Page last updated at 15:42 GMT, Tuesday, 5 August 2008 16:42 UK

Northern Rock cash boost attacked

Northern Rock sign
Northern Rock was nationalised in February

Opposition parties have criticised the government's decision to give Northern Rock up to 3bn more in cash, saying it exposes taxpayers to substantial risks.

Unlike earlier loans to Northern Rock, the 3bn will be turned into equity in the state-owned bank, making it harder to recoup in the future, critics said.

Both the Conservatives and Liberal Democrats said the government were putting taxpayers at unacceptable risk.

But Chancellor Alistair Darling said the firm needed more capital.

'Rights issue'

Robert Peston
If the government tried to sell the Rock into the private sector right now, the loss would be colossal
Robert Peston
BBC business editor

The money for the cash injection will come by pausing repayments of the giant taxpayer loan made to the bank, and about 3bn of that will be converted into equity.

The BBC's business editor Robert Peston said the move was equivalent to a "mega rights issue", in which the firm's single shareholder was effectively buying more shares in the business.

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But this additional money will only be repaid if the bank is eventually sold and denationalised at a profit, he added.

"It is similar to what other banks have been doing recently, where they have been having rights issues," he said. "But the 3bn is taxpayers' money - that is money that is very much at risk."

The government nationalised the lender in February after the first run on a UK bank in more than a century.

Since then, Northern Rock's financial position has deterioriated further as the percentage of its residential mortgage customers either in arrears and having their homes repossessed has risen sharply.

Opposition fury

Opposition parties claimed the latest government move marked a dangerous escalation in taxpayer exposure to the bank's future.

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The Conservative's Treasury spokesman Philip Hammond said the taxpayer "was being forced to hand over yet more money in order to keep this bank afloat".

And Liberal Democrat Treasury spokesman Vince Cable said: "Alistair Darling assured Parliament that taxpayer loans to Northern Rock would be fully secured on mortgage assets. This is clearly not true."

Chancellor Alistair Darling told Radio 4's Today programme that Northern Rock, like other banks, found itself in a "very difficult situation".

"Northern Rock needs more share capital," he said.

"It doesn't have shareholders now that... it's owned by the government, so it's got to come to us, so what we've said is that we will put in up to 3bn.

"We've got to get state aid approval for that so we can't give a precise figure, but up to 3bn may be necessary."

News of the fresh government support came as Northern Rock announced bigger-than-expected losses of 585.4m for the first six months of the year.

Much of the loss came from the charges it takes to cover losses from struggling mortgage borrowers.

But it also managed to repay 9.4bn of a loan from the Bank of England, reducing the amount owed to 17.5bn.

Loans reduced

Northern Rock was hit hard by the global credit crunch, when its main method of financing mortgage loans - by borrowing cash from the wholesale markets - dried up.

The bank, once Britain's fifth-biggest home loan provider, was taken into public ownership after it failed to find a suitable buyer from the private sector.

Northern Rock has reduced the number of its mortgage accounts by 15%, to 662,000 at the end of June compared to 777,000 at the end of 2007.

In cash terms, loans and advances to customers have also been cut back by 14.5bn in the first half of the year to 84.4bn.

'Redemption plan'

Northern Rock's executive chairman Ron Sandler said he was pleased with the progress that had been made in repaying its debt.

"Repaying the government loan is proceeding well ahead of target," he said. "This is the result of the success we are having with our redemption plan."

Things could be a lot worse... 7,000 people could be out of work
Peter Montellier, The Journal

The bank wants to shed 60% of its mortgage customers in the next couple of years.

The money that is redeemed will be used to repay all the government's emergency lending by the end of 2010.

Mr Sandler also said the housing market would "look very soft for some months in the future".

He added:"The external environment has deteriorated and the consequences of this for Northern Rock are increased credit losses."

Job cuts

Northern Rock said last week that it was to cut 1,300 jobs as it slims down its business.

In its results it said it was facing a cost of 37m associated with redundancy, payments in lieu of notice, and outplacement services as part of the restructuring of the business.

Mr Sandler would not reveal the size of redundancy packages but said the payments would be "fair".

Peter Montellier, deputy editor of the Newcastle-based newspaper The Journal - which ran a high-profile campaign to save the bank, said: "Things could be a lot worse... 7,000 people could be out of work."


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