The British government's nationalisation of Northern Rock falls within European Union rules on state aid but regulators will reassess their position if assistance for the distressed bank lasts beyond March 17th, the European Commission yesterday said.
A spokesman for Neelie Kroes, competition commissioner, said EU law "is very clear that we have to be completely neutral as regards private or public ownership. It is entirely a national matter, on which we have no opinion whatsoever."
In Brussels, the commission believes that the UK authorities have co-operated smoothly and effectively with EU regulators since the Northern Rock affair erupted in September.
This enabled the commission to reach a decision as early as December that government support provided to the bank up to that point complied with EU rules on rescue aid. Under these rules, assistance must take the form of loans or guarantees that last for no more than six months. Since the UK Treasury issued a guarantee of deposits on September 17th, the commission might decide to take another look at Northern Rock at some point after March 17th.
"We have been keeping a very close eye on the situation. That continues," the commission spokesman said. "If there were to be any form of public support extended beyond March 17th, we would have to see if that was state aid."
According to legal experts, one important factor would be whether the nationalised Northern Rock showed signs of rebuilding its loan book by offering especially favourable terms to borrowers.
Brussels could interpret such a move as evidence the bank was benefiting from an unfair competitive advantage. The commission's main aim in state aid cases is to ensure there is sufficient restructuring of the company to offset any distortion of competition resulting from the financial assistance.
In the Northern Rock affair, the commission has been understanding of the UK government's point of view, noting that the lender's liquidity crisis erupted because the mortgage securitisation market was virtually paralysed last September.
