Osborne hopes to ‘ease’ business credit

 
George Osborne

The chancellor's announcement that the Treasury is preparing to engage in what he called "credit easing" is potentially very significant.

It would involve the public sector buying bonds issues by companies - in an attempt to cut the cost of credit for companies, and also boost the supply of credit.

There will be no firm announcement till George Osborne's autumn statement in November.

But officials have given me the following details.

Credit easing would involve billions of pounds of public finance. This money would be used to buy corporate bonds.

Initially the bonds would be those issued by big companies. And the Treasury would probably only undertake to purchase these bonds in the event of a further worsening in the eurozone's financial crisis that seriously reduced the provision of credit to businesses.

Such bond purchases could, in theory, start almost immediately, via a reactivation of the Bank of England's asset purchase facility - which was created in early 2009 but has barely been used.

In the longer term, the impact of credit easing on the flow of credit to smaller businesses could be more significant - because the Treasury is hoping to encourage the creation of bonds made out of small-business loans, by promising to buy such small-business bonds and thus create a market for them.

The idea is to encourage banks to parcel up small business loans into such bonds.

The model for all of this is what happens in the US - where there is already a much bigger market for tradable corporate debt and where in 2009 the US Federal Reserve engaged in pretty significant credit easing.

The purchase of corporate debt under a future British scheme would probably be carried out on behalf of the Treasury by the Bank of England. But the risk would sit on the Treasury's balance sheet.

Treasury officials say that these purchases would not add to the UK's deficit or the national debt, under the standard accounting rules, because the Treasury would be purchasing a tradable asset.

Even so, there would be risks to the public sector from making these purchases.

Update, 14:55: I have two further thoughts about the credit easing announcement.

First it demonstrates - if such demonstration were needed - that the Treasury is seriously worried that deterioration in the eurozone's financial crisis could lead to a full scale credit crunch, since phase one of credit easing would be designed to keep the supply of loans flowing to businesses in those appalling circumstances.

Second, it's proof the Treasury has given up hope that - in the absence of structural reform of the credit market - small businesses will find it any cheaper or easier to borrow, even in the longer term.

The Treasury may indeed be fearful that the Project Merlin agreement with the UK's big banks, which sets targets for business lending in 2011, is at best short-term sticking plaster - and at worst, the banks may yet miss their Merlin targets.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 147.

    One of my criticisms of the Tories is they have a philosphical aversion to direct interference preferring to tinker about the edges & rely market forces do the rest, I've argued the current situation needs direct interference to stimulate growth to counter the market forces suppressing it

    Credit Easing is pretty interferring so i approve, although, as others have pointed out, it does have risks

  • rate this
    0

    Comment number 146.

    zorrohead @ 80
    muggwhump @ 108
    TomMW @ 113
    WOTW_IBAA (another thread)

    That's what it looks like to me, the expectation that further corporate bailouts will be required. It's a refinance scheme, not a growth scheme. It's remotely possible that some of the companies that receive money may deserve it but this is being paid for by austerity.

  • rate this
    0

    Comment number 145.

    WOTW_IBAAA@83

    Real growth is growth in information. How valuable is the concept of zero? How many other theories rely on it? This is compound growth not the linear simplicity suggested by labour theory of value. It's growth in information that keeps prices at the peak of the price curve thereby creating demand for skilled labour and raising wages overall.

    Growth in information is life.

  • rate this
    0

    Comment number 144.

    The treasury opposed the Green Investment Bank because borrowing and buying assets would increase the national debt. Apparently "credit easing" is exactly the same thing - yet it doesn't increase the national debt. Interesting how the rules change when it's your own idea - and I wonder what the NAO thinks about it. Apologies if this appears off topic, it's not intended to be.

  • rate this
    -1

    Comment number 143.

    138. BABELrevisited

    You're spot on matey. Prepare to see all of your rights human or otherwise abolished for you by DC/NC.

 

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