October 3, 2011 / 9:24 AM / 8 years ago

Osborne flags new scheme to allow credit easing

MANCHESTER, England (Reuters) - Chancellor George Osborne flagged a new scheme on Monday to funnel lending directly to companies starved of credit by banks, in an attempt to get economic growth back on track without breaking his pledge to cut public spending.

Chancellor George Osborne delivers his keynote speech on the second day of the Conservative Party Conference in Manchester October 3, 2011. REUTERS/Toby Melville

Facing appeals from across the political spectrum to do more to prop up growth, Osborne’s determination to stay the course on fiscal cutbacks got support from rating agency Standard & Poor’s, which warned against any let-up in the drive to reduce Britain’s budget deficit.

His speech to the Conservative Party’s annual conference frustrated some colleagues’ calls for lower taxes or more spending, but pointed to ways both the Bank of England and the Treasury could support lending.

He said the government’s tough austerity plan allowed the Bank to keep monetary policy loose and that he would give the green light for more asset purchases if the BoE decided to launch a second round of quantitative easing.

But he also flagged a new scheme by the Treasury to help firms get access to cheap borrowing.

“Because banks are damaged they won’t lend at current low rates,” he said. “We have got to get credit flowing in our economy.”

“I have set the Treasury to work on ways to inject money directly into parts of the economy that need it such as small business. It is known as credit easing,” he said.

The Treasury was now looking into various options, many of which would involve the Bank of England, Treasury sources said.

Possible options were the direct purchase of corporate bonds with the Treasury underwriting the credit risk, co-funding bank loans to small and medium-sized companies, or encouraging the creation of a secondary market for securitised SME loans.

Such a scheme could involve several billions of pounds, which would not show up as public debt as they were backed by assets.

The government would provide more detailed plans at its autumn statement, following the Office for Budget Responsibility’s update of the forecasts for growth and public finances at the end of November.

Companies have long complained about constraints to lending despite government pressure on major banks to increase credit availability.

BoE policymaker Adam Posen last month suggested the creation of a new public bank that would lend directly to small businesses and a scheme to purchase the securitised loans.

The Bank bought a small amount of corporate bonds during its first round of quantitative easing launched in March 2009, but BoE governor Mervyn King said credit easing would need the government’s involvement because of the credit risks it entails.

EURO CRISIS

However, such a scheme is unlikely to get the economy going in the short-term.

The Conservative-Liberal Democrat coalition has lowered corporate taxes and pledged to cut red tape as part of a growth plan announced alongside the budget in March.

But with the euro zone’s debt crisis and weaker global growth weighing on the economy, its push to erase a deficit of some 10 percent by the next election due in 2015 leaves next to no extra cash available to support growth and puts the onus firmly on the Bank of England.

A survey on Monday showed British manufacturing grew for the first time in three months in September, but other data has been poor and most economists expect the Bank will launch a fresh round of more quantitative easing in November.

The Conservative head of the influential parliament Treasury committee, Andrew Tyrie, has criticised Osborne for lacking a coherent strategy for growth. Business groups such as the Institute of Directors have also stepped up calls for action.

“No aspect of economic policy is more important than returning Britain to a growth trajectory,” IoD Director General Simon Walker said in a statement, as the group launched its own growth plan, including lower taxes and further spending cuts.

Some analysts also argue that lower growth could derail the deficit reduction plan, but ministers have insisted they will not change course.

Osborne announced a number of smaller measures to provide some relief to hard-pressed British households, worth some 1.15 billion pounds ($1.79 billion) and funded with money not spent by government departments. ($1 = 0.642 British Pounds)

Additional reporting by Keith Weir; Editing by Patrick Graham

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