Northern Rock shareholders will be told today that they could lose out completely if they do not accept a final attempt by the Government to sell the bank privately.

The effective ultimatum will come in a statement to the Stock Exchange at 7am that will set out terms for a private-sector solution to the bank’s plight. Up to £30 billion of debt to the taxpayer will be paid off by issuing bonds guaranteed by the Government, as disclosed in The Times on Saturday.

The Treasury will make plain that if a private deal — with Sir Richard Branson’s Virgin, Olivant or the board of the stricken bank — is not accepted, Northern Rock will be taken into public ownership and shareholders could well end up with nothing. One insider last night described the proposal as a “pistol to the head”.

The City will be told that, if the bank is nationalised, the valuation will be reduced by the £55 billion of loans and guarantees that the Government has already given. This means that it will technically be bust, as the debts are much larger than the value of the company.

Background

• Goldman Sachs steps into Northern Rock crisis

• ‘We did not let down our investors’ says chairman

• Northern is not just a bank, it’s our bank

• Northern Rock still lending ‘recklessly’

• Star investor stays bullish on banks

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If a private deal went ahead, the taxpayer would not have to foot the bill for the bank’s £30 billion loan immediately, but would effectively have to underwrite the rescue and could have to find some money in the future if anything went wrong. The deal, which would be the biggest public-private partnership yet seen, would therefore still be seen as state aid.

The Government will, however, take a non-voting stake in any company that buys the bank so that the taxpayer will benefit if its value increases. The move, to be announced today by Alistair Darling, the Chancellor, is clearly designed to answer the charge that the Government is forcing a sale at a knockdown price. The Government will also take a fee from the new company for the guarantees that it is offering on the bonds. If the bank recovers after the current crisis, any government would be able to sell its stake at a future date.

Private bids for the company have to be in by early next month and the European Commission will monitor any rescue package in case it breaks strict rules on the use of state aid to support private enterprises. Were it to do so, the Commission could rule against the plan.

The Treasury must present the Commission with its proposals by March 17 and Mr Darling may have to propose “compensatory measures” to wipe out the competitive advantage provided by government support. Experts have suggested that this could include the sale of one or more subsidiaries or a withdrawal of some products.

Northern Rock is expected to issue its own statement to the Stock Exchange today, praising the Government’s solution and reiterating its belief that a private-sector deal is achievable.

Mr Darling will insist today that, if public ownership does become the option, then it will only be a temporary one. “This Government is not in the business of running banks,” an insider close to the negotiations said. “But we will see how these talks work out. In the end we may have to do it, but it will only be for a time.”

The Chancellor will make plain that, if the negotiations fail or a deal is blocked by shareholders, the bank will be nationalised within weeks to allow the Government to recover the £30 billion of loan it has handed over. Under the deal, up to £30 billion of Northern Rock’s mortgage assets will effectively be remortgaged to raise the cash.

The Government will still be in a position of risk, however, because it will be guaranteeing the bonds, presumably for five years.

Today’s warning to bank shareholders is certain to provoke accusations of blackmail and claims that Mr Darling and Gordon Brown are trying to boost the fortunes of Sir Richard’s group, one of the three bidders expected to emerge today. There was particular shareholder hostility to the Virgin bid and ministers will be accused of trying to pressurise them.

However, Mr Darling will also come under fire for exposing the taxpayer to more risk and for a longer period. The Government originally said that any buyer would have to pay back up to £15 billion immeidately, but it has been persuaded by its adviser, Goldman Sachs, that it has to sweeten the terms to help a private bid.

George Osborne, the Shadow Chancellor, said last night that Mr Brown was “mortgaging the taxpayer to try to get him out of the political hole he has dug for himself”. He added: “It looks like the British people could be billions of pounds in the red for years to come, thanks to his economic incompetence. How does this square with the government guarantee to get all the taxpayers’ money back?”

Sir Richard, whose Virgin group was named as the preferred bidder to buy the stricken bank, is travelling with the Prime Minister on his trip to Asia. He said that he was there for talks on setting up a clean energy business in China, but he remained with the group of businessmen travelling with Mr Brown as they flew on to India.

Sir Richard took part in a televised summit for entrepreneurs in Delhi. He said of the Virgin bid: “Over the next few weeks I believe we will save far and away the most jobs.”

He added that Northern Rock would be restyled as Virgin Bank if he succeeds. Asked if he had discussed Northern Rock with Mr Brown, Sir Richard replied: “I came on this trip for the sole reason that we have a relationship with China and India. I have not spoken one-to-one with Gordon Brown [about Northern Rock].

“I think governments should not have stakes in any company. Nationalised businesses are a disaster.”

Rock and a hard place

— Selling Northern Rock’s debt to the Government could raise cash to ease a private-sector takeover or keep the bank independent

— Northern Rock owes about £26 billion to the Bank of England. The Bank holds Northern Rock assets as collateral

— Goldman Sachs is thought to have suggested that the debt be securitised

— To encourage investors to buy the bonds, the Government would offer a guarantee. The sale would repay the loan to the Bank

— Taxpayers would remain on the hook because the Government would have to ensure that the bonds pay the yield promised

— Northern Rock’s mortgage assets would provide the income to cover interest payments to the bondholders, and could be sold on maturity to cover the original debt

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