Treasury guarantees Northern Rock’s money market obligations

by Gill Montia

Story link: Treasury guarantees Northern Rock’s money market obligations

The news that the Government has agreed to guarantee Northern Rock’s unsecured obligations in the wholesale money markets is being interpreted by some analysts as evidence that nationalisation of the bank is a strong possibility.

The latest guarantee is in addition to the security provided by the Government for £15 billion of retail deposits, and when added to this and the £26 billion borrowed by Northern Rock from the Bank of England, it gives the UK taxpayer an exposure of around £57 billion to the mortgage bank.

While the bidding process continues, Northern Rock management is reported to be dissatisfied with the amount of equity that Luqman Arnold’s investment company, Olivant, is proposing to provide.

At the same time, neither the Virgin bid nor the offer from the Olivant consortium provide guarantees for the immediate repayment of around £10 billion, that the Bank of England is seeking.

Despite today’s intervention, the Treasury has restated its commitment to the sale of Northern Rock, which still has a £100 billion mortgage book that remains unguaranteed, and therefore available for use as collateral by a new owner.