Rock Nationalisation Is Not The End Of Problems

The nationalisation of Northern Rock is not the end of the affair. The Government may like to think that handling the crisis as they did will help to prevent other similar problems happening in the future. They wanted to stop the effects of the crisis spreading to other parts of the financial system and have made loans and guarantees to the tune of £55bn to keep Rock alive.

However, there may well be other problems just waiting to come to the surface. The Government may also believe this, as its emergency legislation for Northern Rock extends for a period of 12 months – way beyond the time needed to deal with Rock alone.

A number of other businesses have confessed to problems of their own. Buy-to-let lender Paragon is looking for £287m of new capital from existing shareholders.

London Scottish Bank is selling off small parts of its business to stay afloat. Bradford & Bingley saw its shares fall to a record low of 1818p as it announced a large sub-prime write-off last week. It now claims to have enough financing to see it through the year.

The Prime Minister might like to think that problems in the UK began in the US with its own sub-prime crisis, but the problem is undoubtedly lapping at our shores. Housebuilders have seen a drop of 50% in sales of new homes, and the whole property sector sits under a huge black cloud. It is said that the commercial market may take another 15 months to recover.

Banks may react by calling in loans to bolster their balance sheets. Many are evidently doing as much as they can already by sending mortgage rates up – against the trend of the base rate, and who can blame them as Bank of England Governor Mervyn King advised them to boost their cash reserves.

It is inevitably the public who will pay for banks’ financial folly in the past few years, as lending conditions continue to tighten and the cost of loans continue to rise. The problems certainly aren’t over yet.