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Last Updated: Friday, 18 January 2008, 22:19 GMT
Rock nationalisation less likely
By Robert Peston
Business editor, BBC News

Northern Rock branch
The government is trying to decide what to do about Northern Rock
Nationalising Northern Rock looks much less likely after a government decision to offer much greater financial support to any private sector rescuer.

Prime Minister Gordon Brown has backed a plan from bankers Goldman Sachs to convert the Bank of England's loans to Northern Rock into bonds for sale.

These bonds would stay on the public sector balance sheet until conditions improve in financial markets.

They would then be sold to investors in small parcels every few months.

The sales would take place as and when financial institutions regain their appetite for such investments.

And they would be guaranteed by the government, rather than by a private sector insurer.

As a result, the Treasury would therefore be funding Northern Rock to the tune of tens of billions of pounds for as long as five years, even if it remains in the private sector.

Monday announcement

On those terms, it will be difficult for Northern Rock not to agree a deal with either the Virgin consortium or Olivant - the private sector groups vying for control of Northern Rock.

The main risk to a private-sector deal now appears to be a veto from the European Commission

Mr Brown has been studying the proposal from Goldman Sachs, a major investment bank, for a week.

He has now decided to go with it.

An announcement will be made to the Stock Exchange on Monday morning and the Chancellor, Alistair Darling, will make a statement in the Commons later that day.

He will say that nationalisation remains possible if agreement cannot be reached on a private sector deal.

Veto risk

However, the main risk to a private sector deal now appears to be a veto from the European Commission, which could rule that the massive long-term financial support to be provided by the government would be in breach of rules prohibiting state aid.

The private sector groups wishing to control the Rock will be set a deadline of early February to submit business plans.

Any deal would have to be agreed by mid-March, which is the expiry date of the European Commission's blessing for the public sector support currently being provided to the Rock.

Under the Goldman Sachs plan, the Rock's assets would be put into a special purpose vehicle.

This special purpose vehicle would then sell bonds over the coming months and years, as markets recover.

Taxpayer exposure

In theory, this would gradually reduce the taxpayers' exposure to the Rock.

A substantial taxpayer exposure, of tens of billions of pounds - in the form of direct loans and guarantees to other lenders and depositors - could remain in place for years.

However the Rock would be expected to pay a fee to the government in return for this substantial support

The government may well be attacked by opposition parties for subsidising what could turn out to be vast profits for any future private sector controller of the Rock, such as Sir Richard Branson's Virgin Group.

Gordon Brown on private sector solution

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