EU to scrutinise UK aid to Northern Rock

The EU’s competition chief Neelie Kroes has launched an enquiry into the legality of the British government’s financial assistance to and nationalisation of Northern Rock, the mortgage lending bank which collapsed last year as a result of the global credit crisis.

The outcome of the investigation, which was launched on 2 April, will be eagerly awaited by bankers and governments across Europe as it is expected to set a precedent for the interpretation of EU rules on state aid for restructuring firms in difficulty. 

According to Kroes, the investigation is warranted given “the large scale of the aid measures, the background of current conditions in financial markets and the risks of distortion of competition”. 

Formerly the UK’s fifth largest mortgage lender, Northern Rock had to be bailed out by the British government when the US sub-prime credit crisis began last summer and clients started massively withdrawing their cash deposits (EURACTIV 22/08/07). 

While the Commission has already given its approval to short-term “rescue” measures taken by the British government, including loans and guarantees worth roughly €70 billion, it has yet to approve the UK’s restructuring plan, which would keep these state measures in place until at least 2011. 

For it to do this, the UK must prove that its plans will be capable of restoring the long-term viability of the firm without any further state support and that the aid provided will be limited to the minimum necessary and will not distort competition. 

Regarding this last point, the Commission says it will also ask third parties to comment. Indeed, while refusing to disclose any additional information, a Commission spokesman acknowledged that the institution had already received a number of complaints regarding the Northern Rock bailout. 

Last month, Danish banks were the first to lodge a formal complaint to the Commission, claiming that the newly nationalised bank benefited from an “unfair competitive advantage” that could lead to distortions in the market. 

The EU executive expects the case to take around 4-5 months. If the UK government’s aid is ruled illegal, Northern Rock could be forced to repay the rescue package plus interest rates. 

The Commission is also investigating aid worth roughly €26 billion by the German government to the IKB and Sachsen LB banks – also handed out in response to the credit crunch sparked by the US sub-prime mortgage crisis.

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