NEWCASTLE (Reuters) - It was held up by politicians two years ago as a model for economic revival for others in Europe. Now England’s northeast is a frontline for the impact of a credit crisis that began in California.
Northern Rock, a flagship bank based in the city of Newcastle with roots as a mortgage provider going back more than 150 years, hit world headlines in September when it suffered Britain’s first bank-run in more than a century, and people in the city are worried for their futures.
At its worst, the crisis that showed hundreds of customers queuing to withdraw savings made Britain look like “a banana republic,” according to the business lobby group the Confederation for British Industry.
Four months on, the British Bankers’ Association said a solution was needed as quickly as possible to prevent lasting damage to the banking reputation, not only of London but also of other British financial centers.
Standing in the rain outside a shareholders’ meeting last week in Newcastle — known to many Britons for the loyalty of its soccer fans and its lost glory as a coal port — people worried about the looming effects of the bank’s near-collapse.
“It’s been a bit of a kick in the teeth for the northeast,” said David Fulton, who owns 30,000 Northern Rock shares and stood in the drizzle to voice support for the bank’s staff.
Britain unveiled a financing package this week that should secure a private-sector rescue of the bank, but will leave the government underpinning its finances for years to come.
The bank’s debt to the state of 24 billion pounds ($47 billion) — just over $1,500 for each taxpayer in the country — hangs over the area, while Northern Rock’s 6,200 staff fear for their jobs, and the significant charitable contributions it has made to the region are starting to dry up.
About 180,000 small investors lost thousands of pounds as the bank’s share price crashed by more than 90 percent, but people at the meeting were more worried about work in an area that had for years struggled as global rivals undercut British industry.
“The northeast has experienced major job losses in the past, but this is different. It’s occurring in a growing sector of the economy, not what people said in the past were declining sectors,” said Jim Cousins, Labour member of parliament for the city on the banks of the River Tyne.
Some enterprises are already feeling the squeeze: a foundation that, since the bank’s stock floated in 1997, has handed out 5 percent of Northern Rock’s profits has started closing down grant programs.
The Northern Rock Foundation has received 190 million pounds in the past decade and it handed out 30 million last year. Its 2008 budget is down to just 7 million pounds and four of its seven grant programs have been closed.
One that will be discontinued is Money and Jobs, which provided funds for Street North East, a not-for-profit organization providing micro-loans for small businesses.
“The effect is going to be huge,” said Street North East chief executive John Hall. “You can’t take out 20 to 30 million pounds a year to organizations such as ourselves without there being an effect.”
In 2005, Newcastle was among a group of cities held up by Britain’s government and former Prime Minister Tony Blair — who is from nearby County Durham — as evidence of how new industries were prospering, and the rich southeast was not the only place driving Britain’s growth.
Manchester, Leeds, Liverpool and Newcastle were all making strides by following a blueprint for urban regeneration drawn up by Bilbao, the industrial port in Spain’s Basque country that created a tourism and economic boom in the last decade.
The reality was already tougher than the rhetoric. Although the region’s economy was the third fastest-growing in Britain at 5.5 percent in 2006, the northeast ranked behind only Wales as the lowest contributor per person to Britain’s economy, according to government figures.
Although unemployment in the region has fallen, it is still relatively high: between April 2006 and March 2007, the northeast was the region with the second-highest unemployment rate in the country, at 6.6 percent.
This helped Northern Rock, or “the Rock” as local people call it, achieve wide popularity as an emblem of achievement: the bank became a focal point for business pride among Geordies, as people from Tyneside call themselves.
“It’s bandied around quite a lot as Geordie pride but Northern Rock is synonymous with success in the region,” Hall said.
The bank established itself as Britain’s most aggressive home lender, reshaping the mortgage market. By blazing a new trail in financial services 280 miles from, London, it epitomized the breakthrough of a city whose 19th-century power in coal and shipbuilding had long waned.
Hedge fund RAB Capital, the bank’s second biggest shareholder, estimated Northern Rock saved mortgage borrowers in Britain about 5 billion pounds a year by driving down charges across the industry with its innovative way of packaging mortgages and reselling them to institutional investors. The bank prided itself as the lowest-cost lender in Europe.
Northern Rock’s crisis — perhaps predictably — has also rekindled old resentments fuelled by the sharp economic divide between the north and Britain’s prosperous south.
Jon Wood, head of the bank’s biggest shareholder, hedge fund SRM, said the London-based central bank had “named and shamed” Northern Rock while banks in other countries had been able to privately access emergency funds.
“It’s a reflection of things gone past, things haven’t changed,” said Ray Spencer, director of Customs House, a theatre and cinema in South Shields which has received about 400,000 pounds in grants from the bank’s foundation.
“We don’t always get the support from the southeast.”
Additional reporting by Raissa Kasolowsky