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
    +1

    Comment number 27.

    There is no way out, the ponzi scheme ran at full pelt before hitting it's natural limits. George Osborne and those at the Fed and ECB can say what they want, but soon, the full affects of their profligacy and ignorance will be bourne by the have nots. It is my view that the inherent unfairness in the current system, shall be it's downfall, and social, political change will ensue (on a huge scale)

  • Comment number 26.

    All this user's posts have been removed.Why?

  • rate this
    0

    Comment number 25.

    "Treasury officials say that these purchases would not add to the UK's deficit or the national debt, under the standard accounting rules..."

    And what happens to the debt when the accounting rules inevitably change???

  • rate this
    +12

    Comment number 24.

    Just UK registered companies? with UK investments? Or are we going to subsidise multinationals raising money to invest in Chinese factories?

  • rate this
    +2

    Comment number 23.

    @9.ComradeOgilvy
    Banks problems in financing industry are

    1. Extra capital requirements will reduce the availability of credit

    2. Extra liquidity requirements increase the cost of lending

    Govt does not have these problems, so they can lend longer term and cheaper.

    Just hope they get their credit assessments right though as the govt assumes the credit risk.

  • rate this
    -1

    Comment number 22.

    20. PURPS
    JUST NOW
    JammyDodger. The reason is by utilising the Insurance industry, it enables this to be kept completely away from the Gov't & socialising SME debt.
    ==
    And when a big insurer collapses? Won't the debt just be socialised? Surely there are even better reasons for saving an insurer than saving a bank?

  • rate this
    +2

    Comment number 21.

    Wasnt it the banks bundling up and playing pass the parcel with debt that got us where we are ???
    Anything modelled in the US serves one purpose only and that is to give money to there banks......

    No doubt we will see as much profit from this as we have from the bank shares we own....

  • rate this
    +2

    Comment number 20.

    JammyDodger. The reason is by utilising the Insurance industry, it enables this to be kept completely away from the Gov't & socialising SME debt.

  • rate this
    +1

    Comment number 19.

    11. Nigelpwsmith


    We certainly don't want to make the mistakes that led us to the current position, by lending to anyone without checking credit worthiness, we must relax the conditions to allow Government mortgages and business loans to stimulate the economy again.
    ===
    Clearly a credit junkie. Can't you see where this sort of thinking has taken us?

  • rate this
    +1

    Comment number 18.

    There is always a risk in the kind of securities being offered, it was similar mortgage backed securities that sparked off this whole crisis. I suppose by spreading the risk across multiple loans to businesses you are less likely to suffer losses. That is, of course, unless the global economy takes another dive... Still if it can get money into SMEs that will be less likely.

  • rate this
    +2

    Comment number 17.

    like we need another market for debt.

  • rate this
    +14

    Comment number 16.

    So what we're saying is that the public sector is going to come to the aid of the commercial sector - again. I do hope someone remembers to refer to this process that next time the government starts lambasting the public sector for being bloated and inefficient, unlike the lean, efficient and self-supporting commercial sector.

  • rate this
    +2

    Comment number 15.

    14 cont

    PS that means student loans too....

  • rate this
    +2

    Comment number 14.

    DEBT CAUSED THE CRASH.

    So get down Government debt - BUT let private debt rise!!?!!

    Daft - and economic nonsense.

    ALL debt has to be reduced to sensible levels and money needs to be prudentially priced THEN and ONLY THEN can we recover energy to the economy that will have a chance of producing real jobs.

  • rate this
    +1

    Comment number 13.

    Personally I would have preferred Osborne to put a cap on interest rates store cards and Credit Cards charge.

    I ran out of space on earlier post. Sry.

  • rate this
    +5

    Comment number 12.

    So big companies will benefit by George having found some more money (which does not count as money because of some accounting trick).
    This sounds like an idea to benefit the financial institutions that bankroll the Conservative Party and not a idea to benefit the majority.

  • rate this
    +1

    Comment number 11.

    Part of the reason the economy has slowed so much is due to the difficulty in obtaining loans for industry and mortgages. The economy has stalled.

    We certainly don't want to make the mistakes that led us to the current position, by lending to anyone without checking credit worthiness, we must relax the conditions to allow Government mortgages and business loans to stimulate the economy again.

  • rate this
    +2

    Comment number 10.

    5. PURPS
    3 MINUTES AGO
    Credit Easing is a very good move, although I would prefer they ustilise the Insurance industry.
    ================
    Why? Do you work in insurance?

  • rate this
    +4

    Comment number 9.

    Isn't that a form of nationalisation? Big government by a Tory administration?

    Being cynical, it looks like the government is preparing the way to bypass the banks to provide finance to businesses. Is that an acknowledgement that the banks are in very, very big trouble? A whiff of things to come.

    Tin foil hat time until the pills kick in.

  • rate this
    +1

    Comment number 8.

    Oh Dear, I fear Mr Osbourne thinks the Treasury can be run as a bank.
    IF government starts to act as a Banker for any business and offering lower rates of interest to them, then surely there is a danger of loans not being repayed. Which is how we ended up with the banking chaos in the first place.
    IF Mr Osbourne wants to get this country moving, tax booze at a level equal to cigarettes.

 

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