The companies hit hard by Carillion don’t need bank loans: they need new capital backed by People’ QE

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Britain's banks queued up to offer assistance to companies that will suffer difficulties as a result of the failure of Carillion yesterday. When I last noted something like £225 million was on offer. And it was being greeted as if it was some sort of lifeline to the companies in question.

In a few cases that may be true. In most that will not be the case. A loss from a bad debt, which is what most sub-contractors to Carillion will suffer, reduces the value of a balance sheet of a company. And in many cases the eventual loss to those companies will exceed the value of the bad debt as a period of adjustment to new circumstances is required, including downsizing, the costs of laying off staff who will suffer through no fault of their own, or the costs of procuring new work are incurred. All those will in turn reduce the value of the balance sheets of the companies in question. Many that were solvent will now look to be insolvent. Companies may not trade whilst insolvent. That is precisely the crisis that Carillion has created.

An offer of a loan from a bank does little to change this. A loan from a bank is a liability on the balance sheet of a company. It is true that the company has more money and so has more short term solvency, but that is only because it has taken on a loan, and by their nature loans must be repaid. The net balance sheet worth of the company does not change as a result of being offered a bank loan.

And the stress that the company must suffer - because the ratio between the capital that it can provide from its own resources to the capital that it has borrowed - has increased. This relationship - called the gearing ratio - is always a clear indicator of potential stress in any company and in the case of all companies taking these loans that ratio will increase. Like night follows day it is a fact that all of them have a reduced chance of long term survival despite receiving these loans.

What this indicates is the sheer inability of the UK's financial system to provide the support that smaller businesses need. The companies that have suffered these losses do not need loans: they need new capital to replace that which they will have lost. Some, to be candid, will not justify that capital injection. That will be because they have no business model left worth injecting funds into. If they were heavily dependent upon Carillion and there is no guarantee that those taking over that company's contracts will continue to buy services from them that may well be the case.

But others will have the ability to survive if only they are not burdened with considerable new fixed obligations to service debt and any associated interest but could instead concentrate on returning their businesses to profitability and then pay returns when they have done so.

In other words, what these businesses need is an injection of new capital now. Let's not get into the precise form that capital could take: that will vary from case to case, and anyway it's hardly worth considering because there is no venture capital fund on hand to provide that funding.

There could be, of course. If the UK had a National Investment Bank it could provide that replacement capital. That National Investment Bank could borrow at next to nothing in financial markets and then invest for the long term in the businesses in question as a partner who can do three things. First they can provide long term capital. Second, they could provide business support to assist management focus on long term survival. And third they could provide the assurance that a return would only be required when the business was able to make it.

And underpinning this offer, in case it was needed, would be People's QE, guaranteeing that the funds would be available in the long term whatever happens in the financial markets. That guarantee might never be needed, but it would be there to make sure the required stability to assist those afflicted by this crisis had the necessary breathing space to recover from it.

People often seem to wonder what a National Investment Bank is for. Many seem to see it as some sort of wild left wing enterprise. I do not deny its social purpose. That is apparent, I hope, in what I say it could achieve, as noted above. But this is no ‘nationalise at all costs' proposal. Instead it's in no small part about the state using its clout to release the potential in the smaller business community to serve society in ways that the existing financial markets, mechanisms and banks in the UK seem quite unable to do.

This is about ‘getting real' for the UK economy.

It is about addressing market failure.

It is about building prosperity in real public / private partnerships where each party bears their appropriate share of responsibility and expects the rewards that might arise from that.

And it's about building an economy robust enough to operate sustainably in the twenty first century.

That is precisely what the ideas inherent in People's QE were all about.

Now it's time for them to be delivered.


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