Underwriting Scheme Missed

We need bold steps to open channels of credit

By Alan Duncan

Published: December 1 2008 19:32 | Last updated: December 1 2008 19:32

Today our economy is facing a reckoning. Virtually overnight the UK’s business climate has gone from overheating to permafrost. Our financial institutions, once the conduits of cheap and easy cash, are now bolstering their own balance sheets and refusing to lend. Smaller enterprises are finding vital lines of credit frozen, overdrafts withdrawn and sudden rises in additional charges. Over the last month the Bank of England has said that the supply of money in the economy is at the lowest level for 30 years, while the CBI reports that more than 40 per cent of businesses are struggling with reduced or withdrawn credit flow.

Put simply, the recapitalisation scheme is failing in its main objective. The Conservatives supported the government’s strategy, because saving the banks was designed to save the real economy. Supporting lending was at the centre of the plan. The reluctance of banks to continue lending is, as Mervyn King, the Bank governor, pointed out, a powerful indication that this process has not been completed. There needs to be a new phase.

Some people have questioned whether it was right for government to intervene at all in this crisis. I could not be clearer in my own view. Intervention is absolutely right to prevent good small companies going to the wall because of the actions of the banks. This is not just about the dreams and aspirations of the hard-working entrepreneurs who contribute so much to our economy. If thousands of good businesses go under, we are undermining our future growth and putting the UK’s economic competitiveness at risk.

This is not an argument about the freedom of the market. For Conservatives, the state is not stepping in to rescue society from the market, but to strengthen the weakness of the market after the joint failures of an over-centralised government and an underperforming regulator. Like the US senator who failed to save his seat, Gordon Brown, the prime minister, should be forced to acknowledge: there was market failure and I was it.

Two related issues need to be addressed: first, the reluctance of banks to continue lending; second, the withdrawal of credit insurance companies from underpinning the payment chain between companies. From large-scale manufacturers in the automotive industry to small-scale resellers of computer software, credit insurance can underpin the certainty of credit in a way that allows people to enhance their cashflow. When cash is king, it is a lifeline to companies.

Now the increased chance of insolvencies and credit complications is leading the three primary credit insurers – Euler Hermes, Atradius and Amlin – radically to reassess their approach to risk. In the past week alone, more than 12,000 British companies have had insurance cover withdrawn. This is placing businesses between a rock and a hard place and the pressure is pushing some of them towards extinction.

Last Friday, David Cameron, the Conservative leader, set out our approach to the problem of bank lending very clearly: radical government action to get lending moving, but with lending decisions made as far as possible according to market incentives. We are calling on the government to establish a temporary new body: a National Loans Guarantee Scheme to guarantee billions of pounds of new loans to businesses, for a commercial insurance fee passed on by the banks, to protect the taxpayer properly.

We must now act similarly to help restore the links of the payment chain. Not only banks but also credit insurers will be able to use the scheme to underwrite a significant percentage of any new loans to businesses – but not 100 per cent. Credit decisions will still be made by the same institutions – and absolutely not by the government; but it will give them the benefits of less capital and less exposure to the unpredictability of a recession.

In the same way as the state cannot assume every defaulted loan from banks, so it cannot assume every defaulted payment. But by sharing the risk with insurance companies in the way we are sharing the risk with the banks, the oil in the cogs will allow the machine to continue turning. That is because the state needs to rely on the private sector, which is better qualified to judge what is good credit and what is not.

What we need now are bold new measures opening new channels of credit to help irrigate our arid economy. Mr Cameron has defined our approach: the government should follow it.

原文：http://www.ft.com/cms/s/0/be13ee94-bfb6-11dd-9222-0000779fd18c.html