18/12/2007

Northern Rock Gets Taxpayer Billions

The Government is bailing out troubled bank, Northern Rock, again.

At the request of the lender, it has offered to cover any loss by financial institutions that provide money to Northern Rock so the bank can operate normal banking services.

The Treasury has already guaranteed savers' deposits held at Northern Rock after September saw the UK's first run on a bank in living memory.

The move risks being seen as taking the bank a step closer to nationalisation.

It will also lead to greater financial exposure for taxpayers, who have already lent Northern Rock an estimated £26bn.

This means that other financial institutions that have lent money to Northern Rock will now have their loans guaranteed.

The government would prefer a commercial solution for Northern Rock, but an 'auction process' has been thrown into doubt recently, though two high-profile suitors remain, including preferred bidder Virgin Group.

The Treasury's announcement means that most of Northern Rock's balance sheet is now covered by government guarantees.

This technically takes the gross exposure of the taxpayer to more than £100bn.

The Treasury said it would extend its existing agreement to cover the bank's wholesale obligations and borrowings to other financial institutions.

It said the agreement related to agreements "existing or arising in the future".

Northern Rock ran in difficulties during the recent credit crunch.

Unlike most banks, which rely on savers' deposits to fund mortgages and other loans, Northern Rock borrowed heavily in credit markets.

But banks become nervous about lending cash to each other amid fears over exposure to the US housing market slump.

This forced Northern Rock to seek emergency funding from the Bank of England in September, news which sent some customers rushing to withdraw their savings.

(BMcC)

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