The Treasury is pumping £3 billion into Northern Rock after the bank posted a £585 million loss, making it more likely that the rescue will end up costing taxpayers money.
Chancellor Alistair Darling will no doubt argue that all that is happening is that part of the government’s huge loan to Rock – now a bit over £17 billion – is being converted into shares and that since the government owns the whole thing it doesn’t really make much difference.
In fact there’s a bit more to it than that. The government gets one pop at sorting out Northern Rock under EU ‘state assistance’ rules designed to prevent governments propping up lame ducks and ‘national champions’. So the £3 billion, which has to be cleared by Brussels, may be a first shot by the Treasury, since it looks as if about £1.5 billion would be enough to give Rock a capital base similar to those of other UK banks.
Borrowers lose out
Either way, savers don’t need to lose any sleep since the bank is now wholly owned by the government and their deposits are effectively backed by the Treasury. Borrowers, though, have less cause to cheer. Rock has got rid of 15% of its mortgage accounts since December and paid £9 billion of loans back to the Treasury.
Mortgage arrears on its remaining borrowers have risen from a mere 0.38% a year ago to 1.19% now, though even that is below the industry average. Analysts expect the arrears rate to rise, since people with good credit ratings can usually refinance on better terms than those being offered by Rock to borrowers when their current deals expire.
So the rescue plan really amounts to a gigantic gamble that the housing crunch will be shorter and shallower than some economists are predicting. If there is a deep 1990s style housing slump, Rock’s losses will soar and the rescue will end up costing taxpayers a packet. Rock’s boss Ron Sandler and Alistair Darling must both have their fingers crossed.
