The long fiscal shadow of credit easing

GEORGE Osborne would have us believe that his policy of “credit easing” is not a fiscal matter. It’s nothing more than a liquidity injection, he says.

The idea is to speed up a shift that is already happening: with new rules forcing banks to horde capital rather than lend, firms are turning to the bond markets for cash.

For small and medium-sized enterprises (SMEs) that is pricey – with good reason: lending to SMEs is risky.

Enter HM Treasury. Just like the ECB’s purchase of junk sovereign bonds, Osborne aims to drive down yields for SMEs below the current market price.

He says this won’t add to the deficit. But if any bank were to do the same, Basel rules would require it to put aside massive stores of capital against the high-risk SME bonds.

In other words, the bank would have to spend less and save more to take account of its assets’ new risk-weighting.

Luckily, the Treasury doesn’t have to worry about annoying calculations of risk.

Osborne will probably get away with it if it keeps its purchases small – in the low tens of billions.

But if the government starts buying on the ECB’s scale, enough to really jolt the market in corporate paper, the fiscal side of the policy will become alarmingly clear.