Government extends Northern Rock guarantees to help sale

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The Independent Online

The Government yesterday extended its guarantee over Northern Rock's deposits to include more of its wholesale liabilities in an attempt to ensure the stricken bank is sold to a private bidder.

The extra guarantee was said to cover up to 1bn of unsecured and unsubordinated liabilities. It was made at Northern Rock's request as it tries to get funding for potential bids from Virgin Money and Olivant.

Items guaranteed include payments under swap agreements and payment under collateralised and covered bonds that exceeds the underlying collateral. Shortfalls as mortgages flow in and out of the bank's Granite securitisation vehicle are also covered.

The Government said its guarantees would remain in place "during the current instability in financial markets" and that it would give at least three months' notice before dropping them.

The guarantee was aimed at providing stability and protecting the bank's credit ratings on concern that a ratings downgrade would further unsettle financing arrangements.

But Moody's cut Northern Rock's bank financial strength rating to E+ with a negative outlook. The agency cited the bank's potential write-downs on holdings of structured credit products. Standard & Poor's said the Government's move would not affect its view of Northern Rock.

"We do not expect the extension of the guarantee to affect Northern Rock's funding profile in the immediate future, S&P said. "Assuming the extended guarantee remains in place following an acquisition, it may assist potential acquirers in refinancing part of Northern Rock's current borrowing from the Bank of England, however."

Fears have increased in recent weeks that the Government could be forced to nationalise Northern Rock as tightening money markets make it harder for its appointed funding banks to make money available to potential bidders.

Sir John Gieve, deputy governor for financial stability, told the committee that "plan B" if a sale did not happen would be to sell the bank off in bits to other banks, who would be keen to buy them.

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