Rothschild ‘witness’ claim confirms fears that this will not go away

Tory fears that Nathaniel Rothschild is a man with a mission have been confirmed. Rothschild has followed up his letter to the Times on Tuesday - when he claimed George Osborne had solicited a £50,000 gift from the Russian oligarch Oleg Deripaska, against party donation rules - by claiming that he can provide a highly respectable witness to the alleged discussion.

The claim virtually guarantees that some kind of investigation will take place; most likely by the Commons Standards and Privileges committee. We can expect MPs from other parties to challenge the shadow chancellor to clear his name by taking action for libel against Nathaniel Rothschild and his associates - an action which Osborne has ruled out.

But the very process of "clearing your name" can be career threatening, as the former Labour minister Peter Hain will testify. He stepped down after an investigation was launched into the funding of his bid for Labour's deputy leadership and remains in the wilderness. Osborne would face similar demands if he were investigated or goaded into legal action.

For Tory leader David Cameron, it will be hard to close down a damaging story about his closest political ally, joint architect of the project to make the Tory party electable. There is every prospect of a steady drip of revelations which will hobble the shadow chancellor during a vital phase in the Commons, with the economic crisis still the major political issue and Chancellor Alistair Darling due to make his pre-Budget report next month.

Osborne hasn't helped himself by coming out with differing accounts of his dealings with Deripaska. It simply whetted the appetite of the media for new developments, such as the witness claim from Rothschild.

We have yet to hear from Oleg Deripaska, on whose yacht Queen K the possibly illegal political donations are alleged to have been discussed. One fear for the Tories is that Rothschild is acting with the Russian's full consent - both of them angry with Osborne for his breach of etiquette in leaking details of private conversations at Rothschild's Corfu home and on the yacht. Their desire to punish Osborne could ensure that the story runs and runs.

Paradoxically, one of the factors helping Osborne is the widely reported involvement of Peter Mandelson in engineering the crisis for the shadow chancellor, revenge for Osborne's claim that the then EU Trade Commissioner, now Business Secretary, was "dripping poison" about Gordon Brown during the Corfu holiday. The Tories will be keen to dismiss the whole affair as political infighting and rely on voters to say they're all as bad as each other.

There is no doubt, however, that Osborne's credibility has been badly dented. In public, David Cameron will back his friend - endorsing the party line that he did nothing wrong even if he may be guilty of poor judgment. But he would be a fool if he was not making contingency plans for getting himself a new shadow chancellor. Short of bringing back the semi-detached ex-Chancellor Ken Clarke, however, Cameron's team is not over-endowed with talent. If Osborne is forced out, it is impossible to minimise the blow this will be to the Tory leader himself.

THE MOLE: OSBORNE ROW

LAST UPDATED 8:44 AM, OCTOBER 22, 2008