I read it as: we do not dare to re-nationalise water because it will add to the state deficit and we will have to raise taxes by X to pay for it, so instead let's allow private companies to charge 5X more in water bills, as long as we can say that we "didn't raise taxes".

Well, that will depend on how much they are allowed to increase prices.

One way or another the private equity backers will demand that their loans are paid back before anything is invested in infrastructure. It's a game of chicken, and I think the government blinked first

Before money is invested in infrastructure? Sure. But that's a second order issue right now when the continuation of the business as a going concern is very uncertain even without infrastructure investment.

My point is: the public will bail out Thames Water, one way or another. But I'd rather it be by nationalising the company, partially defaulting the debt and then investing tax money, than by paying the finance leeches before anyone else...

I think the best way forward is not to nationalise Thames Water, but to let the company go bust, entirely wiping out the creditors. It worth noting that the worst of the leeches have already washed their hands of the company, there is nothing that can be done.

Once Thames water is wound up and no longer exists, a new enitity can be created by the government entirely disconnected from TW and its debt. Clearly this is not what is going to happen. But we can dream.

What i think the government is proposing is that TW and its creditors find a market based approach, without being allowed to increase bills. I'd love to say they'd also have increasing fines levied on them for failing quality standards, but thats perhaps asking too much in this political climate.