UPDATE 1-EU resists UK's revised Northern Rock plan -report

Fri Jan 23, 2009 12:04pm GMT

(Updates with European Commission response, paragraph 3)

LONDON Jan 23 (Reuters) - The European Commission is threatening to veto the British government's revised plan to allow nationalised mortgage bank Northern Rock to lend more, the Guardian reported on Friday.

The newspaper said in an unsourced report that European Union Competition Commissioner Neelie Kroes and her senior officials believed the British government's latest instructions to Northern Rock may break EU state aid rules.

A European Commission spokesman said its existing investigation into the restructuring of Northern Rock would take account of any proposed changes to the bank's role.

"As far as I am aware there is no revised plan," the spokesman said. "The UK government has not yet communicated to us the precise details of what they are planning to do with Northern Rock.

"Clearly we will have to take into account any amendment to the role of Northern Rock in the context of our ongoing investigation into the restructuring aid."

No one was available for comment at Northern Rock or the Treasury.

Another newspaper, the Daily Telegraph, reported the British government was considering injecting as much as 10 billion pounds ($13.80 billion) into Northern Rock to use the nationalised bank to ramp up mortgage lending. [ID:nLM154127]

Northern Rock became the first British casualty of the credit crunch and was nationalised in early 2008.

Since then, it has been shrinking its mortgage book and focusing on repaying a government loan.

However, the bank said on Monday it was slowing its rate of redemptions to support the government's policy of increasing mortgage lending.

The move was announced as part of Prime Minister Gordon Brown's latest package to help banks and unfreeze lending.

The European Commission opened an in-depth investigation of the initial restructuring plan for Northern Rock in April last year, saying it needed to look at potential market distortion.

The Daily Telegraph said the Treasury had yet to make a final decision on whether to inject up to 10 billion pounds into Northern Rock.

Northern Rock is preparing to unveil a new business plan in the next few weeks and Treasury officials have been in contact with the European Commission as they need a waiver from EU state aid rules, it said.

The injection into Northern Rock was likely to be in the form of equity and a new loan, the Daily Telegraph said. It would include the 3 billion pounds the government has already earmarked to be converted from part of its loan to the bank into equity, it said. (Reporting by Adrian Croft in London and Ingrid Melander in Brussels; Editing by Lincoln Feast, John Stonestreet)