The Wizard of Os: Merlin plan causes cracks in coalition

GEORGE Osborne’s flagship agreement with banks over bonuses and lending – dubbed project Merlin – was thrown into disarray last night, after a Liberal Democrat Treasury spokesman was sacked for attacking the deal.

Lord Oakeshott, the Liberal Democrat Treasury spokesman, was unceremoniously ousted after he said the agreement was “pitiful” and “not as tough as it should have been”.

Although he is not a minister, the sacking of a senior Liberal Democrat is sure to exacerbate tensions within the coalition government, especially as many rank and file party members will agree with his sentiments.

Project Merlin, the brainchild of former Barclays boss John Varley, hoped to improve the image of banks and repair relations between the industry and government. In exchange for action on bonuses and lending, the government said it would refrain from any extra taxes or populist attacks.

Yesterday, after weeks of tense negotiations, the government unveiled the terms of the deal, which included a commitment from four banks to lend an extra £10bn to small and medium sized enterprises (SMEs) this year.

Lloyds, RBS, HSBC and Barclays – the four “Merlin” banks – said they would collectively agree £76bn of lending to SMEs this year, compared to £66bn in 2010, an increase of around 15 per cent.

The Merlin banks also agreed to:

• Boost overall lending to businesses from £179bn in 2010 to £190bn this year, an increase of six per cent.

• Pay a collective £200m into the Big Society Bank.

• Show some restraint over bonuses, by paying smaller bonuses this year compared to last. Upfront cash payouts at RBS and Lloyds will be capped at £2,000.

• And improve transparency by anonymously publishing the remuneration packages of the top five executives not on the board.

However, the Merlin package ultimately resulted in a set of agreements that will have little impact on bank remuneration, lending or transparency.

The Office of Budgetary responsibility forecasts GDP growth of 2.1 per cent in 2011 and an increase in consumer price inflation of 2.8 per cent, meaning that a six per cent nominal rise in gross business lending is actually very small in real terms.

Bank lending was already rising before the Merlin agreement, with Santander’s UK arm saying it already planned to lend 12 per cent more to businesses in 2011.

Nor will the focus on lending have any direct impact on credit conditions. The Bank of England’s most recent net lending figures – which take the repayment of debt into account – showed a downward trend as firms deleverage, even though RBS and Lloyds increased lending last year.

Vicky Redwood of Capital Economics said: “We don’t think that this agreement will succeed in getting credit flowing around the economy again.”

Shortly after the terms of the Merlin deal were announced, the taxpayer-backed banks unveiled the pay packages of their chief executives. Eric Daniels, chief executive of Lloyds, will receive a bonus of £1.45m in deferred shares while Stephen Hester, his counterpart at RBS, will get around £2m, also in deferred shares.