Labour faces ‘financial crisis’ as Co-op scandal deepens

The Labour party faces a financial crisis as the scandal engulfing the Co-operative Bank and its former chairman threatens to slash the party's election reserves.

Labour could have to pay back more than £2 million in loans early to the troubled banking group when it is taken over by US-based hedge funds as part of a rescue deal.

The party's MPs could also lose up to £850,000 a year in funding as the Co-op group review their historic relationship with Labour.

Sources said informal contact had been made with the party to warn that those MPs who are members of both the Labour and Co-operative parties could see their funding slashed.

"There is no doubt there is going to be a 30% cut across the board," Labour MP Barry Sheerman said after a meeting earlier this week with other MPs set to be affected.

Other figures in the party suggested they could lose all of their funding from the Co-op group.

Labour today denied their finances were in crisis.

"The party is on a sound and stable financial footing," shadow home secretary Yvette Cooper told the Andrew Marr show.

"It's true that we don't have the same scale of resources that the conservative party gets from its hedge funds and things like that but we have sources of funding from all kinds of different areas."

The scandal over the activities of the former Co-op bank chairman Paul Flowers continued this weekend as the Conservative party claimed Labour were fundamentally entwined in the story.

Education secretary Michael Gove accused the party of failing to answer important questions about the scandal.

"There's a pattern of behaviour I fear that when tough questions are asked of Labour… they tend to clam up," said this morning.

"Ed Miliband has been a great advocate of judge-led inquiries but when anyone asks questions of the Labour party then he has a coquettish reticence."

Labour leader Ed Miliband accused the Tories attempting to "smear" the party.

Writing in the Independent on Sunday, Miliband claimed David Cameron had "demeaned his office" and said their attacks were part of a "smear campaign" orchestrated by election advisor Lynton Crosby.

Linking the story to the attacks earlier this year on his late father, Miliband said the Tories had hit a "new low."

"Last week the Conservatives’ approach to the next election was laid bare," he wrote.

"They want to distract attention from the issues that matter. With the support of a determined section of the press, they have decided that mudslinging matters more than the futures of millions of families across this country."

Yvette Cooper said the Tories had gone beyond the pale.

"This is a return to the nasty party," she said.

"I don't think John Major would have done this. I don't hink Margaret Thatcher would have done this."

Conservative Party chairman Grant Shapps described Labour's defence as "pathetic".

"This is a pathetic attempt to evade the serious issues. Labour have big questions to answer, and when they are asked, they simply try to avoid them by claiming they are smears," he said.

"It is an obvious tactic from the party that brought you the most disgraceful smear operation of modern times, fronted by Damian McBride, and known about, encouraged and tolerated by Ed Balls and Ed Miliband."