Rock debt forces breach of Treasury rules

The Government may yet avoid nationalising Northern Rock but the stricken bank officially became a public sector company yesterday, breaking one of the Treasury's key rules on borrowing in the process.

The Office for National Statistics announced the level of support and control the Government has over the bank means it must be treated in the same way as a nationalised company. As a result, its balance sheet must be considered part of the public finances.

The ONS said the Bank of England could control Northern Rock's corporate policy because of covenants on the loans it has made to the ailing lender. The central bank's powers include deciding on corporate restructuring, dividend payments and acquisitions or disposals, the ONS said.

The statistics office also decided to include Northern Rock's special-purpose securitisation vehicles as public sector entities. For consistency, the Bank of England will also be included within the public sector finances.

"The decision is based on a judgement that the public sector has the power to control Northern Rock Plc's general corporate policy," the ONS said. "The decision is in line with international guidance. It should not be confused with nationalisation."

The decision will increase public sector debt by about £100bn and break the Treasury's self-imposed rule that government debt should not exceed 40 per cent of gross domestic product, according to the Institute of Fiscal Studies, with the figure likely to rise to around 45 per cent.

It will give ammunition to the Government's critics over Northern Rock. Vince Cable, the Liberal Democrats' Treasury spokesman, said: "One of the arguments against public ownership is that it would have led to this embarrassing addition to public sector obligations. If it's going to be included anyway, they can look at the issues on their merits."

The Treasury is understood to be relaxed about what it sees as a temporary, technical, reclassification. The fiscal rules were put in place to stop heavy borrowing that would be landed on future generations, and it believes that principle is unaffected by stepping in to prop up Northern Rock.

A Treasury spokesman said: "As the Chancellor has said, any impact will be temporary and exceptional and the code for fiscal stability has provisions for such situations."

The Bank of England has lent Northern Rock about £24bn, guaranteed all retail deposits and given guarantees over about £30bn of wholesale deposits and derivatives transactions. The Government is negotiating with Virgin and a team at Northern Rock to try to put a rescue in place and avoid nationalising the bank.