Oct 2007 09

£150m Northern Rock Gift2

When the Northern Rock crisis broke, we blogged that taxpayers should on no account be made to bail out NR shareholders. And the Bank and Treasury denied they would do any such thing.

But today they’ve executed a complete U-turn, and handed Northern Rock shareholders an exquisitely wrapped giftbox.

The authorities have done this by extended their deposit guarantee to cover all new NR deposits, as well as those existing when the bank hit the wall.

So now you really can move all your money to NR, benefit from their market leading interest rates (eg 6.31% on an instant access Base Rate tracker account), and rest secure in he knowledge that you’re fully guaranteed by HMG. It’s the best of all possible worlds… as long as you’re not a UK taxpayer.

But the real winners are NR shareholders. Because now their bank can get its hands on all those fresh new retail deposits, it will no longer be so dependent on penal borrowing from the Bank of England. Profitability is automatically boosted- especially when NR trims its deposit rates, as it undoubtedly will.

No wonder NR shares have shot up today. On our reckoning, NR’s market capitalisation has already increased by about £150m.

This is a disgraceful climbdown by the Treasury, and a gross misuse of public funds. Northern Rock shareholders have been gifted £150m. All at the expense of taxpayers.

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  • Acorn

    Fully agree Mike but, think of all those poor Labour MPs that have thousands of little NR shareholder members who vote in their constituencies. It is just Labour buying votes again.

  • ChrisR

    Well of course it galls to see Government subsidising NR shareholders. But what is the alternative? The only way NR can reduce its borrowings from the BoE is to raise new retail deposits (assuming the money markets don’t re-open anytime soon) – but no-one is going to put their money in unless they also get the benefit of the guarantee. So by extending the guarantee and encouraging depositors to invest NR can then reduce its dependence on the BoE – thereby reducing the credit risk that the BoE (and hence us taxpayers) is taking on the assets used to secure the BoE loans. Personally I would prefer this option as the least bad way to extract the taxpayer from what could otherwise be a long and messy involvement.