Northern Rock will be supported by the taxpayer for years to come

22 January 2008 / by Rachael Stiles
The taxpayer will be propping up Northern Rock for at least three years if the new financing structure endorsed by the Government becomes a reality.

This is being viewed as the only viable option without resorting to nationalising the bank and is hoped to draw back potential bidders such as JC Flowers and Cerberus, which both dropped out of the race last year when an attractive sale of the imploded bank was looking increasingly far fetched.

The new plan will include finding a buyer – to be chosen by the Government – and converting Northern Rock mortgages into Government-backed bonds which can then be sold to investors and used to repay its debt to the Bank of England. The struggling bank will pay the Government £400 million for the privilege.

The Treasury will have to resign itself to the fact that taking the liability of Northern Rock under its wing will breach the net public sector debt's 40 per cent rule. However, the plan was welcomed by shareholders and prospective bidders who stand to profit from such an agreement which does not see the bank nationalised – which would leave investors with nothing.

Northern Rock's board issued a response to the new plan, stating that it recognises "the Tripartite Authorities’ reaffirmation that the existing guarantee arrangements for depositors remain in place." and reminded customers that its "Savers’ money remains safe and secure in Northern Rock. The timescales indicated by the Tripartite for the Company to conclude the process remain consistent with the Company's previous guidance for its strategic review process."

Northern Rock's shares rose 46 per cent to 94.5p on the back of hopes that a sale is just around the corner. The Government has issued itself with a February 4 deadline to choose a suitable buyer, which currently include Virgin and Olivant.

The Prime Minister Gordon Brown has been the target of much criticism over the proposed plan – the biggest ever state bail out of a private company – which some are saying will catapult the UK back to the 1970s, with each British family providing the equivalent of £2,000 in state-backed guarantees – the Bank of England loan and the Government guarantee made to depositors in order to put a stop to the first run on a British bank for 140 years when it ran into a liquidity crisis last summer.

However, defenders of the plan that will see the taxpayer left holding the hot potato which no commercial investors would touch, point to the fact that the Government will take a 10 per cent stake in Northern Rock and share any future profits with the taxpayer.

© Fair Investment Company Ltd