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EU opens in-depth probe of Northern Rock bailout

BRUSSELS (Reuters) - The European Commission on Wednesday opened an in-depth investigation of British plans to restructure troubled mortgage lender Northern Rock, saying it needed to look at potential distortion to the market.

Britain’s fifth-biggest mortgage lender, nationalised last month and which owes 24 billion pounds ($47.4 billion) to the Bank of England, said this week it expected to remain “significantly loss-making” in 2008.

The Commission has already endorsed rescue aid loans to Northern Rock, and the decision on Wednesday also backed actions taken in December by the British government to help the lender.

Such rescue aid is temporary. The restructuring aid subject to the in-depth investigation is a different matter.

Restructuring aid permits a government to inject capital into a problem company, and in return the company must shrink in size so that the aid will not unfairly affect competitors.

The Commission said the British plan would reduce Northern Rock’s lending operations and the size of its balance sheet.

Northern Rock would also repay the money it borrowed from the Bank of England.

Competition Commissioner Neelie Kroes said in a Wednesday statement that the in-depth investigation was needed “to ensure legal certainty, notably in view of the large scale of the aid measures, the background of current conditions in financial markets and the risks of distortion of competition.”

The Commission said the bank would need to find investment from other sources, in part by rebuilding the level of its retail deposits.

The bank said early this week that it expected to break even by 2011.

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