An extra lifeline for the Northern Rock

THE Government yesterday made a new move to secure Northern Rock’s future by extending a key financial lifeline.

THE Government yesterday made a new move to secure Northern Rock’s future by extending a key financial lifeline.

North-East MPs welcomed the news that taxpayer guarantees have now been made across virtually all the bank’s balance sheet, saying it could help ensure the business remains as a going concern.

But opposition MPs voiced concern amid warnings that hundreds of millions of pounds have been added to the public’s exposure, while Bank of England chiefs acknowledged there was a risk to taxpayers.

Northern Rock has already borrowed around £25bn from the Bank of England since September, while the Treasury has also fully assured an estimated £16bn in savers’ deposits.

The bank is paying an “appropriate fee” for the extended guarantees, which it requested to protect its credit ratings ahead of a potential sale – although they do not cover the estimated £50bn in mortgages held in the Granite offshore trust Northern Rock uses to raise funding.

Two private sector bidders – a consortium led by Sir Richard Branson’s Virgin and the Olivant investment group – are currently vying to take control of Northern Rock, which was hit by soaring borrowing costs in August.

Newcastle North MP Doug Henderson, whose constituency is home to the bank’s HQ, said the extension of the guarantee would be welcomed by all in the North-East who want to save the business as a going concern. “Hopefully, this will help to reassure potential bidders to allow a change of ownership and management to get the bank back on a strong footing.”

He added staff had made clear that they wanted Northern Rock to stay as one institution and warned nationalisation could lead to a damaging break-up for small shareholders and workers.

Hexham MP Peter Atkinson said: “It removes a hurdle because obviously companies interested in taking Northern Rock over need to raise substantial sums of capital in the markets.”

The Tories claimed it was “a desperate move by a desperate Chancellor”, while Liberal Democrats said the Government was “effectively nationalising” the Newcastle-based group. News of the extended guarantees came as the Bank of England governor and his deputy were grilled by the Commons Treasury select committee on the fall-out from the credit crunch and Northern Rock crisis. Deputy governor Sir John Gieve said: “Essentially this does widen the scope of the guarantee to pretty much the whole balance sheet.”

He admitted no loan was without risk after committee member Philip Dunne suggested around half of the company’s balance sheet was now guaranteed by the Government, which could be around £50bn.

Bank of England governor Mervyn King refused to rule out nationalisation, but added: “I think this is a natural extension to try and help the company. I think what is important now is to ensure we stabilise the company and as soon as possible find a new management team and organisation to take it forward.”

Northern Rock welcomed the announcement as good news in “tidying up” wholesale guarantee arrangements while confirming retail savings remained safe. A spokesman said: “This does not represent immediate further borrowing. This element of the guarantee does not necessarily have to be activated.”

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