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A replay of the U.S. sub-prime upheaval out of london

— PHOTO: AP

Customers queueing outside a branch of the crisis-hit Northern Rock bank in York, England, seeking to withdraw their money.

Over the past week, there has been only one picture in the British media — that of thousands of angry and anxious customers queueing outside the branches of one of Britain’s leading banks, Northern Rock, to withdraw their savings as the bank teetered on the brink of collapse because of bad debts in a replay of the recent upheaval in the American sub-prime mortgage market.

In just three days, Northern Rock customers have withdrawn more than £2 billion, representing an estimated 8 per cent of the bank’s total deposits, and the “run” continues despite assurances from the bank as well as the government that their money is safe.

On Tuesday, as the Government struggled to contain the spread of the crisis, reflected in headlines such as “Panic on the high street,” “Run on the bank” and “Banking crisis spreads,” the Bank of England was forced to intervene breaking its “golden” rule that prohibits it from bailing out private financial institutions from difficulties of their own making.

In what was described as an unprecedented move and virtually amounted to “nationalising” Northern Rock, the Chancellor of the Exchequer, Alistair Darling, gave a guarantee to the bank’s customers that it was putting in place arrangements to ensure that their money was safe. The announcement that the Government was taking over the bank’s liability towards its depositors, potentially underwriting £28 billion of deposits at taxpayers’ cost, was intended to calm jitters amid fears that the crisis was spreading to other banks and mortgage agencies.

Although the move represented a u-turn on the government’s previous policy of dealing with failing banks, it had a sobering effect. Shares in Northern Rock, which had plummeted to one-third of their value, appeared to recover and customers, though still keen to get their money out, sounded more relaxed.

Buoyed by the government support, Northern Rock took out a full-page advertisement in leading newspapers assuring customers that it would “not let you down.” In a signed “message,” its chief executive Adam J.Applegarth said the bank remained a “safe place” for savings, loans and mortgages and highlighted the “simple fact” that “all existing deposits in Northern Rock are fully backed by the Bank of England and are totally secure.”

Northern Rock, whose business is built around mortgage lending and employs more than 4,000 people, hit the buffers when the flow of money it needed to finance mortgages dried up after the collapse of the American sub-prime mortgage market. The bank has been accused of relying too heavily on short-term loans to fund its mortgage business prompting calls for mortgage agencies to be regulated more “robustly.” Critics have blamed the crisis on “greed, lax regulation and government complacency.”

Commentators have noted that the scenes witnessed on Britain’s streets since the crisis erupted last Friday are associated more with “dodgy” third world economies than a country which takes pride in its record of economic stability, much of it achieved under the present Labour Government.

The near-collapse of Northern Rock, Britain’s eighth largest bank, represents the worst economic crisis for the Labour Party since it came to power 10 years ago inaugurating an era of consumer boom marked by low interest rates, cheap mortgages, and, consequently, heaving borrowings.

That era of “cheap and easy money” is seen to be over now with banks and other financial institutions, “spooked” by the American experience, suddenly switching off the lending tap, as The Times business editor, James Harding, argued. For Prime Minister Gordon Brown, the crisis is politically damaging as critics point out that it was under his watch, as the “iron” Chancellor of the Exchequer, that “reckless” lending became rampant.

Mr. Brown’s critics both from the Left and the Right have rushed to attack his policies comparing the current crisis to the humiliating “Black Wednesday” in 1992 when, under the Tories, Britain was thrown out of the European Exchange Rate Mechanism (ERM) — a humiliation from which the John Major government never quite recovered.

Analysts believe that after the “bloodbath” in America, a crisis of this sort was inevitable given the increasingly inter-related nature of global financial markets. Indeed, the government still believes that what Northern Rock is going through is nothing more than a tremor caused by the “turbulence” in the international financial arena.

However, some say that it reflects a deeper crisis. The Liberal Democrats’ treasury spokesman, Vince Cable, said he had warned Mr. Brown about a looming debt crisis four years ago.

It had been a false boom and was bound to bust. “This current boom does not depend on long term investment or on exports or on the cultivation of a more educated, skilled, labour force. It is powered by debt financed consumer spending, some reckless lending and the optimism generated by a house price boom,” he said.

For the Conservatives, whom Mr. Brown routinely taunts for their economic incompetence blaming them for presiding over a “boom-and-bust” policy when they were in power, the crisis has been a god-send at a time when they are struggling in opinion polls and desperately looking for any excuse to attack the government.

Party leader David Cameron said that under the Labour government the country’s economic growth had been built on a “mountain of debt.”

“This government has presided over a huge expansion of public and private debt without showing awareness of the risks involved,” he said.

Mr. Cameron, of course, is being opportunistic but the fact remains that the Northern Rock episode is likely to sap public confidence in the banking system and as one woman waiting to take out her money said:“I am now inclined to do what my grandmother used to do: put the money under the mattress than risk it in the bank.”

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