The FT has reported this morning that:
The UK government is planning to launch a permanent replacement for the £65bn Covid loans programme with new state-backed guarantees to support lending by banks to a broad range of small to medium-sized business.
They added:
Under plans still being finalised by Treasury officials, the new loan scheme could carry a guarantee of up to 80 per cent for loans of up to £10m for businesses that are deemed viable but unable to obtain finance from their lender, according to industry and Whitehall figures.
I am, however hoping that the interest rate noted in this paragraph is wrong, because it most certainly feels it:
Banks will be allowed to set the interest rate for the new loans, although the rate is likely to be capped at about 15 per cent, with bankers concerned that any artificially low state-mandated rate would in effect wipe out all other small-business lending.
I have three thoughts. First, that this is not post Covid funding, even if it is portrayed that way. This will be post-Brexit funding. Maybe their fear of a financial collapse explains the extraordinarily high interest rate cap.
Second, this scheme reintroduces the 80% cap, and will inevitably as a result deny access to the scheme to the companies most in need, who will not be able to cover the 20%, come what may. The scheme might as well in that case be seen as part of a cull of what the banks see to be zombie companies, in the process delivering the Schumpeterian creative destruction the Treasury no doubt desires whilst simultaneously giving the banks a subsidy on the safe bets.
Third, as I have said for a long time, this is the wrong approach. Companies worth saving do not need loans now. They need equity. That is what the government should be supplying. Take stakes of not less than 25.1% to have some control. Appoint directors, including one from the workforce. Require real business plans, and monitoring. Hold the stakes in a National Wealth Service. Build for the future, and give the votes of confidence that equity provides rather than the kisses of death that extra debt burdens create in the corporate sector.
The trouble is, of course, that the Tories and the Treasury are a lethal combination. Neither understand business. And it's showing.
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Its a strange conversion. The Tories used to be the party of business. Now they quite literally say “f### business”. The culling of the weak is surely what underlies their thinking, though if that were to be applied universally, they would have to cull themselves first! The Brexit mess they’re making is senseless and I doubt there is even a sketch of how it should be taken forward. Ask John Redwood maybe? Creative destruction is the easy part. Anyone can do that. But if too many businesses fail what is to stop us from becoming a basket case? As each hole in the dam opens up just slap some more mud on seems to be the answer. There is no coherent policy on anything. To fully back business would mean having to acknowledge our interdependence with the EU and the world, which can’t be done – for political reasons. So they are doomed to appease a nationalist agenda for which backing will be tested to the limit. And then the jobs really start going.
‘Conversion?’
I’m not sure about that.
When Thatcher went hard line monetarist in 1979/1980s her insistence on using the interest rate to control inflation destroyed the bridging loans (meant to provide short-term cash in the cycles between the making and selling of goods) that many British firms/businesses used to manage their operations. The loss of these low interest loans to manufacturing meant that many manufacturers went to the wall.
The CBI used to hate the Tories in this period until the banking sector became the dominant provider of GDP.
It is important to realise that the Tories have always been a pro-City party really and not a pro business one as if they were they would not have encouraged and allowed so many destructive take overs, debt and the like to become so prevalent.
Many bankers say that debt is good for you (paying back the money alongside all your other costs) promotes efficiency and cost saving. The Tories obviously agree with that.
It is a rather sick state of mind. ‘Conversion?’ I think not.
Thanks,
On reflection, I agree. The “business” in question is open to definition. Perhaps I should have described the “conversion” in terms of perception? The Tories were perceived as the party of business. Your comment reveals a more complex relationship than I had realised.
We know now, even as we still pretend we don’t , the ugly and abusive nature of the government and the blind eye of the ‘opposition’.
Yesterday Merkel achieved what she has been trying to do this week. And there is no nasty backdoor sting loans and interest rates, just full support.
‘Under the terms of the national lockdown, which Merkel and the leaders of Germany’s 16 federal states agreed in under an hour in an emergency summit on Sunday morning,’
https://www.theguardian.com/world/2020/dec/13/germany-to-close-shops-and-schools-in-tightened-covid-lockdown
In under an hour!! Because they have gone over 20,000 excess deaths this year and over 500 deaths a day and they have 4,000 ic beds.
Whilst we as we are certainly heading into 6 figure excess deaths have inly just ine London borough closed its schools today whilst others are threatened with emergency powers to remain open – ruining thei kids xmas even more and causing infections and deaths that could easily be avoided.
And we ate liojin instead ar enriching banks and liading our businesses uo with debts.
Qui bono, Bozo?
This is just tarting up the old EFG scheme isn’t it?
Keeping zombies afloat since 2009….
https://www.british-business-bank.co.uk/ourpartners/supporting-business-loans-enterprise-finance-guarantee/about-efg/
Totally agree with your equity point though.
There are many things wrong with this but primarily is is encapsulated in this quote
“that are deemed viable but unable to obtain finance from their lender”
Who will deem these businesses viable? I suspect as in the past it will be the banks. If the banks deem these businesses viable then they should lend as part of their normal business. What the scheme does is allow banks to lend to businesses both low and high risk but pass the risk to the State while at the same time allowing them to charge an excessive rate of interest.
Given that banks know the State will always bale them out there is no need for any such scheme. The scheme allows banks to risk only 20% in a viable business but earn high interest on 100% of the loan value.
Of course you are right in that what these businesses need is equity investment to shore up their balance sheets until such time as they can recover rather than adding more debt. Debt should be used as a means to invest and grow a business not to shore up shortfalls in demand.
Agreed
I’m pretty sure that I have resolved the “disappearing bank loan mystery.” When the bank loan(s) is repaid it goes into the relevant bank’s reserve account – which also happens to be held in the BoE interbank settlement system. Now government and bank reserves are not included in the money supply figures, so, when the loan is repaid the money literally disappears from view. Not destroyed but certainly out of sight.
Which links me in to today’s theme: 50% of Tory funding comes from bankers. Noting now how they get, not only some £25 billion a year in interest from the loans which cost them nothing to create, but the repayments go into their reserves, which increase the value of the banks and raise their reserve ratio.
I will conclude by pointing out that in the 2019 election, the Tories outspent Labour by a factor of 3 and – just like America – money spent on elections is what counts. If you want democracy teach the other parties how to raise election funds, just like they do in America.
NO!!!!!
It disappears
It goes nowhere
Bank accounts are only records of debt
When the debt has been cleared the account goes – literally – for good
You are completely wrong
Sorry, but it has to be said
I am beginning to appreciate how hard this is for people to understand – my discussion on the national debt is delayed for this reason
I will try to post on it very soon but for now accept this, from my twitter account:
“The hardest thing when struggling to understand banking is to realise that a bank balance is not what we think of as money: it is instead a record of what is owing to or from a bank. A bank balance is not something tangible, like cash. It’s just debt. And that’s hard to accept.”
There is nothing left when a debt is paid
I have done a video on this for tomorrow
Interesting talk with Jimmy Dore.
https://www.youtube.com/watch?v=c-AK1RdRzLc&ab_channel=TheJimmyDoreShow
We are a small business involved in holidays or tourism if you prefer. Our business would never qualify for a long based on banking criteria we are just to small. Having looked on the local government site at the application for government backed loans we again wouldn’t qualify. Our premises are subject to a business rate assessment and we have a website etc but we just too small and could not repay a loan. I suspect up and down the land on paper we look like a zombie company but we are real and we have had a business for years that keeps us going. Our customers have been few and far between this year and this is down to Covid and the government’s response. We plan to keep going but for small businesses like our the government and banks don’t know how to help. Thousands of these little businesses like ours and the employment they give to one two or a few people will be gone if help doesn’t arrive in some tangible form. Richard you are right on cash flow it is King conserving it is our main preoccupation.
Good luck
Are we not witnessing the McMillan gap all over again…
https://en.wikipedia.org/wiki/Macmillan_Committee
The banks should be made to own the historic problem and to apply for permission to the local authority if they wish to foreclose the loans to a company.
The company itself should present a business case justifying its continued existence.
Companies should be allowed to apply for both short term relief and new loans.
Relief should come from local authority funds provided by the government and new loans should be approved by both local government and the banks.
If local government cannot see a case for closing the business or for supporting it then the bank can try to recover its money but if there is a case for support and continuing existence the banks should be forced to extend credit.
The involvement of local government takes the risks of preemptive foreclosure and collusion to transfer risk to the treasury out of the equation.
I had read about it…but thanks for the reminder