Plans to split British bank Northen Rock in two which would allow for its partial sale has been granted by the European Union.

The divide would result in two separate banks forming and are already being described as the “good” and “bad” banks.

The “good” bank would offer new lending, retain some of the existing mortgages and hold its savers’ money.

The “bad” bank would be used to repay the existing government loans and hold the remaining loans.

 Decisions made by the EU to accept the move are seen by Northern Rock as “an important and positive step.”

Changes to the existing setup will be made towards the end of the year.

The EU revealed that the good portion of the bank would be expected to grow and then be sold to third party, with the bad bank allowing its assets to dissolve then becoming liquidated.

The good bank may be sold prior to the general election next year with potential buyers being speculated already, with Virgin and National Australia Bank, owner of Clydesdale and Yorkshire Bank, among the interested parties.

EU Competition Commissioner, Neelie Kroes, believes that the move would make the bank a good long-term option, revealing that “this decision demonstrates once again that the EU’s state aid rules provide an appropriate framework to allow state support for a sustainable restructuring of banks without giving individual banks an unfair competitive advantage.”

Whilst Jonathan Todd, European Commission spokesman, said caps would need to be applied for the duration that the good bank remains owned by the public.

Some of the caps include a balance sheet reduced to a quarter of its size prior to the crisis, not being the market leader for loan interest rates, a cap set to limit its lending to one-third of Northern Rock’s 2008 levels and also a cap on retail deposits to be slightly lower than the pre-crisis level.

An investigation was engaged by the EU into Northern Rock in April 2008, two months after its nationalisation.

The results from the investigation showed that the UK government was kept at a “necessary minimum”.

By 30 June, the bank had paid back approximately half the taxpayers’ £26.9bn loan and will gain a further £8bn from the government during the end of year restructuring.

The EU stated that the restructuring would reduce its market share to below half of its pre-crisis level and “correct the excessive expansion of Northern Rock pre-crisis.”

Northern Rock released a statement, saying “this approval is an essential requirement of the planned legal and capital restructure, which is central to the business plan for Northern Rock.”

“The restructure will strengthen the capital and liquidity position of Northern Rock significantly, and offers value for money to taxpayers” and it would be “business as usual” for its customers.

Alistair Darling has announced that the government must borrow its way to recovery and believes that it’s the best avenue for the UK economy in the long run.

The Chancellor of the Exchequer confessed that further national borrowing “may feel counter-intuitive,” but “will mean the bills we face as a country are lower” in the long run.

However, many believe that the levels of government debt are already too high, with cuts in public spending and tax rises required. The government has already raised borrowing during the recession by high amounts.

Following Mr Darling’s speech, a question-and-answer session was held, with the chancellor finding agreement with Mervyn King, the Bank of England Governor, stating that there were “no simple answers” when it came to the reform of big banks.

According to Mervyn King, their core business may need to be divided into other practices to prevent them from becoming so big that they aren’t allowed to fail.

Mr Darling was concerned that “we cannot have a regulatory regime that excludes the possibility of failure.”

He went on to state that the banking sector needed more competition, and when the government came to selling its bank stakes that were bought during the financial crisis, it would be hoping to develop greater competition.

Many are calling for a reduction to the borrowing and spending that has caused so much debt, but Mr Darling believes that withdrawing government support would be “wrong and dangerous,” and the country would have to make a big decision.

At a speech in London, Mr Darling declared that “we can resign ourselves to a decade of austerity, low growth and low employment, or we can embrace change, turn it to our advantage and seize the huge opportunities a global recovery will bring.”

He continued by warning that withdrawing government support to the economy “would put the recovery at risk and abandon people facing unemployment.”

In a bid to encourage demand during the recession, the government has pushed billions of pounds into the economy through its £175bn quantitative easing plan, cut the VAT rate and helping ailing banks.

According to Mr Darling, a great deal of work was still required to steer the country out of the recession, including three big steps.

“First, we must support the economy until we’re sure the recession is over. Some are tempted to think the crisis is over. It’s not. Banks all over the world are still dependent on government support.”

The second step would involve raising taxes to regain financial strength and taking “tough choices on public spending for the years ahead”.

He added, that it “will mean cutting costs, cutting waste and cutting lower priority budgets, while continuing to invest in our priorities and our future.”

His third step would involve a government plan of growth.

“We need growth, because when we grow, the economy becomes bigger, we all become richer as a country, and it gets easier to pay back debt.”

No Such Plans…

The Conservatives say that they have no plans to increase VAT to 20% if they win the next general election says shadow Health Secretary Andrew Lansley.

Mr Lanslet insisted on BBC’s Andrew Marr Show, that the move was note being actively considered. He added that “no such plan” has ever existed and denies reports that “senior level discussions” were being held in order to discuss this possible move.

Stephen Timms, Treasury financial secretary, says David Cameron, leader of the Tories, “needs to explain” his plans

A British newspaper says that a VAT rise would be introduced by a Conservative government within weeks of the party winning the election. They believe the decision to make the increase is part of an “emergency” budget that will reduce the UK’s debt, was made by Mr Cameron and his shadow Chancellor George Osborne.

But Mr Lansley says that no such action has been taken: “As far as I am aware we have absolutely no such plan and I know there have been no such senior level discussions.

…Can’t Be Ruled Out In The Future Though!

“We have been very clear about the need for public spending to be controlled and the priorities that we will have within public spending, including for the NHS.

“We have been very clear about that because we don’t want to be in a position where we have big tax increases, the effect of which is to stifle the economy.”

Shadow Foreign Secretary William Hague also says that there are currently no plans to raise VAT to 20%, but he also said that such a move could not be ruled out completely in the future. He said: “You can’t ask George Osborne to write the 2010 budget now.”

Mr Timms says: “If David Cameron is seriously considering this, he needs to explain why he thinks it’s right that ordinary families should pay more tax while he’s pledging £200,000 tax cuts for the 3,000 richest estates.”

The current VAT rate is 15% after Chancellor Alistair Darling reduced it earlier this year from 17.5% in a bid to tackle the economic downturn.

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Recent election results have showed the Labour has suffered its worst post-war defeat after being beaten to third place by the UKIP.

In the European elections, Labour won just 15.3% of the seats. The Tories on the other hand, won with 28.6%. They also beat Labour in Wales but failed to increase their total share significantly.

The BNP gained two seats in Yorkshire and in Humberside in the North West of England – the first time an anti-immigration party has won seats at a national election.

Both Labour and the Conservatives are viewing this negatively. Health Secretary Andy Burnham said: “The BNP is like the ultimate protest vote. It is how to deliver the establishment a two-fingered salute. I think largely it is a comment on Westminster politics.”

Leader of the BNP, Nick Griffin said he was “absolutely delighted” and that there will be “huge changes” in British politics.

Dismal

The results from Northern Ireland are still unknown.

Harriet Harman, deputy leader for Labour said the following about the results: “It was a dismal result. We have to understand the concerns that people are expressing and address them. What we won’t be doing is wringing our hands, being disunited.”

However, David Cameron, leader of the Conservatives is “delighted” with the results. He says: “The Conservative party were the clear winners in these elections. We topped the poll, we increased our share of the vote, increased our number of MEPs, we won in almost every part of the country and had some staggering results like topping the poll in Wales.”

He added that the results showed “an enormous gap opening up between Labour and Conservative” as the Tories got “almost twice as many votes as Labour.”

Extreme Parties Benefit

Other UK-wide Westminster parties results were very similar, leaving space for smaller, more extreme parties to benefit.

UKIP campaigns for Britain to withdraw from the EU and gained 17.4% of the vote, increasing its number of MEPs to 13 – beating Labour into third place.

The UKIP leader Nigel Farage sees this as a huge achievement which sends a clear message to Gordon Brown. “He has been beaten by a party that he mocked and derided as being on the fringes so if we have beaten him, he has got to go.”

In two southern regions of the country, the Labour party even lost out on fifth place to the Green party.

Nationally, the Green party increased their share of the vote by 8.7%, but blame the electoral system for not gaining more than its current two MEPs, saying: “In the South East we have increased our vote by 50% and we are disappointed it has not translated into a second seat.”

The Liberal Democrats also had a better election than in 2004. Leader Nick Clegg said: “On the European vote we held our own, we actually added an MEP… I think given the very volatile nature of the elections it was a solid result.”

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Prime Minister Gordon Brown has received encouragement from the US Congress after calling for renewal of “the special relationship for our generation”.

Mr Brown is one of only five UK prime ministers, to ever address both houses on Capitol Hill in order to try and enforce his ideas that the US and UK should push “essential” economic changes.

Standing Ovation

There was a standing ovation at the beginning of the speech, which was therefore frequently interrupted by over a dozen pauses for applause.

Among the many requests he made, Mr Brown called for the banking sector to have “rules and standards for accountability, transparency and reward.”

On to the bigger issue of recession, he added: “America and a few countries cannot be expected to bear the burden of the fiscal and interest rate stimulus alone. We must share it globally.

“So let us work together for the worldwide reduction of interest rates and a scale of stimulus round the world equal to the depth of the recession and the dimensions of the recovery we must make.

“An economic hurricane has swept the world, creating a crisis of credit and of confidence.

“History has brought us now to a point where change is essential. We are summoned not just to manage our times but to transform them.”

‘Seize the Moment’

He also said: “Now more than ever the rest of the world wants to work with you… And let me say that you now have the most pro-American European leadership in living memory. A leadership that wants to cooperate more closely together, in order to cooperate more closely with you.”

“So once again I say we should seize the moment – because never before have I seen a world more willing to come together so much. Never before has that been more needed.”

He also awarded the honorary knighthood to Ted Kennedy, saying that: “Northern Ireland is today at peace, more Americans have healthcare, more children around the world are going to school” because of the veteran Democratic Senator. We owe “a great debt to [his] life and courage.”

Waste of Time or Huge Success?

However, other political parties have not been so quick to praise Mr Brown. William Hague of the Conservatives said: “If he’s not prepared to acknowledge that mistakes have been made then he won’t be able to communicate or implement the solutions for the future.”

Vince Cable from the Liberal Democrats also added that: “Rather than trying to shore up his reputation in America, he should be focusing his attention on fixing the mess we face back home.”

But the Prime Minister’s trip seems to have been successful. President Barack Obama described the relationship between the two countries as one that would “only grow stronger”.

Also, in talks with the White House, it was agreed that improvements are needed to be made to the global banking system, and that “inward projection” should be avoided in order to prevent protectionism.

 
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Speaking at the World Economic Forum in the Swiss resort of Davos, the PM has claimed that there is no precedent for the “first financial crisis of the global age” and that history has offered “no clear map” of how to deal with it.

He also warned about protectionism, which he claims is a rising threat, and  added that global operation was the only way forward.

What did he say exactly?

He said that: “this is not like the 1930’s. The world can come together.

“This is the first financial crisis of the global age. And there is no clear map that has been set out from past experience to deal with it.

“I’m reminded of the story of the Titian, who’s the great painter, who reached the age of 90, finished the last of his nearly 100 brilliant paintings, and he said at the end of it, ‘I’m finally beginning to learn how to paint’, and that is where we are.

“We are learning all the time about how to deal with what are real problems for which we have no historical analogies to fall back on, and because when the 1930’s problem hit them, they did not have the global financial markets that we have today.”

He also claimed that the “laissez faire” attitude was not possible due to the “implicit protectionism I’m afraid in what is happening at the moment.”

In addition, he called for co-operation from institutions such as International Monetary and the World Bank in order to rebuild them as they are “out-of-date”. Adding that: “this is a global banking crisis and you’ve got to deal with it for what it is, a global banking crisis.”

What needs to be done?

According to Mr Brown, the solutions don’t lie in just nationalising banks, but there is need of a “global regulatory system” to prevent such crisis’s happing again.

He also claimed that too many nations feared the Asian crisis and therefore were holding onto too many economic reserves.

French finance minister, Christine Lagarde said: “I think it’s a risk in Europe, it’s a risk elsewhere as well, which is why I believe that time is really of the essence and we’re working against the clock.”

Even after the fall of the value of the pound sterling, Mr Brown still claims the UK’s economy is built on “sound fundamentals.”

He told the Davos audience: “I think it is very clear that we are not going to build policies around self-interested speculators.”

He added that he: “[believes] we are making the right decisions for the future.”

What this means for the G20 summit…

The G20’s second meeting is on April 2nd, and the PM claims there will be a focus on global “interdependent” issues.

The UK are to chair this summit, and Mr Brown says nations that are not members will be consulted beforehand to add their views.

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Mortgage rationing is set to become more of a problem in 2009 if the government don’t intervene, according to a lending group.

Director General of the Council of Mortgage Lenders (CML), Michael Coogan, has said there are now fewer lenders with less money. He also suggested that if lending levels in 2009 go in a similar way to 2008, they could be a challenge. And added that smaller companies may have to spend a third of their profits covering the bail-out of bigger banks.

Mr Coogan was speaking at the CML’s annual conference on Tuesday and painted a rather dull picture for people intending to get onto the property ladder in the near future. He said that: “Consumer borrowing will simply not return to the levels seen in 2007, even if funds increased and a wide variety of lenders were to become active in the mortgage market again.

“In fact, unless the government takes further targeted action to help market participants, we will see a worsening of the picture next year compared to this.

A good outcome next year in my view would be if we had lending at levels seen in 2008, but bearing in mind we will be in a recession…this would be a real challenge.”

Sir James Crosby also voiced similar views earlier this year, when in a recent report to the chancellor, he suggested that net new mortgage lending would pads the low of £15 billion in 1995 and fall below zero.

House prices in Britain have fallen by 10% to 15% this year so far. Mortgage approval is also down 74% compared to last year, and it is expected that there will be further falls in prices.

Mr Coogan also claimed that building societies would make a loss this year. Other small financial businesses are seeing their profits hindered by “unintended consequences” of moves to protect customers with failed banks.

Though the government may have made changes in order to avoid tax-payers having to cover compensation paid on those who have lost money with Icelandic banks, in actual fact, it will be financial institutions of all sizes that have to cover the cost via the annual financial services compensation scheme. This has cost some of the smaller institutions up to 30% of their annual profits.

Mr Coogan has however backed the mortgage lenders decision to delay the process of repossessions for borrowers in financial troubles. But he has also asked for more support from the government. He has proposed a “backstop scheme” in order to sell property to their lender which they could rent back. This would stop the need to go to court, as well as underpinning property prices, and allow people to stay in their own homes, therefore supporting the local community.

Prior to Thursday’s decision on interest rates, he also criticised the idea as “short-sighted and counterproductive”, claiming that this was pushing down interest rates offered to savers.

Jon Pain of the Financial Services Authority has warned lenders to keep to contractual rules when passing on cuts to customers, saying that any floor on tracker mortgages must be made clear in an initial mortgage contract.

At the same conference, Liberal Democrat Treasury spokesman, Vince Cable also said that there should be no return on reckless mortgage lending, claiming that: “the industry should now be exploring new products to restore faith in mortgage lending.”

57.9% of the Royal Bank of Scotland will soon be owned by the government, as shareholders have only bought out a tiny amount of the new shares that were offered to them.

The small take-up had been predicted, and is likely due to the fact that the offer price of shares was 65.5p – 10p higher than the price at which shares were trading.

The Royal Bank of Scotland also owns NatWest, and the share issue was part of the government’s plan to recapitalise banks.

The government will now pay around £15 billion for its share in the bank, and will also buy £5 billion of preference shares.

Existing shareholders at the bank bought almost 56 million shares, representative of just 0.24% of the offered new shares. This cost them £36.7 million between them and made an immediate paper loss of £5.6 million.

The fact that the remainder of the shares has been bought by the government, means that taxpayers have made an immediate paper loss of £2.4 billion, based on yesterday’s closing share prices.

Stephen Hester, Chief Executive of the RBS has said: “We regret that existing shareholders did not take up their pre-emptive rights but understand that the market sentiment towards the banking sector made this uneconomic in the short term.

“There remain substantial uncertainties and challenges outside our control but for our part the job is underway.”

At a meeting last week, shareholders of RBS voted to take the government money, even though there will be strings attached, such as the bank losing freedom in areas like executive pay and dividend policy.

It was also agreed that normal lending practices would be resumed. Therefore, the Bank is announcing that it will guarantee overdraft rates and contracts for its business customers for at least a year.

UK Financial Investments Ltd will hold the government’s shares of the Bank. This is in an effort to maximise value for taxpayers and try to prevent politicians from making business decisions about the Bank.

The chair of this company will be Philip Hampton who is also chairman of Sainsbury’s and was also the director of Lloyds TSB.

The Royal Bank of Scotland is, unfortunately, just one of many banks that has been exposed to the debt on the US sub-prime loans and felt the negative effects of this association.

The Bank has also felt the effects of the collapse of the inter-bank lending, as the whole industry worried about which fellow bank they could afford to lend to.

Critics are also saying that the Bank also paid too much for ABN Amro last year, which is another reason for its current problems.

The Bank led a group that paid 71 billion Euros (the equivalent of £61 billion) for the Dutch bank in October last year.

Prime Minister Gordon Brown has pledged that the government will work hard to ensure that struggling high street store, Woolworths, will remain open over the Christmas period.

He also told reporters that plans were being discussed so as to ensure that employees currently threatened with redundancy will be helped to find more work in the future.

This comes shortly after the most recent blow that the chain of stores has had to deal with recently, as lottery operator Camelot stopped selling tickets to stores.

Camelot declares its decision to suspend trading with Woolworths will become effective immediately, “pending the company finding a satisfactory resolution to its current trading difficulties.”

This means that Woolworths will no longer be selling National Lottery Tickets, scratchcards or process prize claims.

The chain will now be staying open until after Christmas, but there is still concern for the 30,000 employees that the chain currently employs.

The Prime Minister has said that: “the important thing is in the long-run that employees in this company – where the businesses and the shops are not going to stay open in the longer term – can get other jobs quickly.

“That’s why we’re going to move in immediately to give advice to employees in the company.”

Deloitte, the accountancy firm that has been appointed the administrator for the high street chain, has said that it is searching for a suitable buyer for the stores.

Dan Butters from the administrator said that: “In the last 24 hours, we have received expressions of interest from a number of parties for both the retail and wholesale businesses.”

The company did try to sell itself to restructuring firm Hilco, which would have taken the firms debt, but this deal fell through.

Deloitte has promised that though things are bad, it promises that employees will get paid.

Currently, Woolworths has 815 stores and four distribution centres, which employ around 25.000 people. It also owns Entertainment UK, which supplies DVDs to supermarkets across the country, and employs around 5,000 people.

2 Entertain is currently jointly owned by Woolworths and BBC Worldwide. Woolworths is currently trying to sell its 40% stake in this venture to BBC Worldwide.

Woolworths is just one of a few high street stores currently struggling, and analysts predict that worse is to come.

An analyst at Hargreaves Lansdown Stockbrokers has said: “the eye of the storm has moves in from the banks to the retailers.”

Other struggling stores include: MFI, who have also gone into administration.

Computer and Technology outlets, Currie, and PC World DSG International are blaming “tough and volatile” trading environments for their “29.8 million half year loss.

Kingfisher has also claimed that their profits at B&Q had fallen 9%.

Some fear that the ending of Woolworths could spark a price war if administrators try to cut prices in order to move the company’s stock, which could then lead to worse problems for smaller, weaker competing stores.

The Woolworths chain is currently struggling under its £385 million debt.

Its biggest problems started after having to pay cash for goods from suppliers, after trade credit insurers were no longer prepared to insure the suppliers to Woolworths.

Chancellor Alastair Darling has revealed that while he may be planning on cutting taxes in his budget, the government will also be borrowing record amounts in order to reduce the effects of repression as much as possible.

According to his pre-Budget report, high income homes will also face more tax, and National Insurance contributions are also set to rise across the board, as part of his “exceptional” measures in order to reduce the effects of recession next year.

Alcohol, tobacco and duty prices are set to rise enough to offset the VAT cut from 17.5% to 15%.

Conservative Chancellor, George Osborne, has accused the Labour party of trying to bring Britain “to the verge of bankruptcy” as the plans detailed in the pre-Budget plan will double national debt, which is set to reach £118 billion next year.

He has accused the government of creating a “huge unexploded tax bomb timed to go off at the time of the next economic recovery.” And also that Mr Darling had offered “temporary tax giveaways paid for by a lifetime of tax rises on the British people,” and that the UK had been “mortgaged to bail out the mistakes of the past.”

Liberal Democrat treasury spokesman, Vince Cable has also said that the government’s plans would not be enough to boost consumer spending, and that they would do better to “put money directly in the pockets of low paid workers by cutting their income tax.”

Mr Darling has also reduced the predicted growth of the economy for next year from 2.75%, to between -0.75% and -1.25%, the biggest downward revision recorded.

On the other hand, he has said that the government will inject either £20 billion or 1% of GDP into the economy in order to get things moving again, leading to an increase in government borrowing.

There is also expected to be a cutback in government spending, with the rise predicted to be at 1.2%, lower than in recent years.

The 2.5% VAT cut will come into effect on Monday, just in time for the peak in the Christmas shopping period, and will aim to put £12.5 billion back into the pockets of consumers over the 13months during which it will last.

Also, on top of their £10 bonus, pensioners will receive a one-off payment of between £60 and £120 in January.

The increase in duty on alcohol, tobacco etc however, will be permanent.

In measures that aim to try and get back some of the VAT that the government will be losing, top rate tax will increase to 45% in 2011 for people earning over £150,000 per annum from April 2011, and all National Insurance contributions for both employees and employers will be raised by 0.5%.

The starting line for National Insurance and income tax line will be brought into comparison with each other so that anyone earning less than £20,000 per year will not pay more contributions.

In defence of borrowing rate being almost double for next year than 2008, the Chancellor has said that “in these extraordinary circumstances allowing borrowing to rise is the right choice for the country. Taken together these steps will ensure money flowing into the economy when it is needed most, but we can reduce borrowing when growth returns.”

Other measures include speeding up the introduction of planned rises in child benefits, along with measures that aim to help small businesses struggling due to the credit crunch.

He has also announced that drivers will face a more gradual introduction of new vehicle excise duty, at only a £5 increase per vehicle next year.

And, of course, there was mention of work on motorways, schools and repair to council houses by bringing forward £3 billion of state spending.

Also for home owners, a scheme that covers mortgage interest payments for those that have lost their jobs will cover up to £200,000 of mortgages.

The other major change in order to try to boost the economy is that this year’s £120 income tax personal allowance per year for basic rate tax payers will stay and be increased to £145.