Northern Rock deal ‘drags us back to the 70s’

THE Tories last night accused the Government of dragging Britain back to the 1970s with its £25billion bail-out for failed bank Northern Rock.

SCATHING George Osborne SCATHING: George Osborne

Shadow chancellor George Osborne said that the loans and guarantees amounted to a £2,000 “second mortgage” for every family in the country to “rescue the reputation” of the Labour Government.

No British Government had ever provided taxpayer support on this scale to a private company. “It’s bigger than British Leyland, bigger than British Steel, “ he said. “This is back to the 1970s. Life in Brown’s Britain is like an episode of Life on Mars.”

With time running out to find a private buyer, Chancellor Alistair Darling announced plans to allow the bank’s debts to be converted into Government bonds in a last-ditch attempt to offload it.

The unprecedented step means the new owner would pick-up Northern Rock virtually debt-free. But the risk for the taxpayers continues, with the Government pledging to repay investors, whatever happens.

Northern Rock and its bidders, including Virgin boss Sir Richard Branson, welcomed the rescue package. Shares in the lender soared 40 per cent on the back of the announcement yesterday.

But critics accused ministers of incompetence and said the taxpayer was “being taken for a very, very big ride.” The Government was forced to step in last year when Northern Rock teetered on the verge of collapse.

It was the first major institution to go under in the wake of the global credit crunch.

Officials allowed the lender to borrow billions to keep it afloat until a new buyer could be found.

But with the debt spiralling to £25billion – and counting – bidders have struggled to raise enough money to secure a deal.

With no breakthrough in sight the Government was left with the astonishing prospect of having to nationalise Northern Rock.

Mr Darling’s proposals would avoid that – but at a cost.

Northern Rock’s debt to the Bank of England would be repackaged and sold on in the form of Government-backed bonds. Investors are guaranteed their money back after five years as well as earning interest.

The money paid back, plus interest, would come via income from mortgages held with Northern Rock.

The Treasury would own the assets but the new owner would collect funds on its behalf. In return, the Government would receive an equity stake of up to 10 per cent in Northern Rock.

Critics say the scale of the rescue plan is highly risky. If the housing market drops, Northern Rock mortgage-holders could default on loans, putting the taxpayer seriously out of pocket.

But Mr Darling told the Commons: “The proposal that I set out today is one which best meets our objectives of protecting taxpayers and depositors and maintaining financial stability.”

In a scathing attack, Shadow Chancellor George Osborne said the loan plus guarantees – totalling £55billion – amounted to a £2,000 second mortgage for every family in Britain. “This is a part nationalisation,” he said. “The Government takes the bulk of the risk and the private sector takes the bulk of the upside.”

Vince Cable, Treasury spokesman for the Liberal Democrats, said the plan was a “private sector solution without private sector money”.

The taxpayer was “being taken for a very, very big ride”, he warned.

Virgin boss Sir Richard Branson, one of three front-runners to take over, denied he would clean up on the deal. He said he was happy  for the Treasury to keep a stake that would give taxpayers a share of any profits.

He added: “I don’t see why anybody should walk away with a windfall out of a disastrous situation like this. We want to make a fair return for the risks we are going to be undertaking.”

The others bidders are the Olivant investment group and a stand-alone plan by the current board of Northern Rock.

Would you like to receive news notifications from Daily Express?