The government launched a scheme on Wednesday to help small and medium-sized businesses refinance up to £20 billion (about $22.2 billion) of debt to stop cash-starved firms going bust.
Economists and industry figures welcomed the steps to get credit flowing again, but some said the scheme did not go far enough and would not be a panacea for an economy heading into recession. Under the plan, a new Working Capital Scheme would see Labor provide £10 billion to guarantee as much as 50% of loans made by companies with a turnover of up to £500 million.
Business Secretary Peter Mandelson said the government had also made a £225 million provision against loan defaults, although he added that the risk of that was “relatively low.” Analysts questioned whether the scheme went far enough. “A 50% guarantee from the government to small and medium sized businesses seems wholly inadequate,” said David Buik of BGC Partners.
The plan is the latest attempt by Prime Minister Gordon Brown, who is lagging in the polls and must fight an election within 18 months, to kickstart an economy and unfreeze the lending markets ravaged by a global credit crunch, and follows a drive to boost jobs Monday. Junior business secretary Shriti Vadera said talks were still taking place with banks on how much the government would charge for its guarantee, but expectations were that it should cover administration fees and the default provision.
Mandelson said talks were also still ongoing with trade credit insurers over cuts in cover for exporters, but criticized providers for being too cautious in their risk assessments. “I happen to think they are over-reacting. The job of insurers is to insure in bad times as well as good,” he said.
An Enterprise Finance Guarantee Scheme has also been established, securing up to £1.3 billion of additional bank loans to firms with a turnover of up to £25 million. Business leaders called it a “stepping stone.” “Things seem to be moving but the banks must also be persuaded and forced to lend under normal criteria,” said Stephen Alambritis of the Federation of Small Businesses.
RATES CUT, BANK RESCUE
After years of steady growth, the economy looks certain to have gone into recession at the end of last year for the first time since 1992 and economists predict falling output and hundreds of thousands of jobs being lost in 2009. The central bank has cut interest rates to a record low of 1.5% but banks, many tottering themselves because of risky bets gone bad, are running scared of giving new credit to consumers or companies, squeezing the life out of the economy.
The government injected billions of pounds into banks' failing balance sheets in October but this has failed to spark an increase in lending, and further measures to boost bank lending are likely before the end of the month. “We know that some companies are struggling to secure the finance they need, not because of any failure in their business but due to the tougher credit conditions,” Mandelson said.
Under the Working Capital Scheme, companies would pay a fee to the government to cover them against default so there is no real government outlay unless companies cannot pay back their debts. Officials say this should minimize risk to the taxpayer.
The government Wednesday also pledged to help businesses raise new long-term finance by investing in viable companies which have high levels of existing debt through a new £75 million enterprise fund, to which banks would contribute. (Reuters)