Chancellor of the Exchequer George Osborne responded to mounting concerns over the economy by proposing to lend billions of pounds of public money directly to British companies struggling to obtain credit from banks.
The proposal, outlined yesterday, would see the Treasury buy bonds issued by small and mid-sized companies in a program known as credit easing. The purchases would be financed from the sale of Treasury bills or government bonds. One possibility would be to instruct the Bank of England to buy corporate bonds.
“The government is under huge and very intense pressure to act,” said Will Hutton, director of the Work Foundation, a London-based research group. “Everyone knows that they can’t stick to this plan so what they are doing is having to find other ways.”
The move underlines the depth of concern over the potential fallout from Europe’s debt crisis on the banking system. Three years after the last credit crunch pushed the British economy into a record recession, small and medium-sized companies say banks continue to deny them access to loans on reasonable terms.
With Osborne refusing to slow the pace of deficit reduction, his Conservative Party and its Liberal Democrat coalition partners are demanding he find ways to stimulate an economy that has barely grown in a year. In his speech yesterday at the Conservative conference in Manchester, northwest England, he described credit easing as “another form of monetary activism.”
The plan opens a new front in the fight to keep the economy growing. Until now, Osborne has put the onus on the Bank of England to spur growth through its program of buying government bonds with newly created money, known as quantitative easing.
QE has focused almost entirely on buying gilts, with corporate debt accounting for just over 1 billion pounds ($1.53 billion) of the 200 billion pounds of assets purchased since the program began in March 2009. In the previous two months, the bank bought corporate bonds financed by government-bill sales through the Asset Purchase Facility.
Osborne said yesterday he’d approve any request from the Bank of England to reactivate quantitative easing. Nine out of 30 economists in a Bloomberg News survey forecast policy makers will do so when they meet this week, the highest proportion since November 2009, when the central bank last expanded the program.
“This is a realization that the current policy isn’t working,” Jonathan Portes, director of the National Institute of Economic and Social Research, said of Osborne’s proposal. “It’s a way of easing fiscal policy through the back door and it’s about time too. There are many, many people who have been calling for this.”
The practice of credit easing allows authorities to buy private-sector assets to increase liquidity and credit in the economy. The Treasury is looking at three options, according to an official at the department: instructing the Bank of England to buy corporate bonds; encouraging a secondary market for loans by purchasing securitized loans made to small companies; or co- funding or underwriting loans to such companies directly.
“It could help prevent another credit crunch, provide a real boost to British business and over time help solve that age-old problem in Britain: not enough long-term investment in small business and enterprise,” Osborne said yesterday.
The program would not add to the budget deficit because the government would gain an asset of the equivalent value when it buys corporate securities, the Treasury official said. The amount would be recorded as extra debt until the corporate bonds are resold.
The Work Foundation’s Hutton said buying debt amounts to creating a special purpose vehicle to fund lending that has almost “unknowable risk.”
Osborne will give further details of the plan when he updates Parliament on the economic and fiscal outlook on Nov. 29.
The initiative comes as the government struggles to meet targets for lending to businesses under its Project Merlin agreement with five major U.K. banks in February. Lending to small and medium-sized enterprises in the first half was 37.3 billion pounds, less than half the 76 billion-pound full-year target, central bank data show.
In the U.S., Federal Reserve Chairman Ben S. Bernanke used the term “credit easing” in a January, 2009, speech to describe a policy aimed at reducing credit spreads and “improving the functioning of private credit markets more generally.” The Fed has purchased mortgage-backed securities and U.S. Treasuries, expanding total assets on its balance sheet to $2.85 trillion.
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