( dpa )- The British government intervened to ensure a private sector rescue for troubled mortgage lender Northern Rock Monday because the present economic climate would not have allowed a "purely commercial solution."
Alistair Darling, the Chancellor of the Exchequer, told parliament that the decision to facilitate a private sale by converting Northern Rock debts into government bonds before selling them to investors was taken because there was "no chance" of striking a deal backed entirely by private finance.
In a statement to the Stock Exchange Monday, the Treasury said it would guarantee bonds to be issued by Northern Rock to repay 25 billion pounds (50 billion dollars) of loans it has received from the Bank of England.
The Newcastle-based bank, Britain's fifth-largest mortgage lender, became the first major casualty in Britain of the global credit crunch that followed the US sub-prime mortgage crisis last year.
The emergency funding from the Bank of England prompted angry investors and savers to stage the first run on a British bank in 140 years last September, and forced the government to guarantee all savings and investment in full.
Darling said the new plan put forward by the government offered the "hope of maintaining financial stability," but warned that placing the bank under "temporary public ownership" or even "nationalization" still remained an option.
Critics have said the government's large-scale support for a Northern Rock rescue amounted to "partial privatization."
Shares in Northern Rock soared by more than 40 per cent on news of the new package Monday, reaching 91 pence.
Just a year ago, before Northern Rock's risky lending practices triggered the crisis, its share price stood at over 12 pounds.
The rescue plans, drawn up by investment bankers Goldman Sachs, would mean the converted government-guaranteed bonds would be sold off in small parcels to investors over a period of time.
In effect, the guarantee for the bonds means that the British taxpayer would finance the bank for up to five years or until financial markets recover.
Richard Branson's Virgin Group and the investment firm Olivant have presented proposals for the takeover of Northern Rock, which they now have to revise by February 4.
Branson, who has been named preferred bidder by the government, said Monday he believed it was possible to repay all the money lent to Northern Rock and to save most of the 6,500 jobs at the Newcastle-based mortgage lender.
"We are putting our Virgin brands and our reputation in it," he said during a trip to India, which he is currently visiting.
Reports over the weekend said that Sir Richard Branson's Virgin Group was preparing to make an improved offer for the beleaguered lender.
The plan effectively turns Northern Rock debt into government bonds or gilt-edged stock, meaning that the taxpayer would be exposed to Northern Rock for much longer than planned.
Analysts described the scale of the financial backing pledged by the government as "breathtakingly large and without precedent."
"No British government has ever provided financial help on that scale to a business," said one.
Observers have said the Treasury's funding proposals could attract other suitors, now that a buyer would not have to shoulder the whole worth of Bank of England loans.
This had been a key sticking point in a private sale, with Virgin and Olivant unable to secure private loans to pay back this debt in the crisis-hit money markets.
The Treasury's plan has yet to be approved by the Financial Service Authority (FSA), and satisfy the European Commission's rules on state aid for companies.
European Commission official has said it will examine the financing scheme in "great detail" but did not say whether it would get the go-ahead from Brussels.