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UK offers $29bn credit lifeline for business

London, January 14, 2009

Britain launched a scheme on Wednesday to help small and medium-sized businesses refinance up to 20 billion pounds ($29.2 billion) of debt to stop cash-starved firms going bust.

Economists and industry figures welcomed the steps to getting credit flowing again, but said the scheme was not a panacea for an economy heading into recession.

The plan is the latest attempt by Prime Minister Gordon Brown, who is lagging in the polls and must fight an election within 18 months, to kickstart an economy ravaged by a global credit crunch, and follows a drive to boost jobs on Monday.

Business minister Peter Mandelson said the government would guarantee loans worth 10 billion pounds as part of a new Working Capital Scheme, that could secure refinancing double that amount for companies with a turnover of up to 500 million pounds.

He also launched an Enterprise Finance Guarantee Scheme, securing up to 1.3 billion pounds of additional bank loans to firms with a turnover of up to 25 million pounds.

Analysts questioned whether the scheme went far enough.

'10 to 20 billion (pounds) sounds like a huge amount of money, but in the grand scheme of the problem and the current disarray the banking sector finds itself in, a 50 percent guarantee from the government to small and medium sized businesses seems wholly inadequate,' said David Buik of BGC Partners.

Business leaders called it a 'stepping stone' to restoring credit flows. 'Things seem to be moving but the banks must also be persuaded and forced to lend under normal criteria,' said Stephen Alambritis of the Federation of Small Businesses.

After years of steady growth, the British economy looks certain to have gone into recession at the end of last year for the first time since 1992 and economists predict falling output and hundreds of thousands of jobs being lost in 2009.

The central bank has cut interest rates to a record low of 1.5 percent but banks, many tottering themselves because of risky bets gone bad, are running scared of giving new credit to consumers or companies, squeezing the life out of the economy.

The government injected billion of pounds into banks' failing balance sheets in October but this has failed to spark an increase in lending, and further measures to boost bank lending are likely before the end of the month.

'We know that some companies are struggling to secure the finance they need, not because of any failure in their business but due to the tougher credit conditions,' Mandelson said.

'That is why we have designed a package of measures addressing different forms of credit and providing real help for businesses.'    

Under the Working Capital Scheme, companies would pay a fee to the government to cover them against default so there is no real government outlay unless companies cannot pay back their debts. Officials say this should minimise risk to the taxpayer.

The government on Wednesday also pledged to help businesses raise new long-term finance by investing in viable companies which have high levels of existing debt through a new 75 million pound enterprise fund, to which banks would contribute. - Reuters




Tags: Brown | Mandelson | UK business |

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