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25 February 2024

UK plans bond sales to save banks

By Agencies




The British government is to support a plan to turn the Bank of England's loans to troubled bank Northern Rock into bonds for sale, the BBC reported on Saturday.

British Prime Minister Gordon Brown backs the proposal, which makes the prospect of nationalisation less likely, the BBC said.

The plan, by US investment bank Goldman Sachs, revolves around converting the loans of at least $51 billion (Dh186 billion) into bonds for sale to international investors.

They would only be sold bit by bit to investors once conditions improve in financial markets, the BBC reported.

Goldman Sachs was asked by the government to look into whether potential bidders Virgin Money and Olivant, a private equity firm, have enough funds to bail out the stricken company.

"What Gordon Brown has in effect decided is that the government will go into a long-term business relationship with one of the groups vying for control of the troubled bank," BBC business editor Robert Peston said in his weblog.

"What it means is that taxpayers would be supporting the Rock to the tune of many billions of pounds for years.

"The biggest risks are that any deal would breach EU rules banning state aid -- and that opposition politicians will accuse the government of using taxpayers funds to subsidise future gains for the Rock's private-sector controllers."

An announcement will be made to the London Stock Exchange on Monday, with British finance minister Alistair Darling making a statement to parliament later in the day, the BBC reported.

Northern Rock was forced to apply to the Bank of England in September for emergency funds to stay afloat as it was hit by a squeeze on global credit caused by the crisis in the US subprime mortgage market.

That prompted worried customers to queue in their thousands to withdraw savings from branches across the country, in turn affecting consumer confidence in the banking sector.

The firm has since borrowed at least $51 billion of British taxpayers' money at a penal rate from the Bank of England (pictured above).

The government has said it wants a private sale but has not ruled out nationalising the bank, which is based in Newcastle, north-east England.

Brown has said the bail-out was to prevent knock-on runs on other banks during a period of global financial turbulence. (AFP)