Sunak’s relaunch is a debt scam that will benefit big banks
Over the past week, Chancellor and former hedge fund investor Rishi Sunak has authorized a series of unprecedented bailouts/stimuli presented by the government and most mainstream media as a bailout to protect the global economy of 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 in aid for UK businesses.” Reuters issued the review:
“Sunak is doing everything to avoid economic collapse.”
Many said that this supposedly generous and unprecedented package, which continues to evolve, did not go far enough. Conservative MP David Davis said:
“a fairly important sector of the economy is missing – namely the self-employed.”
But these reports and calls to do more ignore the underlying nature of the stimulus in its current form. It turns out that in many cases small and medium-sized businesses will be forced into liquidation – as consumers will stop consuming, due to the partial lockdown – or they will have to accept loans from private banks under the guise of the bailout by Sunak. But the government is borrowing at record high interest rates from the Bank of England for a package on which private lenders can charge higher interest rates. Some estimate
total private bank profits to £28bn per quarter if the scheme continues.
Business Finance Facility: “Storing Problems”
Supervised by the Bank of England, the government’s plan for business falls roughly into two categories: the Covid Corporate Financing Facility (CCFF) and the Coronavirus Business Interruption Loan Scheme.
CCFF is for large companies that have enough reserves to survive for the foreseeable future, but need cash to pay salaries and suppliers. The UK Finance trade association Remarks
that the program “offers[s] financing under conditions comparable to those prevailing on the markets in the period preceding the economic shock of Covid-19. It raises questions about how Sunak’s stimulus package can rightly be described as a “generous” bailout as it offers commercial loans on pre-crisis terms.
The program involves getting commercial banks and other financial institutions to issue unsecured short-term debt securities, known as commercial paper, subject to rating agency approval. The confirmed establishments are: Bank of America, Barclays, BNP Paribas, Citi, Goldman Sachs, HSBC, JPMorgan, Lloyds, Morgan Stanley and Natwest.
Kevin Doran of investment and brokerage firm AJ Bell said: the fact that “companies get low-cost loans is probably as much a political function as an economic one”. Doran adds that “if the Chancellor really wanted to be brave and bold and all those other adjectives he threw around, the smart thing to do would be to deliver real debt relief to businesses and households.” Doran is in favor of “interest written off on debts for the entire six-month period”. Adam Vettese of asset firm eToro account
that the “stores problems further” approach, especially as falling stock prices hit pensions.
Coronavirus business interruption loan scheme: ‘Debt-backed’
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 Explain
by the British Business Bank as “provided[ing] facilities of up to £5 million for small businesses in the UK who suffer loss or deferred income, causing disruption to their cash flow. It goes on to note that “CBILS supports a wide range of corporate finance products, including term loans, overdrafts, invoice finance and asset finance.” CBILs, he concludes, “provide the lender with a government-backed guarantee”, meaning a taxpayer-backed guarantee, “potentially allowing a lender’s ‘no’ credit decision to become a ‘yes’. .” The organization warns that “the borrower always remains 100% responsible for the debt”.
A TLE source working in the business community explained that despite the partial guarantee of 80% on the outstanding balance, guarantees will likely be required from entrepreneurs for the remaining 20%. According to the source, this means that individuals are forced to post guarantees and put their personal solvency at risk to save their businesses, even with limited liability. The source believes the problem is exacerbated by a 60% portfolio cap on loans, which can discourage banks from lending.
Others agree. Emma Jones of Enterprise Nation said:
“What we don’t want to see is companies that wouldn’t otherwise survive being artificially backed on a debt basis, like the new business interruption loan.” Jones asks if “it would have been better if we had done what France announced in the longer term to pay the taxes and some bills”. Given that many SMEs were already struggling before the crisis, Ian Cass of the Forum of Private Businesses replied
to Sunak’s plans: “A loan will not solve the problems of a company that is on the brink, it risks pushing the problem further.”
The government as a payday lender
As with the financial crisis and the 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, see the government’s response to the coronavirus crisis as a way to take advantage of government insurance: in this case, taxpayer-backed Bank of England loans issued at record high interest rates. Beneath what the TLE source calls the “smoke and mirrors” of the government’s approach lurk old-fashioned profiteers little different from predatory payday loan companies.