Friday, 02 Nov 2007

Northern Rock and the Bank of England expect that by the end of the year the Rock will have borrowed £30bn from the central bank, the BBC has learned.

It follows Thursday's news that Northern Rock has already borrowed almost £23bn in emergency funding.

That is roughly £730 for every UK taxpayer and marks a rise of £2.2bn from the week ended 31 October.

Northern Rock has been in trouble since the global credit crunch hurt its business and led to a run on the bank.

To win back investor confidence, the government has guaranteed all Northern Rock deposits and loans.

Bigger problem

The BBC's business editor Robert Peston says this means that the UK taxpayer's exposure to Northern Rock could be much more than currently thought.

"The extent of public sector support goes beyond these direct loans," he said.

"The Treasury has also indemnified a further £20bn odd of retail deposits," he explained.

"So we are talking about total public-sector exposure to the Rock of £40bn - equivalent to around 3% of our entire economy.

"And that exposure could become much bigger, as other loans to the Rock fall due for repayment."

Later on Thursday, Mr Peston learned that Northern Rock and the Bank of England were projecting that the firm would have borrowed "a staggering £30bn from the Bank of England" by year end, he said.

Problem model

The problem facing Northern Rock is that three-quarters of its funding came from wholesale money markets, and when the global credit crunch took hold, its main source of financing dried up.

Simply put, banks were so worried about the problems in the global debt market that they stopped lending to each other, making it almost impossible for Northern Rock to keep operating.

As a result, the lender turned to the Bank of England for emergency funding, prompting the run and its current set of problems.

News of the borrowing from the Bank comes as financial firms Virgin Group and JC Flowers have been looking to acquire Northern Rock.

However, none of the possible bidders is likely to buy the firm without a guarantee that the government-backed loans will stay in place.

Simon Ward, economist at New Star Asset Management, said: "I don't think the loans will stop growing until a decision has been made about the bank's future."

Resignation

In the weeks since the bank was first given emergency funding, the firm's chairman Matt Ridley has resigned.

Both he and chief executive Adam Applegarth were criticised by MPs in October about the bank's business model.

But they defended its strategy of borrowing large amounts of money in financial markets that they then lent to house buyers as mortgages.

Northern Rock has declined to comment on the latest Bank of England numbers but has said that former estimates of its loans, using the bank's data, were correct.

News Source:
http://news.bbc.co.uk