Cicero Policy Briefer

Issue 22, March 2008

Where next for the beleaguered Northern Rock?

By John Rowland

Last month it looked like the sale of the Northern Rock might go through, finally offering the Government some prospect of chance of recovering something from what has looked increasingly like a policy disaster. The Chancellor’s surprise statement on Sunday 17 February put paid to that. He announced that legislation would be brought forward to permit a “temporary period of public ownership” initially limited to one year, which would be revisited on an annual basis. The Treasury is hoping that taking this step will allow time for the markets to return to some semblance of normality before divesting itself of the bank and placing it back in private ownership.

So was this another monumental U-turn? Well, sort of. Something that has exercised the lobby hacks since the announcement was whether, while speaking in the House of Commons in November, the Chancellor had agreed with Jim Cousins MP that nationalisation – the policy of the Liberal Democrats—would “lead to a slow lingering death for the jobs of the Northern Rock workers, its assets and Britain's reputation as a major financial services centre with...the Chancellor cast in the role of undertaker”. Initially it appeared as if the Chancellor had agreed, but it later turned out that the usually reliable record of Parliament, Hansard, had misquoted Darling. In fact the Chancellor had been somewhat equivocal, saying that he did not want to close off any options (presumably including nationalisation), though he did agree with Cousins’ attack on Liberal Democrats.

So while the Chancellor did not rule it out, nationalisation was definitely the last thing on his mind. This episode, I think, is all the more interesting because of what it reveals about the role of the Liberal Democrats in the whole affair. If nationalisation casts Alistair Darling as the undertaker then Vince Cable, the ballroom dancing Lib Dem Treasury spokesperson, would be the grim reaper. The cold finger of Vince has been pointed at the Chancellor for some time, and on Northern Rock he has offered a clearer, more devastating critique than the Conservative front bench. His effectiveness can partly be put down to the consistency of message: while the Government has appeared to dither, Cable has called for nationalisation throughout.

However, part of his effectiveness can also be put down to the room for manoeuvre that third party has to launch and sustain campaigns on single issues. This freedom has allowed Cable to raise some difficult questions about the Virgin bid in particular. Cable, scythe in hand, said in December that “it is becoming increasingly apparent that neither of [the bids] will be remotely able to raise the amount of money required to take over the bank as a going concern and give the Treasury the guarantees that it requires”. He continued, “[there] is good reason to believe that the people who have to stump up the money for his [Branson’s] consortium may well not regard him as a fit and proper person to run a public company, let alone a bank, and let alone as someone responsible for £30 billion worth of taxpayers' money.” This last comment caused something of a row, and it is difficult to envisage George Osborne saying something similar.

Unfazed, Cable has taken to bashing Conservative proposals on the Rock too: “The Conservatives’ belief that temporary nationalisation will be catastrophic is nothing more than a vacuous attempt at political points scoring. Tory proposals that Northern Rock should be taken into public administration by the Bank of England is simply a nationalisation that dare not speak its name.”

However, as prescient as Cable has been, he implicitly accepts the Government line that the nationalisation is temporary. It is difficult to see how nationalisation will be temporary in any ordinary sense of the word. Given that it is pretty much impossible to say when the markets will return to normality – whatever that is – the Government cannot really say with any confidence how long it will have to be in the business of retail banking. Moreover, those who hear a politician use the word ‘temporary’ should be cautious, for in the words of a French proverb, il n'y a que le provisoire qui dure: only that which is temporary lasts. We can look back on various moments in politics when temporary measures have taken on a quiet permanence which had been, at the time, wholly unexpected. Income tax, introduced as a temporary measure to fight Napoleon. remains a ‘temporary’ tax to this day – it expires on 5 April each year and is reapplied by the passing of the Finance Act. A bit like the measures being proposed on Northern Rock.

To be sure, it is highly unlikely that the Government will want to hold on to Northern Rock for ever, but the chances of selling the firm off as a going concern in anything like its current form has taken a big dent. If it continues to be problematic under state ownership, there could well be a time when this government—or the next—simply throws in the towel, and decides to put Northern Rock into run-off. This has already been advocated by some of the more hawkish commentators - and if the future of the Northern Rock is reduced to a simple calculus of what will be best for the taxpayer, their logic is difficult to argue with. It would also be an easier sell to many of the Rock’s competitors and the EU authorities who might be asking why a failed business should be singled out for enormous state aid. The Chancellor will have to be careful that this temporary solution does not become a permanent problem. With his foes, not least Mr Cable, looking on, his job and the future of this government depends on it.

John Rowland can be contacted on +44 (0)20 7665 9539 or click here to email.