Bond plan backed for N.Rock rescue

By Adrian Croft and Christina Fincher

SHANGHAI/LONDON (Reuters) - The government will back a plan to convert its lending to Northern Rock into bonds, a source familiar with the matter said, potentially tying itself to the bank for years but avoiding full-scale nationalisation.

The source told Reuters on Saturday that the government had endorsed a plan by its adviser, U.S. investment bank Goldman Sachs, to convert Northern Rock's loans from the Bank of England, around 25 billion pounds, into bonds.

The bonds would be backed by government guarantees and sold onto private investors. But the deal would need to comply with European Union rules on state aid for private companies.

Prime Minister Gordon Brown has come under fire from the Conservative opposition for taking too long to find a solution to Northern Rock, Britain's biggest casualty of the global credit squeeze, and has seen his popularity slump in opinion polls.

Brown, on a visit to China, confirmed the government had received the Goldman Sachs report and said Chancellor Alistair Darling would make a statement to Parliament on Monday.

He neither confirmed nor denied he had backed plans to convert Northern Rock loans into bonds. A government source said the statement on Monday would be about "process" and would not announce an outcome to the four-month crisis at the bank.

Northern Rock, which was Britain's fifth biggest mortgage lender at its height, requested emergency help from the Bank in September, in a move that sparked the first run on a British bank in over a century.

The government has since been searching for a private sector rescue in a bid to recoup taxpayers' money and has held extensive talks with two consortia, one led by Richard Branson's Virgin Group and the other by Olivant, an investment group headed by former Abbey boss Luqman Arnold.