Chancellor Darling considers Northern Rock’s future

by Richard Kilner

Story link: Chancellor Darling considers Northern Rock’s future

Plans permitting the £25bn emergency loan to stricken bank Northern Rock to be extended to a buyer are said to be in the process of being drawn up by Chancellor Alistair Darling.

There is concern that European Union regulations regarding state aid could be breached by the loan’s extension, and officials from both the Treasury and the EU are said to be discussing ways forward that would not result in such a breach occurring.

It may be announced, this week or later, that any buyer for the bank would be allowed to retain the £25bn loan.

Darling will issue a statement of principles at an unspecified time in the next few days, in which the government’s thoughts on Northern Rock’s prospects will be explained. It is believed that any announcement regarding the status of the emergency loan and its potential extension would be made within the statement.

The Chancellor will appear in the House of Commons today to face MPs’ questions over the crisis. The Liberal Democrats have called on him to nationalise the bank to safeguard taxpayers’ money.

Towards the end of Friday the deadline for bids passed, and the resignations of several of Northern Rock’s non-executive directors and its chief executive, Adam Applegarth, were announced.

Speculation indicated that perhaps as many as eight potential buyers were considering placing bids for the bank, though only half that number publicly raised proposals.

The four interested bidders are Olivant, led by City big hitter Luqman Arnold; JC Flowers, an American private equity firm; Cerberus, a second US-based private equity firm; and Sir Richard Branson’s Virgin Money.

Yesterday Luqman Arnold’s plan to send in an expert team to turn the tide at the bank received the backing of shareholders.

The single greatest obstacle for any buyer will be dealing with the issue of the massive Bank of England debt. The £25bn loan is classed as rescue aid under EU rules, though European regulations prevent the state from providing such assistance for more than six months.

Effectively, this gives the bank a February deadline.

It is rumoured that Treasury officials may attempt to reclassify the loan as restructuring aid, helping to provide an easier track to a takeover and simultaneously avoiding falling foul of EU rules.

The Chancellor has indicated he wants the matter resolved within weeks.

Northern Rock’s woes have their root in the credit crunch. In September they were forced to apply to the Bank of England for an emergency loan when its borrowing costs escalated beyond its means, producing the first run on a British bank for more than a century.