In a clear indication that tightened credit markets are hitting the wider economy, the amount of business conducted with manufacturers, retailers and other commercial firms shrank at a record rate, according to the 77th CBI/PricewaterhouseCoopers quarterly financial services survey. Financial firms experienced falling business volumes across all their customer bases, but the rate of fall among industrial and commercial companies stood out as a survey record (a balance of -36%), although this is expected to ease off in the coming three months (-14%).
Supplementary questions on the credit crunch showed the vast majority of financial firms (86%) thought that it will take more than six months before normal market conditions resume, and none believe it will happen within three months.
Speaking about the results of the survey, which were released on 12 January 2009, John Cridland, CBI deputy director-general, said that the issue of credit flows to corporates has become the number one problem as viable businesses are finding the availability and cost of credit very restrictive. He called for direct government intervention above and beyond what it had already promised the banks.
“The banking package wasn’t going to solve the problem,” said Cridland. “Normal lending will not return immediately because the risks associated with lending have increased, therefore the market has to react.” He argued that the government should take a twin-track approach: on the one hand do more to help the banks release credit squeeze, such as re-capitalisation, and on the other hand enter the market directly and use the national balance sheet to underpin what the banks can do.
Within a week of the CBI stressing the urgency of government action, Gordon Brown announced a plan to guarantee up to £20bn of loans to small and medium-sized firms to help them survive the downturn, effectively insuring banks against companies defaulting on loan repayments.
Central to the plan is a £10bn Working Capital Scheme designed to help banks lend much needed capital to small and medium-sized businesses. The government will provide guarantees on 50% of £20bn short-term loans to businesses with a turnover of up to £500m. But there are concerns that £20bn will not be enough.
Yesterday, Brown unveiled a second package of measures to encourage banks to lend to individuals and businesses. The list of measures includes a scheme to offer insurance against banks losing more money from the bad debts that started the credit crunch, while the Bank of England will be able to buy up to £50bn worth of high value assets direct from firms.
Commenting on lending in the economy, Richard Lambert, CBI director general, said that extraordinary times call for extraordinary policy measures. “This intervention will not stop the recession in its tracks, but it should prevent the current problems from becoming a steeper downward economic spiral. It will take a little time to put into place as the amount of operational detail is considerable, and therefore some of the measures will not take effect until April. But they are a necessary precondition for a return to stability which our economy badly needs,” he said.
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