Northern Rock a lingering risk to Brown's future

By David Clarke

LONDON (Reuters) - 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.