The British government to guarantee Northern Rock deposits

The British government says it will guarantee all existing deposits at Northern Rock, the bank that fell victim to the global liquidity crisis.

UK finance minister Alistair Darling made the binding guarantee in the late afternoon, after hundreds of Northern Rock customers ignored earlier pleas for calm and joined long lines outside the branches in Britain and Ireland, seeking to withdraw their funds.

"I do recognise that people are concerned, that's why we have put the matter beyond all doubt," Darling told a Downing Street news conference after a meeting with US Treasury Secretary Henry Paulson. Deposits "are safe and are guaranteed, that's unequivocal," he added as he sought to end the panic. "People can continue to take their money out of the Northern Rock bank, but if they choose to leave their money in the bank it will be guaranteed safe and secure."

The surprise and rapidity of Northern Rock's troubles have raised questions about how the potential impact of the collapse of the US subprime mortgage market on Britain was so underrated.

A total of 2 billion pounds ($A4.76 billion) has been withdrawn by spooked customers since early Friday, when Northern Rock revealed that it had asked the central bank for emergency funds and warned its profits would be significantly lower than anticipated.

Its shares tumbled more than 35 percent to 282.75 pence after initially being suspended on Monday, extending losses of a similar magnitude on Friday. Analysts said the images of customers queuing to withdraw their savings, broadcast nationally and pictured on the front page of newspapers, could be the start of a self-fulfilling prophesy.

"There is a very real risk that Northern Rock's problems, if not sorted out quickly, will have a significant dampening impact on both consumer and business confidence," said Howard Archer, chief UK economist with Global Insight.

A crisis of confidence could spell the end of Britain's decade of economic growth under former Treasury chief and current Prime Minister Gordon Brown, as consumers reign in their spending and the previously booming housing market slows.

Peter Spencer, chief economic adviser to Ernst & Young's ITEM Club, said that a worst-case scenario of the credit crisis could reduce Britain's GDP growth by around 1 per cent in 2008 and 2009.

Northern Rock was the first British bank in 15 years to be bailed out by the Bank of England, although it has yet to draw any of the funding it requested from the central bank at an emergency rate last week.

The mortgage lender was particularly susceptible to the global credit squeeze sparked by US banks granting house loans to Americans with poor credit histories - the debts were then wrapped up in packages sold on to banks in Europe and elsewhere - because it relies on the wholesale markets for 75 per cent of its funding.

Source: Fairax Digital
Date: 19.09.2007 [95]