LONDON (Reuters) - The government will help small and medium-sized businesses refinance up to 20 billion pounds of debt under a new scheme to stop cash-starved firms going bust in the country’s first recession since 1992.
Under the scheme, the government will provide banks with guarantees to cover half the risk on companies’ day-to-day needs worth up to 20 billion pounds for firms with a turnover of up to half a billion pounds.
Economists and industry figures welcomed the steps to get banks lending again, but some said the plan did not go far enough to stop hundreds of thousands of jobs disappearing this year as a global credit crunch takes its toll.
“A 50 percent guarantee from the government to small and medium sized businesses seems wholly inadequate,” said David Buik of BGC Partners.
Job losses are already piling up and figures next week are expected to show the British economy shrank by as much as 1.5 percent in the last three months of the year, putting it in recession for the first time in 17 years.
Barclays said on Wednesday it would cut 2,100 UK-based jobs. Luxury carmaker Jaguar land Rover said it was getting rid of 450 people due to severe fall in demand for new cars.
The loan plan is the latest attempt by Prime Minister Gordon Brown, who is lagging in the polls and must fight an election within 18 months, to kickstart an economy ravaged by the credit crunch, and follows a drive to boost jobs on Monday.
The package offered “real help now to deal with specific problems, real help that is funded by government,” Brown told parliament.
It should not cost the government very much though. Business minister Peter Mandelson said the government had made a 225 million pound provision against defaults, adding the risk of that was “relatively low.”
Business leaders called Wednesday’s plan a “stepping stone.”
“Things seem to be moving but the banks must also be persuaded and forced to lend under normal criteria,” said Stephen Alambritis of the Federation of Small Businesses.
The central bank has cut interest rates to a record low of 1.5 percent but banks, many tottering themselves because of risky bets gone bad, are running scared of giving new credit to consumers or companies, squeezing the life out of the economy.
The government injected billions of pounds into banks’ failing balance sheets in October but this has failed to spark an increase in lending, and further measures to boost bank lending are likely before the end of the month.
“We will not hesitate to take further measures when they are necessary,” Brown said.
Additional reporting by Kate Kelland, Paul Hoskins and Keith Weir. Writing by Sumeet Desai. Editing by Toby Chopra/Richard Hubbard