries to back out of its guarantee unilaterally?

A guarantor cannot renege on a guarantee without undermining its own credit standing, and not just on its other guarantees, but on its bonds and on all manner of other financial obligations.

The UK’s reneging on its guarantee in favour of Greensill sets a bad precedent. What other obligations might the UK decide to unilaterally release itself from? If the UK suddenly does not like its obligations towards Greensill, why does it not suddenly decide to dislike its obligations under the financial settlement within the Brexit Withdrawal Agreement and renege on them?

The outcome would be the loss of trust of investors and all financial counterparties in the good faith of the UK to honour its undertakings, including its ‘gilts’: the UK’s government bonds.

If the UK is able to renege, why would others not follow, picking and choosing which obligations each country feels it is obligated or not obligated to discharge? That road leads to the undermining of the global financial system.

Conclusion

The Greensill case is extremely serious, demonstrating firstly something we already knew: that the UK government is incompetent when it comes to engaging in banking business. But it goes far further than this. Having been exposed as incompetent, it tries to cover its tracks by breaking basic banking and legal principles. This shows bad faith and threatens the credit standing of the UK on world markets. A competent and stain-free Foreign Secretary might be able to remedy this damage, only…