Taxpayers to fund further Rock bail out
The taxpayers is to provide Northern Rock with £3bn in financial support after falling house prices and problem loans pushed the struggling state owned lender into a £585.4m loss for the six months to June.
Northern Rock executive chairman Ron Sandler yesterday announced that the bank would enter into a debt for equity swap with the government of up to £3bn, in a bid to reduce debt, although the bank will continue to consider other capital-raising options.
Any deal would see taxpayers become shareholders in a mortgage lender facing one of the worst house price downturns in living memory.
The move has been roundly criticised by opposition MPs. Shadow chief secretary to the Treasury, Philip Hammond, said: “The taxpayer is being forced to hand over yet more money in order to keep this bank afloat.”
Sandler said Northern Rock was ahead of schedule on the repayment of its £27bn Bank of England loan and had reduced net borrowing by £9.4bn to £17.5bn, putting it ahead of schedule to repay the loan by 2010.
Fears for the future of the bank have been fuelled by rising arrears on its mortgage book, with many customers likely to slide into negative equity as house prices plummet.
Repossessions have risen to 3,710 from 2,215 since the beginning of the year, while the number of loans in arrears for more than three months doubled to 1.18 per cent.
Sandler said the bank had suffered from deteriorating market conditions, an increase in credit provisions and costs associated with restructuring, including redundancy packages relating to 1300 job cuts.
And there was further bad news for Northern Rock staff as discussions on government plans to patch up the bank’s pension scheme stalled.
The bank’s board and pension scheme trustees have failed to agree over its deficit and trustees now say that the pension regulator should intervene to help fund the retirement schemes of 8,000 Northern Rock staff and pensioners.
Redemptions were ahead of plan despite a crunch across the mortgage market which has made it harder for customers to re-mortgage elsewhere. Retail deposits, critical to the bank’s aim of no longer relying on capital markets for funding, rose £3.7bn over the last six months. It re-entered wholesale markets in July but “in modest amounts”.
City Views: Do you agree with the government using £3bn of taxpayers’ money to bail out Norther Rock?
Andy Baker (Deutsche Bank): “I can see pros and cons to it. The pros are that lots of people would be positively affected if the government helps the bank, in terms of fewer job losses, mortgages being safe, and so on. But on the other hand, the government is taking money that it could have used for something else.”
Tim Franks (RK Harrison): “They have already pumped so much money into it that, since they have gone this far, they want to see the end. But I guess the question is: how far can they go? I have a mortgage with Northern Rock, so I am happy about it, but I understand why taxpayers are worried.”
Amanda Carter (Synergy Group): “I don’t agree at all. I think they need to find other ways to help the bank. They always go to the taxpayers when they need to find money. All costs are going up and this is not helping people. As a taxpayer, I would have expected the government to help me to cope with this.”