In one sense, nothing has changed as a result of Alistair Darling’s proposed reworking of the Northern Rock balance sheet. No extra public sector cash is being injected into the nationalised bank as a result of the conversion of up to £3 billion of taxpayer-funded loans into equity. In theory, what taxpayers lose on the loan swings, they gain on the equity roundabout. In theory, Northern Rock will fetch much more if and when the Government is able to sell it back into private hands. And, as the Chancellor was only too keen to point out, Rock is far from alone in needing to strengthen its balance sheet. Barclays, Royal Bank of Scotland, HBOS and Bradford & Bingley have all already had to resort to equity infusions as a result of the arctic conditions in the banking world.

In practice, however, there is something unnerving about this transaction. Debt-for-equity swaps typically are undertaken by companies in trouble. Debt-holders usually exchange pounds’ worth of debt for pennies’ worth of equity. In the event of a winding-up, equity-holders rank lower than debt-holders and other creditors in the queue for recompense.

Ron Sandler, Rock’s chairman, came up with some encouraging news yesterday: the bank has managed to repay £9.4 billion of public loans in the past six months and the Government’s deposit guarantee has helped to lure savers back to branches that 11 months ago they were besieging to get their money out.

But dig a little deeper and the operating performance is less encouraging. Savings inflows have slowed dramatically since March, when Rock was prevented from taking unfair advantage of its government support. The bad debts position, meanwhile, is dire and deteriorating. Borrowers are falling behind on monthly repayments at an alarming rate. Bad debt provisions have almost quadrupled in the past six months. Compare that performance with HSBC, where bad debts in its UK retail financial services division have actually fallen in the same period.

And all the time, as Rock’s good-quality mortgages are redeemed, the bank is left with a greater proportion of toxic assets. The test for Mr Sandler comes not now, as the good-quality assets are redeemed or sold, but in 12 to 18 months, when he has to grapple with those tens of thousands of borrowers given 125 per cent loans at the very top of the property market in 2006 and early 2007. Already Rock is repossessing people’s homes at the rate of eight a day.

A short-lived economic slowdown and a rapid bottoming out of the property market could yet save Mr Darling’s blushes. But the odds are shortening on taxpayers having to foot a substantial bill when the final Rock reckoning is made.

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