Northern Rock investor says rescue criteria flawed

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Hedge fund SRM Global said support provided to Northern Rock does not constitute state aid and its lawyers will tell the government on Friday that as a result it needs to reassess its criteria for rescue proposals.

"The government incorrectly conceded that measures were state aid ... and has not made any appeal of the Commission's decision. As a consequence, the criteria set out by the Treasury for continued liquidity support are flawed," the fund said.

"It would be a mistake for the government to take a decision on private sector bids and the future of Northern Rock without revisiting the question of state aid and the appropriateness of its criteria."

On Wednesday the Treasury asked two suitors competing to rescue Northern Rock to improve their offers or it would nationalize the country's fifth-largest mortgage lender.

The Treasury said a rescue proposal from a consortium led by billionaire Richard Branson's Virgin Group is the front-runner, ahead of a rival "in-house" offer led by the bank's management team, which is supported by SRM.

The government has called on the rescuers to improve their proposals in regard to the repayments to the government of the 26 billion pounds borrowed from the Bank of England.

But SRM said the funding support being provided to Northern Rock represented an "exceptional case which does not warrant the imposition of undue compensatory measures."

Revised proposals are expected to be submitted in the coming days and the Treasury could make a decision next week.

"The judgement on state aid is a matter for the European Commission," a spokesman for the Treasury said in response to SRM's statement.

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