N.Rock needs EU okay to operate, shrinkage likely

LONDON/BRUSSELS (Reuters) - The European Commission is likely to force Northern RockNRK.L to downsize in compensation for receiving government aid, British and European Union officials said on Monday.

Such a step is standard treatment for troubled companies -- publicly or privately owned -- that obtain significant government aid for restructuring.

"The conditions under which Northern Rock will do business have to be approved under the (EU's) state aid rules, which are deliberately designed to stop there being unfair competition from something that has the state standing behind it," British finance minister Alistair Darling told a new conference.

Darling said he understood the concerns of rival banks. The EU rules are designed to deal with the concerns of competitors who see government aid going to a rival.

Northern Rock faces a March 17 deadline to pay back about 25 billion pounds ($48.7 billion) of emergency aid authorized by the European Commission for no more than six months. But it will be unable to do so.

The British government as a result must ask the EU executive to convert that emergency aid into restructuring aid, which is given only under stringent conditions.

"Restructuring aid requires the company to be restored to viability so it can survive in the future without any further injections of public money," Commission spokesman Jonathan Todd said in Brussels.

He added: "There must be compensatory measures to offset the distortion of competition caused by the subsidy, and normally that's a reduction of capacity".

It was unclear what form the downsizing may take -- fewer employees, branches, loans, customers or a combination of those.

The Commission cleared a 2.5 billion euro ($3.7 billion) restructuring of French heavy engineering firm Alstom (ALSO.PA) in 2004, but the company had to find industrial partners to share investment and decision-making on a 50-50 basis in major sectors.

It also had to sell 1.6 billion euros worth of businesses, including a locomotive arm and an industrial boilers operation.

(Reporting by David Clarke and Kate Kelland in London with David Lawsky in Brussels; Editing by David Holmes)