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The UK Government will fall foul of European rules if it attempts to grow the newly nationalised Northern Rock, it has emerged. The
The warning undermines pledges by chief executive Ron Sandler and Chancellor Alistair Darling that Northern Rock will "compete vigorously" in the mortgage markets and will continue to lend money and receive deposits.
A European Commission official said that if the Government continues to provide support for the company beyond March 17 - as now looks almost certain - it will have to prove the money is being used as restructuring aid, not rescue aid.
"It must show that the company has been restructured to make its future viable," an official said. "There also has to be reduction in capacity."
The warning underlines the likelihood that Mr Sandler makes swingeing job cuts, and possibly closes branches, near to the March deadline.
With the company in public ownership, it is almost inconceivable that it would not need government support by then.
The Treasury informed European regulators before announcing the nationalisation on Sunday. An EC official said: "This is probably the biggest ever state aid case dealt with by the Commission. We are keeping a very close eye on the situation."
By Edmund Conway