Northern Rock reaction in full

Treasury statement in full

Alistair Darling, the Chancellor, today revealed details of the Government's last-ditch effort to prevent Northern Rock from being nationalised in a plan that gives bidders two weeks to submit offers for the stricken bank.

Under the new proposal, Northern Rock will immediately repay the £25 billion it owes the Bank of England by issuing bonds that will be guaranteed by the Government.

While the deal means a large chunk of the bank's estimated £50 billion debt will be paid off, UK taxpayers will still be on the hook because the bonds are being underwritten by the Government. The state is already underwriting an estimated £25 billion worth of Northern Rock’s deposits.

Prospective bidders, which include Sir Richard Branson's Virgin Money and the Olivant consortium, have been given until February 4 to table offers for Northern Rock.

Issuing details of the new refinancing, the Treasury said today the new plan would provide the Government with the ability to share in the potential upside of any rescue, as well as ensure the Government's loans to Northern Rock were paid in full with interest.

The market welcomed Mr Darling's proposition, sending shares in Northern Rock up 47.2 per cent, or 30.5p, to 95p.

However, while the City reacted positively to today's plan, the Liberal Democrats have already blasted the scheme, saying it reflected Prime Minister Gordon Brown's "pathological inability to admit failure".

The Treasury hopes to submit an application for approval of the new plan to the European Commission by March 17. It would need approval because it constitutes state aid to a private sector company.

The Treasury made plain it would still go ahead with nationalisation if private sector bidders failed to make acceptable offers: "If no proposal is received which meets [our] objectives, the Government would bring forward legislation in order to facilitate temporary public ownership of Northern Rock," it said.

The Treasury gave no clues as to how it hoped to share in any upside should a private sector rescue succeed. But one option understood to be under consideration is that it would be issued with warrants - giving it the option to buy shares at a pre-agreed price.

The Treasury, speaking on behalf of itself, the Bank of England and the Financial Services Authority, said the new financing structure would only be available for proposals that protected taxpayers' interests, promoted financial stability and protected consumers.

Government guarantees protecting depositors would remain in place whatever the short-term outcome.

Under the bond issue plan, Northern Rock would pay a fee for the privilege of the bond guarantee in addition to other fees.

Northern Rock said it welcomed the preference for a private sector solution and said it would be working closely with the authorities to enable bidders to develop their proposals further and to develop its own standalone plan.

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