UK government announces £20 billion loan insurance package
As we suggested yesterday, the UK government has today revealed plans for a £20 billion loan insurance package for small businesses. The move will see the government effectively guarantee loans to businesses, from the banks, which will take away the risk of default on the side of UK banks. However, interestingly the scheme has received mixed approval in the marketplace with many suggesting it is open to abuse.
Some business leaders believe that UK banks will use the loan facility, in which the government would be paid a fee, to guarantee loans to businesses which would normally have gone through anyway. As there is only a limited supply of guaranteed funds available at the moment we could see this very quickly eaten up and effectively "wasted" on loans which would have gone through anyway, leaving struggling smaller businesses no better off.
As we suggested recently, the only real way to address the issue is to force UK banks to increase liquidity to the business market at a time when short-term finance is in very short supply. The UK government currently owns significant stakes in a number of businesses and has the power to push through increased liquidity but for some reason this has just not happened.
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