Over the last week, Chancellor and ex-hedge fund investor, Rishi Sunak, authorised a series of unprecedented rescue packages/stimuli presented by the government and most mainstream media as a bailout to protect the overall economy from total systemic failure. The BBC assured us that Sunak’s measures were a “lifeline for the economy.” The Guardian ran with: “‘Whatever it takes’: chancellor announces £350bn aid for UK businesses.” Reuters opined: “Sunak goes all out to avert economic collapse.”
Many said that this allegedly generous and unprecedented package, which is still evolving, did not go far enough. Tory MP David Davis said: “it does miss out a pretty important sector of the economy – namely the self-employed.”
But these reports and calls to do more fail to address the underlying nature of the stimulus in its current form. It turns out that in many cases, small-to-medium-sized businesses will be forced into liquidation–as consumers stop consuming, due to the partial lockdown–or they must accept loans from private banks under the cover of Sunak’s rescue package. But the government is borrowing at record-low interest rates from the Bank of England for a package on which private lenders can charge higher rates of interest. Some estimate total private bank profits at £28bn a quarter if the scheme goes ahead.
Corporate financing facility: “Storing up problems”
Overseen by the Bank of England, the government’s plan for businesses falls roughly into two categories: the Covid Corporate Financing Facility (CCFF) and the Coronavirus Business Interruption Loan Scheme.
The CCFF is aimed at large businesses that have enough reserves to survive the foreseeable future but need cash to pay salaries and suppliers. The trade association UK Finance notes that the scheme “offer[s] financing on terms comparable to those prevailing in markets in the period before the Covid-19 economic shock.” This raises questions about how Sunak’s stimulus can be justly described as a “generous” bailout when it is offering commercial loans on pre-crisis terms.
The scheme involves getting commercial banks and other financial institutions to issue unsecured, short-term debt instruments, known as commercial paper, subject to approval by credit rating agencies. The confirmed institutions are: Bank of America, Barclays, BNP Paribas, Citi, Goldman Sachs, HSBC, JPMorgan, Lloyds, Morgan Stanley, and Natwest.
Kevin Doran of the investment and stockbroker firm A.J. Bell says: the fact that “corporations are getting low-cost loans is probably as much a function of politics as it is economics.” Doran adds that “if the Chancellor was serious about being brave and bold and all those other adjectives he tossed about, the smart thing to do would be to give genuine debt relief to both businesses and households.” Doran favours “interest written off on debts for the entire six month period.” Adam Vettese of the asset firm eToro reckons that the approach is “storing up problems further down the line,” particularly as falling share prices hit pensions.
Coronavirus business interruption loan scheme: “Propped up on debt”
The other part of the scheme, aimed at small-and-medium-sized enterprises (SMEs) is the Coronavirus Business Interruption Loan Scheme (CBILS).
The CBILS is explained by the British Business Bank as “provid[ing] facilities of up to £5m for smaller businesses across the UK who are experiencing lost or deferred revenues, leading to disruptions to their cashflow.” It goes on to note that “CBILS supports a wide range of business finance products, including term loans, overdrafts, invoice finance and asset finance.” CBILs, it concludes, “provides the lender with a government-backed guarantee,” which means taxpayer-backed guarantee, “potentially enabling a ‘no’ credit decision from a lender to become a ‘yes’.” The organization warns that “The borrower always remains 100% liable for the debt.”
A TLE source working in business explained that, despite the partial guarantee of 80 percent against outstanding balance, guarantees are likely to be required from company directors for the remaining 20 percent. In the source’s opinion, this means that individuals are obliged to provide guarantees and jeopardize their personal solvency to save their companies, even ones with limited liability. The source reckons that the problem is exacerbated by a 60 percent portfolio cap on loans, which may discourage banks from lending.
Others agree. Emma Jones of Enterprise Nation said: “What we don’t want to see is for businesses that would not otherwise survive being artificially propped up based on debt such as the new Business Interruption Loan.” Jones asks whether “this might have been better if we’d done what France announced around longer terms to pay tax and certain bills.” Given that many SMEs were already struggling prior to the crisis, Ian Cass of the Forum of Private Businesses responded to Sunak’s plans: “A loan is not going to solve the problems of a company that’s on the brink, it risks pushing the problem down the road.”
The government as payday lender
As with the Financial Crisis and Great Recession, the highly financialised nature of the UK economy, promoted by the likes of Sunak when he was a hedge funder, means that financial institutions, including banks and liquidity firms, see the government’s response to the coronavirus crisis as a way of profiting from government-back insurance: in this case, taxpayer-guaranteed Bank of England loans issued at record-low interest rates. Beneath what the TLE source calls the “smoke and mirrors” of the government’s approach, lies old-school profiteering little different from predatory payday loan companies.
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