Northern Rock's rescue deal: does it add up?
Were Northern Rock a normal company, “it would now be dead three times over” after as many bailouts or guarantees, said Hugo Dixon on Breakingviews.
But Gordon Brown won’t acknowledge the bank should have been declared bust or nationalised long ago. Hence this week’s Goldman Sachs-devised plan, whereby Northern Rock will repay the £28bn Government loan by issuing mortgage-backed, state-guaranteed bonds. Private investors will inject some new equity and new management into Northern Rock.
Rock shares rallied on hopes that, with the risks for potential bidders reduced as they would not have to find the money to repay the Bank, a sale of the bank to Sir Richard Branson’s Virgin Group or another private-sector buyer is more likely.
Does it add up?
No, said Anatole Kaletsky in The Times. As the bonds used to repay the Treasury’s loans will be guaranteed by the Treasury, they will be “indistinguishable from any other government borrowing”. It’s a case of using Mastercard to pay off the Visa debt. Meanwhile, noted the Wall Street Journal, “the state retains much of the risk” should the bank never recover while “claiming a disproportionately tiny slice of the reward if it does”.
It’s the “nationalisation of risks and losses, combined with privatisation of gains”, as Liberal Democrat Vince Cable put it. The plan may avoid a painful administration process, added The Times, but taxpayer money should not be used “to enrich the likes of Sir Richard Branson”.
The state will receive a fee for guaranteeing Northern Rock’s debt and a percentage of future profits, which will mitigate the damage to taxpayers, but it’s not clear what these will be, noted Dixon. What is clear, said the FT, is that this “half-baked” rescue package amounts to a subsidy. So state aid regulators in Brussels now look likely to pose some awkward questions.
NRK: 12m change -92%
