Treasury extends Northern Rock guarantee

Rock moving 'towards nationalisation'

Tuesday, 18, Dec 2007 12:00

The Treasury has intervened again in a bid to save Northern Rock from collapse.

Alistair Darling has agreed to extend the government's financial guarantees after a request from the lender.

The Treasury will now cover any losses by financial institutions which have lent money to the troubled bank, in a move designed to allow Northern Rock to operate as normal.

Shares in the north-west bank rose 4.5 per cent after the deal was confirmed, with the move potentially giving the bank's owners more time to find a private buyer.

However, the guarantee also increases the risk to taxpayers, with the government already lending an estimated £26 billion to Northern Rock, and takes the bank a step closer to temporary nationalisation.

The extended guarantee will cover the cost of buying back mortgages from the Granite securitisation programme, the Jersey-based offshore trust Northern Rock uses to raise funding.

The Liberal Democrats warned today's deal would leave taxpayers bearing all the risks on Northern Rock, arguing the government is effectively nationalising the bank's liabilities.

Lib Dem economic spokesman Vince Cable said: "It is outrageous that the taxpayer should now be carrying all the risk involved in keeping this bank afloat while having no direct control over its affairs.

"The government is ensuring that if any sale is achieved the benefits will go to speculative investors and not back to the taxpayer."

The Conservatives said it now appeared even less likely taxpayers' funds would be recouped.

Shadow chief secretary to the Treasury, Philip Hammond, said: "With Alistair Darling's dithering, we are no closer to a resolution of the Northern Rock affair than we were three months ago. Meanwhile the risk to the taxpayer grows by the week, as does the threat to the reputation of Britain's financial services industry."