The rate at which Northern Rock is currently paying back its government loan ahead of schedule may intensify the overall mortgage squeeze, a leading investment manager has warned has caused concern among economists.
Latest calculations by New Star suggest that the troubled lender’s strategy to repay the loan as quickly as possible means it has already met its debt reduction target for the whole year of £20 billion.
But according to economist Simon Ward, this reduction has almost certainly been funded largely by mortgage redemptions .
Ward added that a continuation of this trend would lead to a further fall of some £30 billion in mortgage lending in 2008 compared to last year, which in turn could even increase the risk of a "severe economic downturn ".
Ward explained: "Northern Rock appears to be repaying its Bank of England loan faster than projected in its restructuring plan ."
"While good news for Ron Sandler and co, Rock’s rapid shrinkage is exacerbating the current mortgage market squeeze, with negative macroeconomic implications."
The economist said that while EU state aid regulations were constraining the government’s room for manoeuvre, "a less rapid reduction in Northern Rock’s mortgage book would help to reduce the risk of a severe economic downturn".
Northern Rock Repaying BoE Loan Quicker Than Anticipated
Northern Rock Repaying BoE Loan Quicker Than Anticipated
Wed, 18 Jun 2008
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