British markets calmer following government intervention (Roundup)

Sep 18, 2007, 15:29 GMT

London - The British government vowed Tuesday to do everything in its power to 'return financial markets to normal' following the shock crisis over mortgage lender Northern Rock.

Shares in the Newcastle-based bank rose by 6 per cent on the London stock market Tuesday, and those of fellow-lenders followed suit, after an unprecedented pledge by the government late Monday to guarantee all deposits of Northern Rock in full.

The highly unusual move by Alistair Darling, the Chancellor of the Exchequer, followed three days of panic withdrawals from the Northern Rock, estimated to have reached 3 billion pounds (6 billion dollars).

By Monday, when Northern Rock shares fell by more than 35 per cent in London, more than half of the bank's value had been wiped out.

The dramatic government intervention, while clearly reassuring the stock market, also led to a noticeable reduction in the lenght of the queues that had formed outside Northern Rock branches since last Friday.

Meanwhile, the Bank of England Tuesday followed up an emergency loan facility granted to Northern Rock last week by announcing that it would inject 4.4 billion pounds (8.8 billion dollars) into financial markets, offering cheap credit through a so-called emergency tender at a rate of 5.75 per cent.

Darling, clearly relieved Tuesday that the unprecedented emergency measures taken by the government and the Bank of England had shown results, pledged that similar assistance would be offered to any other bank that could find itself in trouble.

In a BBC interview Tuesday, Darling clearly linked the problems at Northern Rock to the financial turmoil caused by the surge in US subprime mortgage defaults.

'This is an international problem which is why we are taking action internationally,' Darling said. 'We will continue to do everything we can to ensure that the market returns to normal and I'm determined we maintain a stable banking system,' he added.

However, some analysts remained critical of the government's 'knee-jerk reaction' to the Northern Bank crisis.

'This situation could be rescued but it will take strong leadership by the government to resolve the hysteria witnessed in the last few days,' said James Rambsbotham, chief executive of the North East Chamber of Commerce in Newcastle, north-eastern England.

Willem Buiter, professor of economics at the London School of Economics (LSE), expressed concern about the dramatic Bank of England intervention. 'Bail-outs of independent banks are always deeply political,' he said.