Bankboozled – Government hits the panic button!

The government has announced two schemes to provide finance for businesses; the monies are to be provided directly to the banks who must lend this onto business owners in the form of cheap loans or finance.

The government states that up to £140BN will be funnelled to businesses in this way, but insiders believe there is effectively no limit to the amounts that may be provided, with widespread anxiety within the Bank of England and the Government that the euro zone crisis will worsen and take the UK further into recession.

A cautious welcome

The coordinated action by the Bank of England and Treasury will see billions offered to banks on the condition that they pass it on to businesses and households in the form of cheaper loans and mortgages.

The scheme, which is due to start in the next few weeks, has received a cautious welcome, with bank shares rising on the news.

However, there are warnings that the scheme will not address the core problem of companies’ reluctance to borrow, particularly with business owners’ awareness of the ramifications of the euro zone debt storm that could deepen this weekend following elections in Greece.

Graeme Leach, chief economist at the Institute of Directors, said: “The funding for lending scheme helps the supply of money and the demand for it, by lowering the cost of borrowing.

But the core problem remains: Companies alarmed by the euro crisis will not be eager to borrow, regardless of the cost.”

No guarantee banks will lend

Economists have also cautioned that banks may simply not want to lend more, even with the carrot of cheaper funding.

Vicky Redwood of Capital Economics said, “High bank funding costs are just one challenge facing the UK economy. Indeed, these moves on their own will do little to reduce the effect of the euro zone crisis on UK exports or reduce the uncertainty facing UK companies.”

In his annual Mansion House speech, Bank Governor Sir Mervyn King also activated facilities for an emergency scheme that offers six-month liquidity to banks in tranches of at least £5 billion a month.

The two measures are estimated to be worth around £100 billion in funding to banks.

Banks signal they are ready and willing to release funds

The banking industry has been hit by higher funding costs as the euro zone troubles have escalated, and they have been hoarding money for fear of another worrying phase in the crisis. However, there are hopes that the new schemes will allow these stored funds to be released.

The British Bankers’ Association (BBA) said it was ‘ready and willing’ to get behind the moves.

BBA chief executive Angela Knight said the industry welcomed the news that the Bank and Government were “ready to stand with the financial sector in making more money available to fuel the recovery”.

Experts also hailed signs that the Bank stood ready to further expand its quantitative easing programme, which currently stands at £325 billion.

Alan Clarke, economist at Scotiabank, said the announcements “come at a crucial time” ahead of the Greek elections, which are being seen as a referendum on the country’s future in the euro.

“The Bank has hinted that it has contingency plans in the event of disaster, but has now started to flex its muscles and show that it means business,” he added.

However, he cautioned incentives for banks to loan needed to be well thought out: “Past schemes have been conditional on banks increasing their loan books, but we have hardly seen a dramatic rebound in lending. We need to hope that the incentive structure is better designed in this scheme.”

Battling the worst crisis since the Great Depression

The moves follow mounting pleas for action from the Bank and Treasury to do more to help banks and steer the UK economy through the euro zone crisis. The origin of the current financial malaise is the 2007–2012 global financial crisis, considered by many economists to be the worst financial crisis since the Great Depression. It resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis also played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity, leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis.

Will it be enough?

So what will this £140bn kiss of life do for Britain? Have the Chancellor and Bank of England acted in ‘panic’ in a bid to hand small firms and house-buyers cheap loans and there any likelihood that this gamble kick-start the economy?

Let’s look at the facts:

  • Banks will be loaned money on condition that they pass it on in the form of cheaper loans and mortgages
  • This staggering sum represents 1/5 of all Government spending
  • Scheme aimed at limiting impact of ‘euro zone debt storm’ which is blamed for raising the cost of lending
  • Government will soon announce another initiative to underwrite tens of billions of pounds of spending on housing and infrastructure

This £140billion lifeline to small businesses, homeowners and the banks is a high stakes gamble to jolt the economy back into life. Both the part time Chancellor George Osborne and Bank of England Governor Sir Mervyn King have clearly been asleep at the wheel, the question is – have they woken up in time to prevent a crash?

Government sources indicated that two separate schemes will pump around £140billion over the next 12 months into Britain’s big five banks and their smaller rivals.

A stated previously this huge sum is equal to a fifth of all Government spending, and more than the current education and defence budgets combined. And it doesn’t stop there because sources privately admit there is no limit to how much money will be given to the banks, meaning the total bill could be far higher with one senior Lib Dem saying the move was like ‘hitting the panic button’.

A move born out of anxiety rather than level headed judgement?

The extraordinary move comes amid rising Government anxiety that the euro zone crisis could plunge Britain back into a deep recession that could take years to recover from.

In his annual Mansion House speech in the City last night Mr Osborne warned the euro zone crisis had made the economic outlook ‘as difficult perhaps as any our country or our continent has faced outside of war’.

But he insisted Britain was ‘not powerless in the face of the euro zone debt storm’.

Unveiling plans for two new bank lending schemes with Sir Mervyn, he said, ‘Together we can deploy new firepower to defend our economy from the crisis on our doorstep. Funding for lending to inspirational families wanting to own their home, business that wants to expand, plus liquidity for our high street banks.

The Government – with the help of the Bank of England – will not stand on the sidelines and do nothing as the storm gathers. “We are rolling up our sleeves and doing everything possible to protect British families and firms.”

Can the banks be trusted?

In essence the government is placing implicit faith in the banks to do the right thing for business owners. This is ignoring the banks’ failure to abide by Project Merlin, the previous government initiative. Yet bankers and the banking system have repeatedly failed both the economy and business: despite the previous millions pumped into the banks from the government, lending to businesses is down but staff remuneration by the banks has increased significantly.

It does not make common sense for the government to place such faith in the banks – the very institutions that have brought our economy to its knees. Nor does it seem wise to channel such a large amount of money to these institutions.

We wonder also whether it is prudent for business owners to take on more financing (and risk) when the global financial world is imploding around us.

What does make sense, however, is creating the right conditions for businesses to grow. This may mean taking radical steps with regards to legislation and the way that taxation is structured. The present levels of corporation tax mean that many companies have left our shores and set up headquarters elsewhere, so the UK is losing out on collecting the corporation tax from those companies, so why not reduce corporation tax rate to a flat rate of 10%. That will surely be more of more benefit to hard pressed UK business owners than extending their financing and their liabilities. Isn’t debt what got us all into the present mess? So why are we planning to increase the indebtedness of business owners now!

The current legislation on employment makes employers think twice before taking on new staff for fear of either paying out twice for maternity leave (as they not only have to pay for the staff member who has taken time off but also for staff replacement). In addition they have to consider the potential financial consequences and potential time spent attending an industrial tribunal.

One thing’s for certain, there is a bumpy ride ahead.

If you are a business owner and are considering increasing your financial liabilities to take advantage of this new initiative, we would advise that it may be better to re-plan your business and personal financial arrangements to ensure that increasing your liabilities do not place your family at risk.

Ray Best can help you protect your financial future. To find out more, simply click here!

About Ray L Best

Ray Best has had over 30 years experience of advising on complex financial matters. A published author of a number of books including “Partnership and Shareholder Protection”, Inheritance Tax Simplified”. We provide an initial meeting at no cost and only engage with clients when we can add significant value.

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