Northern Rock's speedy loan repayment could intensify the credit crunch, according to New Star economist Simon Ward.
Ward says Bank of England figures suggest Northern Rock is ahead of schedule when it comes to repaying its taxpayer loan, but may cause problems for the economy as a whole.
Northern Rock’s current restructuring plan estimates around 25% of its Government loans will be repaid by the end of 2008, equating to around £6.9bn.
However, Ward says the Bank of England’s weekly return suggests Northern Rock has repaid almost all of the £6.9bn due this year by early June, and is likely to pay more in the remaining six months of the year.
Ward believes Northern Rock’s enthusiastic attempts to repay its loans may cause major problems for the supply of mortgages in the UK.
“The repayment is likely to have been funded mainly from mortgage redemptions,” he says.
“The restructuring plan projects a fall in Northern Rock's share of the stock of mortgages from 7.5% at the end of last year to 3.7% by December 2009, implying a nominal reduction of about £20bn a year in 2008 and 2009.”
Ward says the reduction in mortgage availability for Northern Rock will result in a reduction of around £30bn in the UK mortgage market in 2008 compared with the previous year, and will have a major impact on borrowers, and amplify the effects of the credit crunch.
“The government may be constrained by EU state aid regulations but a less rapid reduction in Northern Rock's mortgage book would help to reduce the risk of a severe economic downturn,” he warns.
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