16 March 2008

Independent: Northern Rock revamp to be revealed, but EU casts a shadow

Ron Sandler, the man charged by Gordon Brown with overseeing the running of Northern Rock as a nationalised company, is expected to deliver his much-anticipated restructuring report to the Treasury tomorrow.

Mr Sandler is tipped to propose a dramatic culling of vast tracts of the Northern Rock business. It is likely that the bank's lending book will be cut back, while suggestions on how to shore up the firm's lending base will also be made.

It is thought that thousands of jobs in the Rock's North-east heartland are also likely to be slashed on the back of Mr Sandler's suggestions.

Speculation that there are plans to sell off parts of the business was heightened in last Wednesday's Budget, when the Government forecast that £14bn of the estimated £25bn lent to the bank will be paid back in the first year.

Mr Sandler's recommendations will be tabled just hours ahead of tomorrow's six-month deadline imposed by the European Commission, after which the bailout of Northern Rock may be considered in breach of EU state funding rules and to have distorted the British savings market.

Under EU rules, member states are only allowed to give firms financial support for six months on a commercial basis. That period ends tomorrow, handing scrutiny of the UK Government's actions to Neelie Kroes, a no-nonsense Dutch conservative who is the EU's Competition Commissioner.

Given past rulings, it is thought unlikely that Ms Kroes will look favourably on the British Government's handling of the bank's collapse.

Competition lawyers have warned that Mr Sandler faces a difficult balancing act marrying the concerns of the EU with the best deal for taxpayers' money. Anthony Woolich, competition partner at law firm LG, said the taxpayer was likely to get a raw deal from the restructuring.

"If the Government wants to remove Northern Rock from concerns about state aid, it needs to make it uncompetitive, because unfair advantage is an inherent part of state aid," said Mr Woolich. "So in effect Sandler would need to weaken Northern Rock – which is offering some of the best deals to savers. It seems to me that Northern Rock will have to agree with the commission to cut back its business."

Ministers also face the hazardous problem surrounding the Northern Rock pension fund, which is in deficit. Trustees are pushing for the Government to make good on the shortfall, which could contravene European rules.

"If the Government doesn't agree a funding plan with the trustees, we could have the spectacle of the trustees asking the Pensions Regulator to determine how much the Government should pay to the scheme," said Mr Woolich.

Mr Sandler's submission is likely to signal the start of an onslaught from the Conservative Party, which sent a letter to Ms Kroes last week highlighting a range of issues in its criticism of the nationalisation of Northern Rock.

High on the Tory hitlist is thought to be lending by Northern Rock's subsidiaries in Denmark and Ireland, and whether or not customers in those countries are benefiting from British guarantees and unusually high interest rates for savers.

By Simon Evans

© The Independent