The stand-out para in today’s Guardian article about how credit easing might work is:
“Bonds could be bought directly in the £180bn corporate bond market. Buying bonds issued by small and medium-sized enterprises (SMEs) directly is less feasible as they don’t really exist. Instead banks could package small company loans and overdrafts into so-called securitisations which could then be bought.”
Now a big reason for the dearth of credit for small firms is that the creditworthy ones want as little debt as possible while lenders rightly won’t touch the uncreditworthy ones with a barge pole.
So George Osborne has come up with a cunning plan to take the crappy loans of rocky SMEs, whizz them up with decent debt from sounder firms, and use the resulting brew as collateral against new loans to the very SMEs that sensible lenders won’t touch.
It’s the Subprime Debacle all over again, only with small businesses instead of houses. Moreover, it will put good businesses at risk for the sake of bad ones. Does anyone believe that the banks will ask the good SMEs before they bundle their (sound) loans and overdrafts into one of these securitisations? Of course they won’t: it’s too good an opportunity for banks to make risk-free money trading the securitisations while accepting the Government’s plaudits for opening a ‘credit lifeline’ to struggling small firms.
So if – or rather when – credit easing goes ingloriously tits-up, subprime-style (because that’s what always happens when you give money to people who can never pay it back), the sound businesses risk getting screwed along with the weak ones because credit will dry up for all.
Stiffing the prudent to save the feckless. It’s the story of the second great depression but who’d have thought it was Conservative policy?