Northern Rock appears to be repaying its Bank of England loan faster than projected in its restructuring plan. While good news for Ron Sandler & co., Rock’s rapid shrinkage is exacerbating the current mortgage market squeeze, with negative macroeconomic implications.

The restructuring plan projects a 25% repayment of the BoE / government loan in 2008, implying a reduction from £26.9 billion on 31 December 2007 to about £20 billion. According to a trading update on 12 May, the loan had declined to £24.1 billion by 31 March. More recent developments can be estimated from the weekly BoE return. “Other assets” fell by £7.9 billion between 2 April and last week. As well as the Rock loan, this category includes foreign currency lending, which may have declined by £4 billion over this period, judging from information in the latest BoE Quarterly Bulletin (see p.137). A reasonable assumption is that Rock has repaid a further £3-4 billion since the end of March, implying the outstanding loan may already be close to the £20 billion full-year target.

The repayment 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% at the end of last year to 3.7% 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. Its U-turn will therefore cut the supply of mortgage loans by over £30 billion in 2008 compared with last year – significantly worsening the impact of the wider credit “crisis”.