Hidden within Rishi Sunak’s announcement that he is to bolster his interruption loans for small businesses is a startling confession; as of last Friday, of 130,000 enquiries made by businesses, just over 900 had been approved by banks.
The Chancellor, who has won plenty of plaudits for his stimulus in response to the coronavirus crisis, appears to have taken a classic hedge fund manager approach to one of the greatest economic challenges of our times by minimising the government’s risk while bolstering its ideological position.
By not actually spending any money directly, but instead trying to get the banks to provide emergency capital to business, he has avoided putting his hands in his own pocket while also maintaining the Tory mantra that the government shouldn’t get involved in the market.
But the plan appears to be majorly flawed.
The devil in the detail
Under the current proposals the government has pledged a guarantee of 80 per cent on loans of up to £25 million to small and medium sized firms, which form the backbone of the economy and employ millions of people.
But that only covers a bank’s losses on any individual loan – it will actually only guarantee up to a maximum of 60 per cent of the total loans made by any one lender under the scheme.
This matters.
With the government only offering to share 60 per cent of a bank’s total losses rather than 80 per cent, lenders face a materially different calculation as to their exposure: closer to a 50/50 punt than a guaranteed loan.
Combine this with the risk averse institutional set up within lenders that has been hammered into them since the banking crisis of 2008- entirely designed to ensure they do not make loans which bear any risk – and you don’t have to be an economist to figure out the result.
Suddenly Sunak is asking the banks to take nearly half of the risk on loans to companies whose prospects are intrinsically uncertain as they face the greatest economic meltdown of our times.
Unwilling to lend
As such, the obvious and inevitable result is that banks have been unwilling to lend cash.
One SME Finance Director who has applied for loans said there is a palpable sense of frustration from the banks that the scheme is simply not fit for purpose.
“Firstly they feel they are being blamed for not lending the money when the government have set the terms that business need to achieve to get the loan,” he said, adding that while the announcements last week were meant to make it easier to access the money, he was told by his bank that it had “actually made it harder”.
His relationship manager estimated that under the newly revised rules, 80 per cent of businesses that apply would not qualify for support – which chimes with the rather embarrassing numbers published by the government.
By attempting to claim to be saving the economy (remember “whatever it takes”) while not actually spending any money, instead relying on the old hedge fund mantra of “someone else’s cash”, Sunak is betting lots of your jobs and lots of small businesses, many of which have taken a lifetime to create, on a fake rescue package.
It is only a matter of time before he gets found out.
