Sep 17, 2007, 19:08 GMT
London - The British government pledged Monday to fully guarantee all deposits lodged with embattled mortgage lender Northern Rock which suffered savage losses on the London Stock market as investors feared its collapse in the wake of the US credit crisis.
Customers queue up outside a Northern Rock bank branch in central London, 17 September 2007. Northern Rock Plc, the British mortgage lender bailed out by the Bank of England last week, tumbled to a seven-year low in London trading after customers lined up at branches across the country to withdraw their savings. EPA/ANDY RAIN
In an attempt to prop up confidence in the ailing bank, which has been besieged by customers withdrawing their deposits for three days running, Alistair Darling, the Chancellor of the Exchequer, made the announcement after markets closed Monday.
He said the decision for a full guarantee, rather than up to a limit of 31,000 pounds (62,000 dollars), had been taken after consultation with the Bank of England and the regulatory authority, the FSA.
Darling had earlier held talks with US Treasury Secretary, Henry Paulson.
The troubles engulfing Northern Rock depressed fellow mortgage lenders Monday, with shares of the Alliance and Leicester building society down 30 per cent at the market close.
Northern Rock, Britain's fifth-largest mortgage lender, was given a financial lifeline by the Bank of England last Friday, but this has not stopped its shares falling to over just one-fifth of their value at the beginning of the year.
By early afternoon Monday, shares in the Newcastle-based lender had fallen by over 35 per cent from 438 pence to around 280 pence, compared to 1,250 pence at the start of the year.
An estimated 2 billion pounds had been withdrawn from Northern Rock by Monday. But continuing queues at branches and withdrawals via the internet and from postal accounts could mean that as much as 12 billion pounds - half of Northern Rock's deposits - could be cleared out over the coming weeks.
The run on the bank by a large section of its 1.4 million savers continued despite assurances from the government and financial regulators that Northern Rock would remain solvent.
Britain's Treasury Secretary Alistair Darling insisted Monday that, despite the 'problem' at Northern Rock, the British economy as a whole was well placed to ride out the international turmoil caused by the surge in US subprime mortgage defaults.
'What is encouraging from our point of view here in the United Kingdom is that the fundamental positions - the strong economy, the fact that we have got low interest rates and low inflation which we haven't had in the past - do stand us in good stead and that is very, very important,' he said.
'We have had shocks to the system in the recent past with the collapse of the Asian markets in the late 1990s, with the collapse of the American stock market earlier in this decade. Both of those instances we dealt with, our economy carried on growing when others faltered,' said Darling.
His remarks followed a warning Monday from Alan Greenspan, the former US Federal Reserve chairman, that the boom in the British housing market is set to end as a 'painful correction' was being forced by the current turmoil on world financial markets.
Greenspan, in an interview with the Daily Telegraph newspaper, said he believed that recent increases in house prices in Britain were unsustainable, and that Britain was more exposed to the current crisis than the US.
Greenspan, who is an adviser to Prime Minister Gordon Brown,also said in the interview that thanks to the 'Thatcherite reforms' of the 1980s,' the British economy would continue to be 'one of the best performing Western economies' over decades to come.
However, because of variable mortgage rates that go up and down with key lending reates, the housing market was more vulnerable to the effects of the credit crunch in the US.
The nervousness triggered by Northern Rock was felt across the London stock market Monday, where the FTSE 100 Index was down by 108.7 points at 6180.6 points.
'Extensive news coverage of people queuing up to withdraw their savings from Northern Rock could well fuel the fears that other financial institutions will be affected and increase general concern about the economic outlook,' said Howard Archer, an economist with Global Insight, the leading market analyst.
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