Going nowhere fast

Not only has the government presided over the biggest financial bailout in Britain's history, it has

When America's sub-prime mortgage crisis hit these shores on 9 August - the day global credit markets froze over - no one could have quite imagined that nearly four months later the nation would still be grappling with its impact on our national life. New Labour, which built its reputation on economic competence, has seen it shattered by the fumbled handling of Northern Rock. And now it is reeling from a second successive crisis, the loss by HM Revenue and Customs of the personal details of 25 million people in the UK.

Not only has the government presided over the biggest financial bailout in Britain's history, it has sought throughout the affair to minimise its importance. It was only this month, when the Bank of England rapidly changed its growth forecast, projected up to three cuts in interest rates in the coming months and forecast potential recession and cascading share prices, that the gravity of recent events hit home.

The key question, which Alistair Darling has failed to answer, is: What is he going to do about the Rock? The sums involved are staggering. So far the Bank of England, as the lender of last resort, has advanced a staggering £24bn and rising. That is only part of it. In the turbulent hours following the run on the Rock's branches, the Chancellor finally listened to Mervyn King, governor of the Bank of England, and agreed to guarantee all the savings.

This guarantee was eventually narrowed so as to discourage speculative fortune hunters. But the bottom line is that the pledge is, in effect, a further government liability of between £10bn and £15bn, bringing the total notional cost of the rescue up to £40bn so far. That is a sum greater than the annual defence budget.

This is an unstable situation that the government cannot allow to persist, especially as the cost will have risen even further by February, which is Darling's deadline for sorting matters out.

The first sign of government impatience came this past week. At an unannounced session of the tripartite group, consisting of King, Darling and Sir Callum McCarthy, chairman of the Financial Services Authority, the board of the Rock was defenestrated. Out the window went the chief executive, Adam Applegarth, the person responsible for minting the Newcastle lender's disaster, and four non-executive directors. This group contained three people who should have known better: the former NatWest boss Sir Derek Wanless (the PM's health spending guru), Nichola Pease, scion of the Barclays family, and Rosemary Radcliffe, the former ombudsman for the FSA. Their reputations have been damaged irrevocably.

The choice now is between takeover or insolvency. There is no shortage of interest. When the first "soft" deadline for buyers was reached, several expressions of interest were received, including serious bids from the private equity banking specialists J C Flowers, Richard Branson's Virgin Money and a fund headed by Luqman Arnold, the man credited with turning around the fortunes of Abbey National.

None of these buyers would be capable of taking over Northern Rock without some guarantees that government funding would continue. J C Flowers is seen as one of the more credible bidders because of the banking expertise in its team. It includes the grand old man of finance, the former Lloyds TSB chief executive Sir Brian Pitman, who turned Lloyds around after disastrous lending to Latin America in the early 1980s. It is thought to have lined up commercial loans of at least £15bn, which would be a start. Like the others, J C Flowers would need assurance that government funding would continue until such time as the Rock's balance sheet can be normalised.

With almost all of these rescues, with the possible exceptions of the Branson and Arnold offers, the investments of private shareholders - of which there are up to 150,000 - would be wiped out. This is a great political danger for a government that wants to avoid a repeat of the Railtrack experience, when it was accused of abusing property rights.

Because of the perils of private rescue, including the possibility that the new owners might eventually walk off with a huge profit at the taxpayers' expense, the authorities are also looking at the possibility of placing the Rock in administration. This would create a legal quagmire as creditors fight over their share of the pie. But such a course would at least avoid "moral hazard" - the belief that banks are too important to go bankrupt.

Yet there would still be a serious concern. The sight of a bank being put into administration would deliver an enormous new shock to an already damaged financial system, reducing confidence even further. It might even tip other vulnerable mortgage lenders over the edge, leading to long-term damage to Britain's world-beating financial services industry.

Alex Brummer is City editor of the Daily Mail

This article first appeared in the 26 November 2007 issue of the New Statesman, China

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Is anyone prepared to solve the NHS funding crisis?

As long as the political taboo on raising taxes endures, the service will be in financial peril. 

It has long been clear that the NHS is in financial ill-health. But today's figures, conveniently delayed until after the Conservative conference, are still stunningly bad. The service ran a deficit of £930m between April and June (greater than the £820m recorded for the whole of the 2014/15 financial year) and is on course for a shortfall of at least £2bn this year - its worst position for a generation. 

Though often described as having been shielded from austerity, owing to its ring-fenced budget, the NHS is enduring the toughest spending settlement in its history. Since 1950, health spending has grown at an average annual rate of 4 per cent, but over the last parliament it rose by just 0.5 per cent. An ageing population, rising treatment costs and the social care crisis all mean that the NHS has to run merely to stand still. The Tories have pledged to provide £10bn more for the service but this still leaves £20bn of efficiency savings required. 

Speculation is now turning to whether George Osborne will provide an emergency injection of funds in the Autumn Statement on 25 November. But the long-term question is whether anyone is prepared to offer a sustainable solution to the crisis. Health experts argue that only a rise in general taxation (income tax, VAT, national insurance), patient charges or a hypothecated "health tax" will secure the future of a universal, high-quality service. But the political taboo against increasing taxes on all but the richest means no politician has ventured into this territory. Shadow health secretary Heidi Alexander has today called for the government to "find money urgently to get through the coming winter months". But the bigger question is whether, under Jeremy Corbyn, Labour is prepared to go beyond sticking-plaster solutions. 

George Eaton is political editor of the New Statesman.