The government will guarantee £20bn of UK bank debt over the next two years, chancellor George Osborne revealed yesterday, in a desperate bid to unfreeze credit markets.
The Treasury’s credit easing programme will see the government underwrite chunks of lenders’ debt to bring their borrowing costs down, in return for which they will cut the cost of their loans to small businesses by up to one per cent.
Osborne said the aim is “to use the fact that the government can borrow money very cheaply to help small business to borrow money more cheaply”.
It is not yet clear how much more small businesses will opt to borrow at the lower cost or how much banks’ cost of credit will be brought down.
The scheme marks a temporary reversal in the attempt to end the implicit state guarantee for banks, seeing governemnt directly underwrite their debt. But the treasury has promised to audit it so that the drop in the price of risk is passed on to small businesses and does not benefit banks.
The firepower for the plan will come from cancelling £40bn’s worth of guarantees to the Bank of England’s asset purchase scheme (APS).
The APS will still be underwritten to the tune of £10bn but the treasury will deploy £20bn of guarantees on credit easing and keep another £20bn on standby to boost it to £40bn if needed.
Alongside the details of the scheme, City A.M. understands that Osborne will also announce a new tax raid on hundreds of banks in his autumn statement tomorrow.
He will unveil the second hike to the UK’s 0.075 per cent bank balance sheet levy within a year of its introduction.
The hike is due to banks shrinking their wholesale funding base so much that Osborne is no longer on course to get the £2.5bn in revenues he had budgeted for.
In effect, it means that banks that have cut their loan book the most by selling off assets – Lloyds and RBS – will shoulder less of the burden.
Other banks, including HSBC and Standard Chartered, will take on proportionately more of the burden despite some of them having less risky funding structures.
However, those worst hit will be banks more reliant on wholesale funding, such as the UK businesses of many American investment banks.
Among the other growth measures expected are:
• Talks between the Treasury and pension funds to get them to invest in infrastructure. The National Association of Pension Funds told City A.M. it envisages investing £15-20bn.
• Scrapping auto-enrolment in pensions for small firms with under 50 staff, although this could be delayed.
• Scrapping a planned 3p rise in fuel duty and limiting rail fares rises.
• Reducing carbon tax costs for firms.