Chancellor criticised for excluding Northern Rock from Budget
05 March 2008 / by Rachael Stiles
The Chancellor, Alistair Darling, has received fresh criticism for his plans to leave Northern Rock out of his first Budget next week.
There are various theories behind the Chancellor's decision to treat the nationalised bank as a special item on the agenda. Most prominent is his desire to keep within the Government's rules about sustainable investment and not exceeding 40 per cent of gross domestic product; adding Northern Rock to the books would push this figure to between 43 and 45 per cent.
Ministers have maintained that the Chancellor is not cooking the books, as the Conservative Party believes him to be, but that he does not want to distort the financial outlook by incorporating the £100 billion of Northern Rock liabilities into the Budget when it is only intended to be in public ownership for a limited period.
One of the bank's main shareholders, Legal & General, has spoken out against the Government's treatment of the Northern Rock scenario and its decision to nationalise the bank when, in their opinion, it was still a going concern.
Legal & General has announced that it is considering legal action against the Government for valuing the bank as if it was bust and suspending the shares which were worth just 90p, a dramatic fall from £12 a year ago. Shareholders are expected to be offered about 5p per share, and the bank will take the Government to court if it does not feel that investors are offered sufficient compensation.
Meanwhile, the Office of National Statistics (ONS) has insisted that Granite, Northern Rock's offshore vehicle for long-term mortgage funding, is the concern of Northern Rock and therefore of the UK taxpayer, even though it has not been nationalised.
The taxpayer will be responsible for any defaults it incurs because Northern Rock is responsible, the ONS has said, and that the bank's risks are the nation's risks while it is in public ownership, despite the Chancellor insisting that Granite is a separate entity, is legally separate from Northern Rock, and that the Government has not offered any guarantees to Granite's bondholders.
Northern Rock's management has also come under fire following the revelation that it paid £15 million for the Newcastle Falcon's rugby club grounds when it could not keep up with its mortgage repayments, just weeks before it approached the Bank of England for emergency funding, loans which eventually rose to £30 billion. Because the loans from the Bank of England were given at a high rate of interest, the acquisition of the grounds could be costing about £1 million a year in interest.
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