Return of The Rock a banking horror movie sequel

LONDON BRIEFING:The decision to bring Northern Rock back into the mortgage market is unlikely to work out, writes FIONA WALSH.

AS U-TURNS go, the British government’s decision to catapult Northern Rock back into the moribund mortgage market is a pretty spectacular one. Exactly a year after the state was forced to nationalise the bank that became a byword for reckless lending, Northern Rock has now effectively been handed £14 billion (€15.8 billion) of taxpayers’ cash and instructed to start lending again.

The extra funds should provide the kickstart the housing market needs – or so the theory goes. But is there any reason to think it will be more successful than the government’s previous measures?

The return of The Rock was billed more like a horror movie sequel – “Return of the 90 per cent mortgage” screamed the frontpage headlines on Monday – and there was certainly a sense of deja vu about the whole thing. After all, wasn’t it Northern Rock’s reckless 100 per cent and 125 per cent mortgages that caused all the trouble in the first place?

As instructed by the government, the Newcastle-based bank has spent the past year cutting back its mortgage business, turning away new customers and offloading existing ones to other lenders. But the impact of removing such a large and active lender from the market has had dramatic consequences for mortgage borrowers, particularly first-time buyers.

UK chancellor Alistair Darling was swift with reassurances that the bank has learned its lesson. The lending will be more responsible this time round; there will be no 100 per cent mortgages and probably very few 90 per cent deals, he said.

Northern Rock will have £9 billion of taxpayers’ funds to lend this year and £5 billion next year, but many experts believe even this latest attempt to revitalise the housing market is doomed to failure. While funds have been scarce, there is a growing reluctance among first-time buyers to take the leap into the market as house prices continue to fall and employment prospects worsen.

The return of The Rock comes as another state-owned banking basket-case, Royal Bank of Scotland (RBS), prepares to update the market tomorrow on plans to shrink its balance sheet and shed thousands of jobs.

RBS has already indicated losses of £28 billion and new chief executive Stephen Hester is expected to unveil swingeing cost-cutting measures, including a plan to sell off up to a quarter of its business in an attempt to avoid full-scale nationalisation. As many as 20,000 jobs could go.

The market will be looking for a “back to basics” strategy from Hester as he effectively unravels the empire discredited former chief executive Sir Fred Goodwin created.

The bank will be the first to sign up for the government’s new toxic asset protection scheme, which will at least cap future losses on the worst of its loans.

There will be further grim news for the banking sector on Friday, when Lloyds Banking Group will give more detail of the horrendous losses run up by the bombed-out HBOS business. The job cuts at Lloyds are expected to be even heavier than at RBS.

MEANWHILE, THE fallout from the credit crunch could be about to explode into social unrest, with senior figures in the British police force warning of a “summer of rage” ahead.

As unemployment mounts and more and more homes are repossessed, public order could come under threat as normally law-abiding citizens take to the streets to express their anger.

There have already been protests throughout Europe, some of them violent, such as the clashes between police and demonstrators earlier this year in Iceland’s capital, Reykjavik. In the UK, there have been a series of wildcat strikes in oil refineries over jobs for foreign workers.

The last time Britain saw a wave of middle-class protest was during the anti-government poll tax riots of the 1980s.

The fear this time round is that known activists will attempt to hijack any protests, which are likely to be directed against banks and other financial institutions.

April’s G20 meeting in London has already been identified by the authorities as a potential flashpoint – another headache for Gordon Brown.

After last week’s unseemly four-letter spat in New York between business secretary Lord Mandelson and Starbucks boss Howard Schultz, who had the temerity to say Britain was “in a spiral”, the prime minister will be desperate to avoid pictures of rioting Britons being beamed across the world from London.

Fiona Walsh writes for the Guardiannewspaper in London