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Northern Rock not so solid for Brown's future

Photo Credit :

financial markets and questioned Prime Minister Gordon Brown's economic competence has been questioned. (AP) Imaging by Shokinder Goyla

LONDON: Nationalising ailing Northern Rock bank may be the best option left to British Prime Minister Gordon Brown, but lingering doubts over its future risk chipping away at public confidence in the run up to the next election.

Hopes for a fast Northern Rock turnaround are hostage to financial markets stabilising, a buoyant housing market returning and approval for nationalisation from the European Union that does not result in a breakup and big job losses.

Brown has staked his credibility on protecting Britain from the fallout of the global credit crisis. But with the economy and the housing market slowing, he will be in the firing line if things get worse and the public looks for someone to blame.

And if those with Northern Rock mortgages get houses repossessed in a downturn, the chances are high that newspapers hostile to the ruling Labour government will use their headlines to attack Brown's policies.

So just as the Iraq war and a scandal over political party funding dogged former Prime Minister Tony Blair until he finally threw in the towel last year, so Northern Rock risks becoming a millstone for Brown.

"It was interesting that Brown was saying the test for the government is economic stability as there are no guarantees it would pass that test given the turmoil could still pass through to the economy," said Philip Shaw, chief economist at banking group Investec.

But Brown has time on his side. He doesn't have to call the election for more than two years and while the economy is slowing, few now predict a massive slump. He could be facing voters during an economic upswing.

And he may convince the public that current problems are solely a result of risky mortgage lending in the United States which has caused a housing slump there and hit financial institutions in leading Western economies.

Seize The Day

The main opposition Conservative Party has also failed to streak ahead of Labour in opinion polls. They lead, but not by the double-digit percentage points needed to land a convincing majority. And the polls are still volatile.

Before Labour won power in 1997 after 18 years in the wilderness, more than half the country backed Blair and Brown, wanting a change from a Conservative party wounded by accusations of economic mismanagement and sleaze.

"He does have a chance. Over the last few months we've seen how fickle the public can be in the polls," said Stephen Lewis, chief economist at brokerage Insinger de Beaufort. "At some point between now and 2010 there may be an opportunity to take advantage of strength in the Labour Party poll rating."

He suggests several months of upbeat economic news, troops finally pulling out of the unpopular war in Iraq plus a Conservative Party scandal could be the "perfect constellation" -- so long as Brown is decisive enough to grasp the opportunity.

The Conservatives acknowledge they have a long way to go to be confident of seizing power. A senior member of the shadow cabinet told Reuters that given an election is still some way off, the chances of a government policy onslaught are high and even a shaky economy may not be a killer blow.

For example, in 1992, the economy was still in a bad slump. Yet the Conservatives stayed in power because voters did not trust the traditionally left-leaning Labour Party to run the economy.

Partly worried about having ideas pinched by Labour, the Conservatives have yet to come up with substantive policies. And while criticising the nationalisation of Northern Rock, they have offered few credible alternatives.

"The suspicion is that were they in power they wouldn't have done any better," said Lewis.

What the Northern Rock debacle has done, however, is to inject an element of political risk into UK financial markets that has largely been absent since Labour came to power. Brown's economic competence has been questioned.

Sterling was singled out for attack on Monday morning after the decision to nationalise Northern Rock, economists say. Markets may now scrutinise data such as the rising budget and current account deficits far more closely.

"Political risk hasn't registered at all on the radar screen for a long time," said Shaw at Investec. "The market perception over the last 10 years has been that the government is very competent at handling the economy."