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Northern Rock now part of the national debt

08 February 2008 / by Rachael Stiles
Gordon Brown has been the subject of much criticism over the reclassification of Northern Rock to include it in the national debt, which has come about as a result of the Government taking such a large role in determining its fate.

The struggling bank was officially classified as belonging in the public sector yesterday by the Office of National Statistics (ONS), "largely due to powers that the Bank of England has taken as part of its secured lending facility arrangements through covenants in the loan agreements", the ONS said in a statement yesterday. It was quick to clarify that this does not mean that the bank has been nationalised, but that it should be classified in the same way as nationalised entities such as Royal Mail.

"The exact impact of Northern Rock plc's inclusion in public sector net debt cannot be stated at this time because it was not possible to collect the relevant data from Northern Rock plc in advance of this announcement and it would have involved disclosing commercially sensitive information." the report said, but the figure is thought to be approximately £90 billion.

The added debt from Northern Rock is said to be equivalent to about seven per cent of national income, and its inclusion on the public sector balance sheet will push the Government debt to almost 45 per cent, far above its self-imposed limit of 40 per cent, and it represents an additional £3,000 burden on each UK family. Analysts have said that the increased debt could in turn lead to higher taxes or reduced Government spending.

Meanwhile, the battle continues to take possession of Northern Rock. The in-house solution led by Paul Thompson has gained an advantage over Virgin with shareholders, having won around £700 million of investor commitments from RAB Capital, SRM Global, the Tyne Consortium, which includes US private equity group Five Mile, and various other stake holders.

Contrastingly, Virgin has a tetchy relationship with shareholders, who would find their holdings severely diluted under a Virgin regime, and would be on the front line if there are any further crises of liquidity in the future.

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