Bloomberg News

Osborne Said to Favor Low-Rate Loans for U.K. Credit Easing

November 24, 2011

(Updates with comment from Cameron in the third paragraph, RBS’s Hester in 13th, Lloyds in 14th.)

Nov. 23 (Bloomberg) -- U.K. Chancellor of the Exchequer George Osborne may propose a plan to channel low-cost loans to companies through commercial banks to spur economic growth, said a person with knowledge of the matter.

The model, based on the European Union’s European Investment Bank, would see the AAA-rated Treasury raise money in bond markets to finance the credit to small and medium-sized firms, said the person, who declined to be identified because details of the plan is still being worked on. Other measures are also being considered, the person said. A Treasury spokesman declined to comment on the plans.

The program, which Prime Minister David Cameron said this week would be “massive,” is aimed at boosting an economy in danger of returning to recession without compromising deficit- reduction efforts. U.K. banks have been reluctant to lend since the 2008 financial crisis or have done so at onerous interest rates to offset higher funding costs.

Osborne told supporters at the Conservative Party’s annual conference in October that he would put the Treasury to work to “direct money into the economy.” He will announce details of the plan in his economic statement to Parliament on Nov. 29.

The chancellor is facing growing pressure to stimulate growth amid a slowdown triggered in part by the debt crisis in Europe. He has identified easier credit as a key policy lever to supplement the Bank of England’s 275 billion-pound ($429 billion) quantitative-easing program, whereby the central bank creates money to buy government bonds.

No Letup

Osborne and Cameron are resisting opposition calls to scale back their plans to cut the budget deficit, saying that would risk Britain’s standing with investors.

Osborne’s approach to what he has called credit easing differs from that of the U.S., where Federal Reserve Chairman Ben S. Bernanke used the term in a January 2009 speech to describe a policy aimed at reducing credit spreads and “improving the functioning of private credit markets more generally.”

The Fed has purchased mortgage-backed securities and U.S. Treasuries, expanding total assets on its balance sheet to $2.85 trillion.

Among other mechanisms the U.K. Treasury said in October it would consider are instructing the Bank of England to buy corporate bonds, encouraging a secondary market for loans to small companies and co-funding loans to companies. While the latter option is the one favored by the Treasury, other mechanisms remain on the table, the person said.

Business Lending

Though business lending is ahead of targets agreed upon between banks and the government under a February deal known as Project Merlin, banks are lending about half as much to companies as they were in 2008, according to the British Bankers’ Association.

Banks loaned 449 million pounds in April to small companies compared with a monthly average in 2008 of 991 million pounds, the BBA said in its latest report on the sector published in August.

Small and medium-sized companies account for 99 percent of all enterprises in the U.K. and almost 60 percent of private- sector employment, according to the Federation of Small Businesses.

Stephen Hester, chief executive officer of Royal Bank of Scotland Group Plc, told lawmakers in London today that weak business confidence meant demand for credit was low. The average interest rate RBS charges on loans to small firms is the lowest ever and the bank, Britain’s largest publicly owned lender, is not constraining credit to the sector, he said.

Lloyds Banking Group Plc, also state controlled, pledged on Nov. 23 to provide 12 billion pounds of loans for small and medium-sized firms next year as the government pushes banks to boost lending.

The European Investment Bank has as shareholders the 27 states of the EU and was established in 1957 to extend loans to companies mostly within Europe. It raises funding from bond markets and its paper carries a AAA rating.

--Editors: Andrew Atkinson, Eddie Buckle

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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