John Kingman, the second most important Treasury official, has told friends that sorting out the Northern Rock mess is the hardest thing he has ever had to do. It is easy to see why.
The Treasury’s task, after getting more than £20bn involved in the mortgage business, is to find an exit route that satisfies six tough conditions. The first three come from the government itself: to get the taxpayer out without losing money; to safeguard financial stability; and to protect depositors.
The three additional goals are to secure agreement from Northern Rock’s shareholders who can reject any bid; to protect jobs in the politically sensitive north-east of England: and to meet EU rules designed to prevent governments distorting competition across Europe.
The Virgin bid appears to have a chance to meet all six criteria.
Taxpayers will immediately get £11bn repaid, or roughly half their money back. There will also be what Northern Rock calls a “clear path towards repayment in full”. The remaining loans will be charged at commercial interest rates.
Financial stability is secured – though not guaranteed, officials say – by the capital injection that will leave the bank well capitalised and Sir Richard Branson at the front of the queue to lose money if the bank suffered from rising defaults on its loan book.
Depositors still benefit from the 100 per cent government guarantee on their funds and the Treasury has said it will keep this in place until the business is financially secure.
Northern Rock shareholders may be a tougher group to satisfy, since their shareholdings would be highly diluted under the proposals.
Their reaction is yet to be tested and the bid could easily come a cropper if they feel they are getting a raw deal. But the Treasury can still threaten administration under which they would probably secure even less.
But that threat will not necessarily appear credible. Alistair Darling, the chancellor, was due to tell the CBI employers’ organisation on Tuesday: “There were always going to be critics when the going got tough, but that is not the point. Far worse would have been to do nothing, to have allowed that bank to have gone under.”
Virgin’s bid secures jobs in the north-east and has gained support from local members of parliament. Labour’s north-east caucus of MPs is highly influential and Jim Cousins, a Labour MP in the bank’s Newcastle heartland, said Virgin had been clear about maintaining Northern Rock as a company whose headquarters were on Tyneside. He added: “This is the best option from the government point of view and best from the point of view of getting the taxpayers’ money out again.”
Finally, it appeared last night that the European Commission was taking a sympathetic position on the issue of state aid, especially as the government would be lending on terms identical to those of the private sector.
Neelie Kroes, EU competition commissioner, discussed the Virgin bid with Mr Darling at the Treasury on Monday, as part of regular British contact with Brussels since the bank’s near-collapse in September.
Ms Kroes’ spokesman said Brussels’ state aid rules would normally not apply if Bank of England loans to Northern Rock were charged at a commercial rate – as envisaged under the deal. ”We would have to be satisfied the loans were on commercial terms,” he said.
Others, however, were less sure that the Treasury had got round all the obstacles.
Chris Huhne, a contender for the Liberal Democrat leadership, said the Virgin bid was almost bound to be bad news for taxpayers.
“By getting preferred bidder status, they exclude rival bids. They will then look at the books in detail and tell the Treasury that things are far worse than they expected, and they need a much better deal from the taxpayer. I could write the script”.
Vincent Cable, Liberal Democrat treasury spokesman, said the ”temporary” nationalisation of Northern Rock could still be better than the Virgin bid. Mr Cable said he believed the Treasury and its adviser,Goldman Sachs, were continuing to look at that option.
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