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Northern Rock’s rapid shrinkage could worsen credit crisis, says Ward

The rapid shrinkage of Northern Rock’s mortgage book could significantly worsen the impact of the wider credit crisis, according to New Star chief economist Simon Ward.

Ward estimates that the lender has repaid a further £3.4bn of its loan since the end of March, implying that the outstanding loan may already be close to the £20bn full-year target.

He says that while this is good news for Northern Rock, the “rapid shrinkage is exacerbating the current mortgage market squeeze, with negative macroeconomic implications.”

“The restructuring plan projects a 25 per cent repayment of the Bank of England loan in 2008, implying a reduction from £26.9 billion on 31 December 2007 to about £20 billion.”

Ward points out that in a trading update on 12 May, the loan had already declined to £24.1 billion by 31 March.

He says the repayment since March is likely to have been funded mainly from mortgage redemptions.

“The restructuring plan projects a fall in Northern Rock’s share of the stock of mortgages from 7.5 per cent at the end of last year to 3.7 per cent by December 2009, implying a nominal reduction of about £20 billion a year in 2008 and 2009. Economy-wide net mortgage lending totalled in £108 billion last year, of which Rock contributed £13 billion.

Ward says Northern Rock’s u-turn will cut the supply of mortgage loans by over £30bn in 2008 compared with last year.

“The government may be constrained by EU state aid regulations but a less rapid reduction in Northern Rock’s mortgage book would help to reduce the risk of a severe economic downturn.”

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