The National Audit Office has issued a stark report this morning. It refers to risks within the loan schemes made available to businesses with government backing to help them survive the coronavirus crisis.
In the key paragraph in the report the NAO says:
As a result of credit and fraud risks, the Department and the Bank's preliminary central estimate is that 35% to 60% of borrowers may default on the loans but the estimate is highly uncertain. Government's default estimates at Scheme launch ranged between 30% and 75%. The latest estimates, including those including those by the Bank and the Office for Budget Responsibility,
have widened to between 15% and 80% depending on the UK's economic performance. According to the Bank, credit and fraud risks are interrelated and therefore it did not assess them separately. The Department's 2019-20 annual report and accounts highlights likely total credit and fraud losses of between 35% and 60%, based on historic losses observed in prior programmes which most closely resemble the Scheme. Assuming the Scheme lends £43 billion, this would imply a potential cost to government of £15 billion to £26 billion. However, actual losses may differ from those forecast and indications of the extent of credit losses and fraudulent applications will not become apparent until borrowers are due to start repaying their loans. Loan repayments begin from 4 May 2021 as government is paying interest on all loans for the first 12 months.
Overall,the report suggests fraudulent claims may represent between 0.5% and 5% of all balances. That means losses of up to £2 billion may arise for this reason. That will, almost entirely, be a cost attributable to the lax regulation of U.K. company law, to which I have referred on this blog countless times. Surely it will now be appreciated that having a proper regulatory environment in place that really permits abuse to be traced makes sense? I would hope so.
But more importantly, that still means bad debts of between 10% and 75% are expected on this scheme, with a mid range estimate of around 50% seemingly being likely.
It's my suggestion that most of the defaults will be amongst limited companies, simply because it is much harder for a sole trader or partnership to default when they have personal liability for the sum owing. That means that, give or take (and the data is not finalised as yet) it is possible that up to 500,000 companies may fail according to those who have offered them loans. To put this in context, there are around 1.5 million trading companies in the U.K. based on tax return data. And the government is expecting roughly a third of these to fail.
That's the real message of this report, but I am not seeing that drawn out in the commentary in the press.
And, if one in three businesses fail so too does the employment associated with it.
Of course, some of these failed businesses will re-emerge, Phoenix like. I am well aware of that. But there will be disruption, chaos and employment loss along the way.
Not all will be immediate, I accept. But, this report does, whatever its supposed theme, and however it is reported today, really set out the scale of risk that our economy faces, including on the employment front. The companies to whom these loans were made might be small, but they employ millions of people. And those jobs are at real risk, which this report acknowledges. And still the government is not recognising the scale of the crisis that we face as the economy heads for its real downturn, which has yet to happen. I seriously wonder how they have got things so wrong.
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Personally I think that in some areas we are going to be staring dangerous disorder in the face.
And what is worse is that it could well be increasingly justified as the only action that might get this Government to do things properly for once.
In the early 80’s Thatcher had a shot across her bows as to the destruction her Friedmanite economic policies were reeking across the land and she relented. But will Bungling Boris and Caustic Cummings listen?
The economy would do better if the track and trace system for working properly. We read it has cost or will cost £12 billion. That is almost a third of the defence budget. I am baffled as what the money is spent on-it’s hardly hi -tec equipment.
The spend minus costs surely equals profit. What is the rate of profit? Will we know? Do they have to publish accounts? At what point does it become profiteering?
In parts of the world where there have been famines, some merchants have hoarded food to drive up prices. Is this the same order of immorality in a pandemic where over 40,000 have died (and the real figure could a lot more)?
I fear they will hide the data in larger numbers
The most expensive copy of Excel anywhere.
That’s nonsense Richard.
The figures talk of the number of those companies WHICH HAVE TAKEN A LOAN.
For your figure of 500,000 to be right it would require every single trading company to have taken a loan. They haven’t. Of the 300+ companies which my firm acts for, less than 20 have taken a loan.
No doubt when the number of companies which fail is far below your 500,000 figure, you’ll quietly forget that you ever predicted it and refuse to answer questions on here. It’s what you always do when your alarmist predictions are shown to be nonsense.
You are scare-mongering again.
I said 1.5 million companies trade
I said 1/3 will fail
And that is at the low end of the estimated failure rate the government is suggesting
If you’re an accountant your grasp of numbers is very weak
My logic flows absolutely from what is being said by the NAO etc
The BBLS borrowers are all SMEs borrowing up to £50,000 each. According to the report, about 90% of the BBLS loans went to very small (micro) businesses – about a million loans totalling £30 billion (so £30,000 each on average) – about 75% were small companies, and most of the rest are sole traders. The report gives some very wide estimates for how many loans may not be repaid in full – 15% to 80% is tantamount to saying “we really have no idea: something between almost all and hardly any”. So there might be “up to” 750,000 small companies at risk of “failing”, in the sense of not being able to repay when the debt becomes due. (“Up to” is an indication that the actual number might be very much less.)
In principle, the lenders should first attempt to recover the debt from the borrower, and can then call in the government guarantee. But is it in the lenders interests to spend their own time and money treating the borrower harshly and ultimately liquidating the businesses, to recover relatively small amounts of money, when they can fall back on the 100% government guarantee anyway? Will the government (assuming it has subrogated rights once it pays up on the guarnatee) want to do be responsible for driving people out of business itself?
If (as seems likely) a large fraction of the loans cannot be repaid, a better solution might be just to waive the lot.
Or turn it into a national wealth fund
I could not fund data to suggest that the majority of claimants are sole traders / one person companies
What have I missed (I could have done, of course)
The report says 75% (by value) small companies and 18% (by value) sole traders, leaving 7% of something else – partnerships, perhaps? But it may be that the average company received a bigger or smaller loan than the other borrowers on average, so the percentages (by number of borrowers) may be different. Whether it is around 500,000 or around 750,000, we are in the same neighbourhood – probably tens or hundreds of thousands of small companies with debts they might not be able to repay when they fall due.
If the reality is the loans are not going to be repaid, we should just accept it and move on, rather than burdening the businesses with trying to repay. (A billion here, a billion there, and soon you are talking real money. But the Bank of England can just print some more.)
I have suggested calling it equity and adding conditions
See and theres me thinking you were to optomistic ,if the ONS is anything to go by there always wrong.
“Mission Control you have a problem!” – “It’s the government!”