Monday, September 17, 2007

Darling guarantees Northern Rock depositors' money at last

The Chancellor has finally guaranteed depositors' money in Northern Rock. That he did so today will come as a bit of shock to some people who were convinced that the Bank of England's loan facility was in some way a 'guarantee' that people's money was safe. It wasn't and until Darling spoke up the smart thing was to get your cash out quick. Now, there really is no need to panic, but there is still some case for evacuating from Northern Rock because while it is saying that it hasn't taken up any of the Bank of England's loan, that is soon going to change. When it does, cheap mortgage deals will start to be financed with expensive money cutting, or eliminating, the margin on the asset. Put simply, while Northern Rock has a good quality loan book in that few of its mortgagees are likely to go bust, it doesn't have a very profitable loan book and it is going to get worse. So, at the very least it won't be able to match the best deposit rates and at worst it may yet fail. If that happens your money may be safe, but it will probably be some time before you can get your hands on it. Simply because of better deals elsewhere and the possibility of some inconvenience then depositing elsewhere is still a rational option. What it isn't any more is immediately urgent, and people have some time to shop around and consider options.

On a political note, if the Chancellor was up for a guarantee then why wait until now? Loss of nerve or just bad timing? Both are pretty important in politics.

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