The biggest “surprise” in the Osborne speech was his commitment to “credit easing” – developing an idea that the Tories had in opposition called the National Loans Guarantee Scheme. Here is our news story on ft.com.
This could involve billions – or 10s of billions – of pounds but will be fiscally neutral: because although the Treasury would issue gilts to raise money this would then be used to buy financial assets. These would then sit on the government’s balance sheet.
I’m told it has two elements.
1] In the short-term the government already has the option to buy corporate bonds, which would push down yields – making it easier for big companies to borrow. At present this is not necessary as bond rates are quite low. But it could be used if the eurozone crisis leads to a surge in yields in the sector.
2] Osborne wants in the medium term to develop a corporate bond market for smaller companies. At present this is only in its infancy in the UK but the US has a more developed sector. It could have the potential to lower borrowing costs (as well as being an alternative to bank loans) for relatively small companies, although perhaps not for the very smallest SMEs.
Given that bond markets require borrowers to want to raise 10s of millions of pounds – or hundreds of millions – you might need some kind of aggregation mechanism. (Or the securisation of many ‘granular’ SME loans). I’m sure this is the type of issue which will be explored by Treasury officials in more detail.
Jim Pickard
Kiran Stacey
