I have already mentioned this morning the capacity that the government and/or the Bank of England have to help mess up the economy this winter, with an interest rate rise being the greatest folly that they could impose, with a consequent stock market collapse on the cards if they get this wrong. However, it's not only the large business sector that might see real risk this winter: the small and medium-sized enterprise (SME) sector is also at risk.
As the Bank of England reported last Friday:
The pandemic presented a large financial shock to UK businesses. Support from authorities – including the Government and Bank of England – and from the financial sector helped businesses to continue operating during the pandemic. Part of the support came in the form of government-backed lending to businesses.
Overall, the level of debt taken on by UK businesses has increased moderately during the pandemic. But there has been a larger increase in borrowing by small and medium-sized enterprises (SMEs). Many of these businesses had not previously borrowed.
A high level of debt among UK businesses can lead to risks to the financial system. Higher debt levels can cause businesses to cut back on employment and investment more in the face of economic shocks. This can have a negative impact on people's jobs and incomes. Banks can also take losses if businesses struggle to pay back their loans.
The sums involved are smaller:
However, the scale is bigger, as is clear. And there is no guarantee that in an economy that is struggling that there will be the capacity to repay the loans that these smaller businesses have taken on. The risk to the economy is very real because almost half of all people work in this sector.
The Bank is right to be worried. I was right from the outset of this recession, saying (rather repetitively as I recall) that the reopening was when the problems would raise. And they are.
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It’s on recession they are afraid of it is inflation..you don’t see it as a problem. others do. Let’s see how it unfolds.
I don’t disagree with you, lots of problems lie ahead and I think a big rise in corporate defaults is inevitable… particularly as the BoE seems so keen to raise the spectre of higher rates.
However, the difference between large and small companies might be telling us something. Could it be that pre-COVID we had a banking system that really tried to avoid lending to SMEs and that the the pandemic induced Government intervention allowed access to debt finance for companies that did not have access previously… and perhaps should have had access.
How can we ensure that the involvement of our major banks with SMEs continues?
@ Clive Parry
“How can we ensure that the involvement of our major banks with SMEs continues?”
By ensuring the creation of local and mutually owned local banks who know their local customers.
Take a leaf out of the German System!
See
http://www.progressivepulse.org/economics/mutual-banking
The massive hike in energy costs and supply chain problems will exacerbate the debt problems/crisis of SMEs and sole owner enterprises.
Is most of this borrowing not through the bounce back scheme on fixed low rates?
So?
It still has to be repaid and the banks are charged with pursuing the debt
Of course! I didn’t look at it like that. My business is doing ok, so the fear I have is less people buying and raw material cost. Of course I can see that many businesses will face the downturn and still be paying the bounce back loan.