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Branson’s Virgin Money buys Northern Rock

European developments affecting markets today came in the form of a dispute between France and Germany, the eurozone’s two biggest economies clashing over the role that the ECB should play in the resolution of the crisis. France, with rising borrowing costs and questions around the safety of its triple-A credit rating, is urging greater intervention from the ECB. Angela Merkel however suggested that a greater role for the central bank would breach EU rules, in so doing expressing German opposition to the idea.

Additionally, the ratings agency Fitch expressed concerns that the outlook for US banks could deteriorate if a solution is not found to solve the eurozone crisis, stating that “the risks of a negative shock are rising”. The announcement hurt banking stocks globally and sentiment in general, even before a Spanish 10 year bond auction that saw €3.6 billion of debt issued at a worrying high average yield of 6.975%.

Domestically, Virgin Money (the retail bank owned by Richard Branson) is to buy Northern Rock from the UK government for £747m in cash, although further payments over the next five years could bring the total to over £1.03 billion. This was touted as a successful sale by the government and one that will add important competition to the high street banking sector and safeguard jobs in Newcastle. However (and perhaps unsurprisingly), Shadow chancellor Ed Balls (with others) has questioned the timing of the deal, and with £1.4 billion of tax payers money originally sunk into the institution, whether it really is a good deal for the UK taxpayer. It must be noted that today’s sale represents an offloading of the “good half” of the former Northern Rock. The “bad half”, currently held in the state owned Northern Rock Asset Management and merged with the bad debts form Bradford and Bingley, was segregated from the group in 2010 and is being wound down.

The FTSE 100 was in the red all day, although it took a dramatic dip in the late morning losing nearly 80 points form already depressed levels to take the index well below the 5400 level. The blue chip index rose from its lows to end the day around 1.6% weaker, led by miners and financials to finish at 5423.

This was posted in Bdaily's Members' News section by John Dance .