Northern Rock may buy back debt

LONDON, June 16 (UPI) -- The British government is working on a plan to reduce nationalized bank Northern Rock's debt, sources close to the discussions said.

The plan is for the bank to use its own funds to buy back debt from bondholders, which would reduce the $4.9 billion in capital the British government said last year it would give the bank to increase its lending, The Times of London reported Tuesday.

The bank, which has already borrowed more than $16 billion from the government, could use part of its deposits at the Bank of England to fund the deals.

In turn, the move may help persuade the European Commission that the $4.9 billion capital injection is not state aid.

The Commission's ruling on the strategy could come as early this week, The Times said.

The London government has proposed splitting Northern Rock into a two banks, one of which would hold the firm's toxic assets, which would be wound down over time.

The $4.9 billion capital injection would go to both the "good" bank and the "bad" bank, the newspaper said.