Minister blames Bank of England for Northern Rock debacle

Germany’s Finance Minister, Peer Steinbrück, blamed the Bank of England on Friday for the collapse of Northern Rock and the loss of 2 000 jobs, savaging the central bank for not pumping enough liquidity into money markets last year.

Unlike the central banks of the United States and European Union, the Bank of England failed to support the banking sector with vital loans, Steinbrück told the German Parliament. He said the main reason Germany and the US avoided a run on a bank was the swift reaction of the European Central Bank (ECB) and the Federal Reserve to lend billions at crucial moments. The day after the markets began to seize up in August the ECB injected â,¬61-billion into the system.

”The policy of the Fed and ECB to supply the market with liquidity was right. A central bank that didn’t do this in Great Britain led to people standing in long queues outside.”

Steinbrück, criticised at home for the multibillion-euro bail-out of the industry lender IKB, which was stricken by the sub-prime crisis, added: ”Just imagine if we’d had these kinds of scenes in Germany that harked back to the 1920s.”

His comments will embarrass Mervyn King, the Bank of England governor, who has sought to persuade MPs and the City that he acted to support banks in need of finance last summer when the US sub-prime crisis triggered a credit squeeze.

King has maintained that he matched his counterparts with a more subtle, behind-the-scenes injection of liquidity and Northern Rock was brought down by a series of failures, mainly of regulation.

Steinbrück’s comments come at a sensitive time for the government, which is preparing to push through 2 000 redundancies at Northern Rock as part of an effort to stabilise its finances and pay back the estimated £25-billion the bank owes the exchequer.

The Newcastle-based bank, nationalised in February, will enter talks with unions next week to discuss how to reduce the workforce by a third from its peak. Unions are seeking promises that it will resist compulsory redundancies and rely on natural turnover and volunteers. A spokesperson for the union said a team of negotiators headed by the national officer Karen Reay plans to meet the management on Thursday.

Ron Sandler, the bank’s chairperson, said an HR1 form, which is legally required ahead of a mass redundancy programme, would be sent to ministers to clear the path for negotiations. He said he wanted to have a constructive discussion with unions during the required 90-day consultation period.

A spokesperson for the bank said: ”We are about to start a consultation with the unions. The process will start with a submission to the government, which will go ahead next week ahead of meetings with staff and unions.”

It is understood the bank’s precarious finances have put Sandler under pressure to accelerate the redundancy programme and achieve the cuts in months rather than the several years envisaged by ministers.

The government is rapidly losing hope that the bank can minimise the political impact of the job cuts in its north-east heartlands and will be forced to carry out swift and heavy compulsory redundancies.

Sandler said at the time of the nationalisation that the vast majority of job losses would be concentrated in Newcastle and not at the bank’s 78-strong branch network, which is crucial to its aims of boosting saving deposits.

Repayment of the government’s £25-billion loan is the bank’s priority, but with the credit crunch continuing it is expected that Northern Rock will be forced to delay payments. Competition in the savings market also remains intense, further harming its ability to raise funds and bolster its finances. – Â

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