B&B deal to add £30bn to public sector debt

The nationalisation of Bradford & Bingley will add a further £30bn to public sector debt, leaving the Government's fiscal rules in shreds and exposing the taxpayer to potentially huge losses as house prices fall and mortgage arrears increase – at least £1,000 for every taxpayer, or 2 per cent of GDP.

When combined with the £87bn that Northern Rock added to the public debt when it was nationalised earlier this year, it leaves the UK with a public sector net debt level of about 45 per cent, against the 40 per cent dictated by the "sustainable investment rule", and on a sharply rising trend.

Some £130bn of mortgage debt, some "toxic", has thus been acquired by the taxpayer. In addition, the Bank of England has lent funds in the order of £200bn or more to the wider banking system.

The round £30bn figure for the B&B's contribution to public sector net debt represents analysts' estimates of its net debt. B&B had £51bn of financial liabilities, £22bn of which were retail deposits, which have been sold to Santander.

Concerns centre on the quality of the B&B loan book. Its weakness was demonstrated in its failure to find a buyer. It recently revealed an arrears rate three times the industry average, reflecting B&B's decision to specialise in riskier buy-to-let and "self-certified" mortgages – 47 per cent and 17 per cent respectively of the B&B total. Estimates of the "true" value of the book are usually at a substantial discount. Presently arrears stand at £1.3bn, with the recession still to come.

The Government will also, via the Bank of England and the Financial Services Compensation Scheme, fund the sale of B&B's branches and deposits to Banco Santander, which will administer them through its Abbey subsidiary. The £18bn the Government is pledging in the form of a loan should be covered, in due course, by repayments and redemptions on B&B's £42bn mortgage book, which is being retained by the state. However, the interest alone on that loan, to be borne by the taxpayer, will be about £1.8bn per annum, the same amount that ministers spend on management consultants. Some £450m in interest will be due in September 2009.

All that is arriving in the public sector coffers immediately is a payment of £612m by Santander for the B&B savings and activities it has acquired.

The largest exposure, of close to £1trn, is the Treasury's statement that "the government stands behind the Financial Services Compensation Scheme". There is £891.6bn in individuals' deposits in banks and building societies.

Paul Dales, UK economist at Capital Economics, warned: "The nationalisation is another blow to the Government's already dire fiscal position. It also highlights how vulnerable banks are to future mortgage losses, which are likely to result from a 35 per cent fall in house prices and a rise in unemployment."