Northern Rock Cash Boost Attacked

Thur, 7 August 2008

Opposition parties have criticised the government's decision to give Northern Rock up to £3bn more in cash, saying it exposes taxpayers to substantial risks.

Unlike earlier loans to Northern Rock, the £3bn will be turned into equity in the state-owned bank, making it harder to recoup in the future, critics said.

Both the Conservatives and Liberal Democrats said the governments were putting taxpayers at unacceptable risk.

But Chancellor Alistair Darling said the firm needed more capital.

'Rights issue'

The money for the cash injection will come by pausing repayments of the giant taxpayer loan made to the bank, and about £3bn of that will be converted into equity.

The BBC's business editor Robert Peston said the move was equivalent to a "mega rights issue", in which the firm's single shareholder was effectively buying more shares in the business.

But this additional money will only be repaid if the bank is eventually sold and denationalised at a profit, he added.

"It is similar to what other banks have been doing recently, where they have been having rights issues," he said. "But the £3bn is taxpayers' money - that is money that is very much at risk."

The government nationalised the lender in February after the first run on a UK bank in more than a century.

Since then, Northern Rock's financial position has deteriorated further as the percentage of its residential mortgage customers either in arrears and having their homes repossessed has risen sharply.

Source:: bbc.co.uk